–from the Introduction to Part IThe Art of M&A Strategy is exactly what you need to build mergers, acquisitions, and divestitures into your overall business strategyto make M&A a competitive advantage and avoid landing on the long list of M&A failures.Experts in the field of M&A, Smith and Lajoux demystify this otherwise complex subject by taking you through the types of M&A strategy and the key steps to successful M&A strategy development and implementation. The Art of M&A Strategy is conveniently organized into three sections:
- Part I presents a range of possible corporate strategy situations and provides the role and rationale for M&A in each, such as building and managing a portfolio, participating in industry consolidation, spurring corporate growth, and using acquisitions to create “real options.”
- Part II outlines how to determine the role of M&A in your strategytaking into consideration industry context, competitive imperatives, and strategy optionsand explains how to find and screen partners, decide whether to buy or sell, and engage the board of directors in M&A decisions.
- Part III covers M&A as a sustained corporate program, particularly in the context of international growth, outlining the most strategic aspects of post-merger integration, describing how to use advisors throughout the process, and examining core competencies required for successful M&A programs.
About the Author
Alexandra Reed Lajoux, chief knowledge officer at the National Association of Corporate Directors (NACD), has three decades of experience in business information and has served as editor for Directors & Boards, Mergers & Acquisitions, and Export Today. She is the author or coauthor of all books to date in McGraw-Hill’s acclaimed Art of M&A series.
Read an Excerpt
THE ART OF M&A Strategy
A Guide to Building Your Company's Future Through Mergers, Acquisitions, and Divestitures
By Kenneth Smith, ALEXANDRA REED LAJOUX
The McGraw-Hill Companies, Inc.Copyright © 2012The McGraw-Hill Companies, Inc.
All rights reserved.
Building and Managing a Portfolio of Businesses
Even then, we will make plenty of mistakes.
For most companies, M&A activity is optional. For a multibusiness portfolio company, however, it is quintessential. Acquisitions drive portfolio companies as their path to value and sometimes their reason for existence.
A portfolio company is an enterprise composed of multiple corporate entities and investments. These "holdings" have usually been acquired, but some may have resulted from the division of a prior business. This chapter focuses on those portfolio companies that maintain these entities as separate businesses—these portfolio companies look to add businesses to the portfolio and occasionally sell businesses from the portfolio. Some single business companies comprise multiple legal entities but are managed as one overall company—these are not the subject of this chapter.
We also distinguish portfolio companies from passive investment funds. Portfolio companies for our purposes hold all or a majority interest in many of the companies in their portfolios, either alone or with partners. As such they (perhaps with partners) effectively control the businesses in the portfolio. We exclude for our purposes funds that make equity investments but not controlling investments (not even with partners). Such companies buy and sell stock and play a passive role in the companies in which they have invested, whereas the portfolio companies buy and sell companies and are often in a position, either alone or with partners, to control the companies they hold. (Portfolio companies may have such passive investments as well as corporate holdings, but this chapter is concerned with only the latter.)
As noted in the introduction, it is the portfolio companies that dominated M&A in earlier decades and that have drawn much criticism. In particular, some such companies earned a so-called conglomerate discount from the capital markets. This dubious distinction meant that the market assessed the whole (the portfolio company) as being worth less than the sum of the parts (the sum of the market's valuations of the holdings). In other words, such portfolio companies were adding negative value.
This raises important questions about the role of corporate centers in these portfolios, how they can add value, and the role of M&A. In fact, many portfolio companies are highly successful and remain a major force in the M&A markets. We will use a characterization of management approaches for portfolio companies to look at how M&A can add value.
ROLE OF THE CORPORATE CENTER
How can portfolio companies add value?
A portfolio company can create value in excess of the value of the individual companies in many ways, including the following:
* Reducing risks to the shareholders by diversifying assets
* Improving returns on investments through superior selection of acquisition candidates
* Optimizing across holdings the use of tax credits, loss carry forwards, debt management, and other forms of "financial engineering"
* Exploiting skills and synergies available between businesses
* Consolidating assets as in an industry "roll up."
However, how the portfolio company adds value depends on the role and corresponding skills of the corporate center or parent company. In a portfolio of businesses, the corporate center can add value either by improving the performance of the units or by making changes to the portfolio. The latter is clearly the role of M&A&—that is, the portfolio can be changed by selling units or buying new units.
However, the former also has a bearing on M&A strategy. Unit performance can be improved by changes in strategy, management disciplines, staff, or access to skills or resources—all of which can be influenced by what else is in the portfolio and/or how the portfolio is managed.
A typology of business portfolio companies can be defined by the differing roles of their corporate centers.
What roles can the parent company play in a portfolio of businesses?
The roles of portfolio parents—or corporate centers as they are increasingly called—can vary widely. Michael Goold of the Ashridge Strategic Management Centre and Nathaniel Foote of McKinsey & Company defined five scenarios for the corporate center based on the degree of business integration and the type of parent company intervention. Each scenario suggests the strategy to create value.
The controller role applies to a diversified portfolio in which the parent company does not intervene in the individual business, other than exercising its fiduciary duties on any boards of its holdings, including setting goals and budgets. The parent company's role is essentially to grow and allocate shareholder capital, usually within defined risk-return parameters. This is done through buying and selling of companies or shares of companies and through monitoring performance. Berkshire Hathaway Inc. and some of the large pension funds are examples.
The coach role may also apply to a diversified portfolio, but there is a greater direct role of the parent in the businesses of the portfolio. The coach aims to help the companies in the portfolio perform better through better management tools and processes. The application of Six Sigma across the holdings of General Electric Corporation is a good example. The role of coach also applies to a portfolio of businesses for which similar skills are required to manage, for example, businesses in a single industry, such as the newspaper chains.
The role of orchestrator applies to a portfolio of businesses that share some aspects of their business systems. The evolution of media serves to illustrate the nature of this role over that of the coach: with the prevalence of digital media, many of the former print media chains, such as Time Inc., are now managing content centrally and are bundling print and digital product for sale to consumers and advertisers. Thus each magazine remains a separate product, but elements of its business system may be shared or intertwined with others.
The first three roles are variants of holding companies with a defined basis for the corporate center to add value. The last two roles, the surgeon and the architect, apply to transformational interventions, such as turnarounds. The surgeon role applies to diversified holdings, but unlike the controller, the surgeon will be directly involved in the transformation. Some private equity firms, hedge funds, or "corporate raiders" are in the surgeon role.
The architect is also implementing transformational change, but in a portfolio of businesses with common skills or potentially shared business systems. The transformation of Thomson Corporation from essentially a newspaper chain into the Thomson-Reuters information services company illustrates an architect at work in the selection and disposal of assets and the integration of the new portfolio of businesses, clearly distinct from the work of the surgeon on unrelated companies in a portfolio.
There is, of course, some gray area between these five roles. Some parent companies may also change roles due to a change in strategy. Nonetheless, most portfolio companies fit into one of these types at a given time. The corresponding role defines, in part at least, their M&A strategies.
ROLE OF M&A FOR HOLDING COMPANY CENTERS
What is the role of M&A if the parent is in the "controller" role?
The parent as controller uses M&A to &
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