Divestiture makes for hot topic in lean times

Lingering effects of the credit crisis and the broader economic downturn have created a new urgency for chief executives in the defense and government services industry to explore divestitures.

Divestitures are again becoming a hot topic in corporate boardrooms. The reason: Smart, well-timed corporate divestitures can be an important value creation tool for company executives.


 RELATED STORIES

Lockheed to sell two units in company restructuring

Ethics rules expected to spur acquisitions


During much of the past decade, the mantra of most companies in the defense and government services sector was “buy” rather than “sell.” Active consolidators were rewarded with historically high valuation multiples. Also, the capital to support acquisition efforts was plentiful and cheap. There wasn’t much incentive for chief executive officers to divest noncore assets because they could earn a high valuation on the profits from such businesses and didn't have a need for cash.

But lingering effects of the credit crisis and the broader economic downturn have created a new urgency for CEOs in the defense and government services industry to explore divestitures. Several such rationales are:

  • Unlock hidden value. Average price-to-earnings ratios for publicly traded defense and government services companies are in the 15x to 23x range, a 25 percent decline from post 9-11 highs. Most certainly, though, many contractors have smaller pieces of business in their portfolios that would garner much higher valuations than prevailing industry averages were they to be separated from their corporate parents. Cybersecurity assets represent a great example of an opportunity to unlock value. Businesses in the right area of cybersecurity are routinely selling for multiples of 10 times earnings before interest, taxes, depreciation and amortization. This represents a premium of approximately 20 percent to 30 percent above average company valuations of diversified defense and government services companies. Of course, divestiture strategies to create value can go in the opposite direction. Companies might also sell larger, lower value assets to become more concentrated in a higher value area, potentially resulting in an increased valuation for the divesting company. The bold nature of this approach means it is employed less frequently, but with risk comes reward.
  • Raise capital to invest in growing core business. With capital no longer a commodity, there is increased interest on the part of CEOs to divest noncore assets as a way to raise capital to support growth activity in core business areas. The reduced multiples of public defense and government services companies make it easier to offset the potential earnings dilution of divestitures. Meanwhile, the capital raised from the divestiture can be deployed into more productive value-enhancing business activities.
  • Mitigate conflicts of interest. Many business leaders predicted that Northrop Grumman's divestiture of TASC would lead to a rush among large companies in the defense and government services sector to shed businesses that have the potential to create organizational conflicts of interest. Instead, would-be sellers have been much more deliberate in thinking through organizational conflicts-of-interest divestitures. There is still uncertainty with regard to specific agencies’ plans for managing OCI issues. As a result, companies have been reluctant to make divestiture decisions without clarity, but they should remain ready to act to satisfy customers’ objectives. At present, there remains a stable of buyers looking to acquire OCI businesses to become trusted advisers to the government. As the appetites of those buyers are satiated, companies late to proceed with OCI-related divestitures could see lesser valuations than their early-to-market peers.

In today’s market, there are many compelling reasons to divest non-core assets. Look for companies to turn to this tried and true tool to build shareholder value and be ready to take advantage of the opportunities they create.

X
This website uses cookies to enhance user experience and to analyze performance and traffic on our website. We also share information about your use of our site with our social media, advertising and analytics partners. Learn More / Do Not Sell My Personal Information
Accept Cookies
X
Cookie Preferences Cookie List

Do Not Sell My Personal Information

When you visit our website, we store cookies on your browser to collect information. The information collected might relate to you, your preferences or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. However, you can choose not to allow certain types of cookies, which may impact your experience of the site and the services we are able to offer. Click on the different category headings to find out more and change our default settings according to your preference. You cannot opt-out of our First Party Strictly Necessary Cookies as they are deployed in order to ensure the proper functioning of our website (such as prompting the cookie banner and remembering your settings, to log into your account, to redirect you when you log out, etc.). For more information about the First and Third Party Cookies used please follow this link.

Allow All Cookies

Manage Consent Preferences

Strictly Necessary Cookies - Always Active

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data, Targeting & Social Media Cookies

Under the California Consumer Privacy Act, you have the right to opt-out of the sale of your personal information to third parties. These cookies collect information for analytics and to personalize your experience with targeted ads. You may exercise your right to opt out of the sale of personal information by using this toggle switch. If you opt out we will not be able to offer you personalised ads and will not hand over your personal information to any third parties. Additionally, you may contact our legal department for further clarification about your rights as a California consumer by using this Exercise My Rights link

If you have enabled privacy controls on your browser (such as a plugin), we have to take that as a valid request to opt-out. Therefore we would not be able to track your activity through the web. This may affect our ability to personalize ads according to your preferences.

Targeting cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.

Social media cookies are set by a range of social media services that we have added to the site to enable you to share our content with your friends and networks. They are capable of tracking your browser across other sites and building up a profile of your interests. This may impact the content and messages you see on other websites you visit. If you do not allow these cookies you may not be able to use or see these sharing tools.

If you want to opt out of all of our lead reports and lists, please submit a privacy request at our Do Not Sell page.

Save Settings
Cookie Preferences Cookie List

Cookie List

A cookie is a small piece of data (text file) that a website – when visited by a user – asks your browser to store on your device in order to remember information about you, such as your language preference or login information. Those cookies are set by us and called first-party cookies. We also use third-party cookies – which are cookies from a domain different than the domain of the website you are visiting – for our advertising and marketing efforts. More specifically, we use cookies and other tracking technologies for the following purposes:

Strictly Necessary Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Functional Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Performance Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Social Media Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Targeting Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.