How crisis can open doors to new growth

History reveals that divestment as a share of overall mergers and acquisitions (M&A) reached peak levels during 2004 and 2012–13 — essentially the periods post-downturn — when the economy was already recovering from crisis. In contrast, during the immediate downturn period, many companies stopped their divestiture programs and focused instead on internal cost management and preserving cash.

Leading CEOs are adopting scenario planning to play out their actions and reactions to these and other potential major disruptions. Assessing the portfolio of assets, operations, ecosystems and supply chains, including routes to customers, and considering how each aspect of their business is impacted at a fundamental level can yield significant insights.

Disruption never sleeps

Over US$10 trillion has been deployed through M&A since July 2020¹, with many companies undergoing major transformations. There is an investment arms race happening. CEOs and companies that have not yet positioned for the future will be left behind. The massive investments, especially in technology and digitalization, will begin to widen the gap between winners and losers over the near and mid-term. This investment gap is soon likely to surface in financial results.

The vast majority of CEO respondents (95%) have altered their strategic investment plans because of geopolitical tensions. Of these, 39% have relocated operational assets and nearly a third (30%) have exited certain markets. In an increasingly febrile geopolitical environment, CEOs should be considering whether an asset-light model would create elevated resilience and agility in their operations, providing the ability to move at lightning speed should circumstances change.

An asset-light strategy involves transferring capabilities, such as people, process and technology, to “better owners” so companies can transition fixed costs to a variable cost structure, enhance agility and focus on core capabilities.

Asset-light business models are expected to be increasingly adopted by companies across the value chain well beyond the current crises impacting the world. This is in response to an increasing need for innovation, maintaining liquidity and building more agile and resilient operating models.

When all partners in an ecosystem work together to create customer value — with capabilities aligned to the better or best owners — it can create a winning value proposition for all participants. Companies that proactively seek out opportunities can benefit from a first-mover’s advantage and, ultimately, create a competitive differentiation to outperform their peers.

Managing through short-term crisis to create long-term value

Divestments should be more than just one-off decisions based on short-term factors. Corporate strategy should be the lens for determining which assets are candidates for divestment and how carve-out sales or spin-offs can focus management attention and capital toward businesses that will drive long-term value. This strategy demands a more dynamic and rigorous review — but will likely lead to a more flexible organization that is able to respond on this and other crises in a far more agile and faster way. Leading CEOs will clearly communicate a vision of how divestment decisions strengthen the company’s core business.

To form a winning strategy, CEOs should ask themselves five key questions:

• Is your company performing at its full potential — on growth, margin, return on invested capital (ROIC) and total shareholder returns metrics versus your peers? Is there an opportunity to perform even better?
• Do you have businesses or capabilities that need to be retained or non-core assets that may have a better owner in the marketplace?
• Can you create greater focus within your organization by retaining your core capabilities only?
• Is your business model appropriate for the products and services you sell in various markets?
• Are you agile enough to react quickly to changing geopolitical conditions?