Transforming Portfolios for Long-Term Growth in a Red-Hot M&A Market
source link: https://hbr.org/sponsored/2021/09/transforming-portfolios-for-long-term-growth-in-a-red-hot-ma-market
Go to the source link to view the article. You can view the picture content, updated content and better typesetting reading experience. If the link is broken, please click the button below to view the snapshot at that time.
Transforming Portfolios for Long-Term Growth in a Red-Hot M&A Market
By Andrea Guerzoni, Brian Salsberg, and Rich Mills
We are in the biggest mergers and acquisitions (M&A) market in history. CEOs are reshaping portfolios to address new technology needs, changing customer behavior, and heightened environmental, social, and governance (ESG) concerns.
Companies are using M&A to build scale and quickly fill gaps that cannot be satisfied fast enough through organic initiatives and specific investments such as joint ventures. At the same time, they are selling businesses that are not expected to be market leaders and those that are no longer core to their long-term value story.
Data shows active transactors outperform
Between 2015 and 2019, companies with no acquisitions had negative compound annual growth in enterprise value (EV CAGR), according to EY analysis of Capital IQ data. Infrequent buyers (with five acquisitions or fewer) had median EV CAGR of 5.6%. But active buyers (with five-plus acquisitions) had median EV CAGR of 11.9%.
EY analysis also shows that divestors outperform as well. Even divestors in the weak M&A market from 2008 to 2010 outperformed non-divestors in the eight years following those transactions by 24 percentage points in median total shareholder return.
Three M&A trends shaping portfolios
Below are three trends that are driving companies to pursue M&A and divestments, and how companies are seeing success.
- Technology disruption: Digital everything—cloud capabilities, artificial intelligence (AI), cybersecurity, and more—is driving change, particularly in the industrial, manufacturing, automotive, health, and life sciences sectors. Companies are buying capabilities that take too long to build in-house while using divestments to jettison businesses that don’t fit their digital footprint or can generate proceeds to accelerate technology investments.
Action items for buyers:
- Consider how to incorporate new selling and distribution or delivery models, new customers who engage with products in a different way, and more data to be analyzed.
- Understand synergies and risks that differ from the core business and can be difficult to measure directly, such as customer lifetime value or customer acquisition costs.
- Assess governance structure and retention policies, especially when planning to allow the acquired company to retain autonomy.
Action items for sellers:
- Determine if you are better selling a non-core or slower-growth business, as such businesses may struggle to secure internal growth capital.
- Consider alternative deal structures, such as joint ventures with a technology company, to bring needed capabilities and scale innovation rapidly while also allowing current owners to reap valuation upside in a subsequent sale.
Why a biopharma company acquired technology through M&A: This company saw market opportunities related to advancing animal health and well-being but lacked the technology to gather critical information and actionable data to move forward. Through a series of acquisitions, the company added several digital technologies that let it play a role as an industry leader by improving animal well-being across the food-production value chain.
- Changing customer behavior: Companies are adapting their operating models to pandemic-induced customer behavior changes. For example, health care is often delivered digitally, and business-to-business customers have become more accepting of remote sales visits, lessening business travel. On the consumer side, the EY Future Consumer Index finds that 46% of consumers will shop more online for products that they previously bought in stores.
Action items for buyers:
- Identify growth platforms, which could include both selling the current product lines to new customers and expanding offerings to existing customers.
- Assess a potential target customer base: What is the growth potential? What does the target sell that you don’t offer? Consider opportunities for cross-selling and bundling offerings.
- Clearly articulate the sales strategy based on new products and services to align your go-to-market team with marketing messaging.
- Reward employee behaviors that align with the new go-to-market strategy.
Action items for sellers:
- Assess whether all businesses in your portfolio are meeting changing customer demands, if the capital required to support them is reasonable and available, and whether there may be a better owner for some assets.
- Define what the customer experience needs to be during the divestment transition process. Minimize disruption to avoid customer attrition.
- Plan for go-to-market changes and cost changes at the remaining organization.
How an edtech company enhanced remote offerings: During the Covid-19 pandemic, a high-growth education technology (edtech) software-as-a-service (SaaS) company, which already had an aggressive acquisition strategy, made multiple acquisitions to be more competitive in the remote learning environment. The acquisitions have complemented the company’s product offerings to meet changing customer needs.
- ESG
Focusing on profits alone is no longer enough. CEOs need to consider broader stakeholder considerations around financial value, customer value, people value, and societal value.
All companies’ KPIs should capture the value created for all stakeholders – including traditional measures like revenue and costs, but also brand value, diversity and inclusion, community impact, sustainability, and other measures.
From oil and gas companies reassessing alternative-energy investments to auto companies embracing electric vehicles, investors and other stakeholders are influencing companies’ ESG-related transaction decisions. At the same time, a rise of ESG-focused activist funds is driving scrutiny of corporate portfolios and ESG narratives, calling out “greenwashing” when they see it.
In 2020, the renewable-energy sector dollar volume in the equity capital markets reached a four-year high of $14.8 billion globally, while the sector hit a record 74 transactions, according to Dealogic.
Action items for buyers:
- Understand the valuation impact of possible future ESG risks, especially considering upcoming government standards.
- Buyers of ESG-friendly businesses like clean energy need to assess the asset’s financial potential and competitive advantages.
Action items for sellers:
- Weigh whether divesting assets can elevate the company’s ESG profile, thereby reducing stakeholder scrutiny. In fact, 46% of sellers in the 2021 EY Global Corporate Divestment Study say ESG issues directly influence divestment plans.
- Consider how a potential buyer might handle the environmental and stakeholder concerns surrounding a divested business.
Why an energy company expanded its buyer pool: An energy company was looking to sell underfunded coal assets in the face of long-term regulatory and reputational risks. The buyer pool was diminishing because banks and institutions were pulling back from funding these types of assets. The seller has taken to working with an expanded buyer pool, opening access to smaller mining companies by dividing up its portfolio into several transactions, allowing it to complete sales.
Plan your next move
Realizing CEOs’ long-term growth ambitions requires both M&A and divestments, each informing the other at every step, as companies actively manage their portfolio of businesses to increase long-term value.
Learn how EY-Parthenon teams can help you drive your corporate and growth strategy through M&A and divestments.
Andrea Guerzoni is EY Strategy and Transactions Global Vice Chair. Brian Salsberg is EY Global Buy and Integrate Leader. Rich Mills is EY Global Sell and Separate Leader. The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organization or its member firms.
Recommend
-
8
Versioning and long term stability promise in GTK+ The plans set out in this post supersede those that were publicised after the Toronto GTK+ hackfest in June 2016. This month, the GTK+ team will publish the first in...
-
10
Destaffed projects: short term wins, long term losses Staffing levels are a funny thing. They can both save and destroy a project. Let's say there's a project, tool, or service which you really like. It looks good, it wo...
-
14
Pixel 4a 5G long-term review
-
9
Monitoring Web page differences on a long term with screenshotsotsukare Thoughts after a day of workHallvord has created a very nic...
-
13
Bitcoin could hit $146K long-term by ‘crowding out gold,’ says JPMorgan – HodlalertBitcoin could hit $146K long-term by ‘crowding out gold,’ says JPMorgan...
-
6
Samsung Galaxy S20+ long-term review: trusty reliable With Samsung primed to announce the Galaxy S21 series in a couple of days, I figured out it might be a good time to assess how the Galaxy S20 series has fared so far. I happened t...
-
15
It appears the LINK price momentum has quieted down a bit in recent weeks. Although a 10.4% increase in value for the past months is still acceptable, many may see it as Chainlink peaking. With both exchange deposits and withdrawals hitting n...
-
5
CEO InsiderGreat Leaders Focus On Long-Term ValueJust like money, our time and capacity are finite. Good money managers understand this fact and weigh the opp...
-
6
Content Opinions expressed in this article are those of the sponsor....
-
13
Mobile App Growth Strategies For Long-Term SuccessUnlock the secrets to mobile app success in the UK with essential growth strategies for your mobile app, from analytics to user engagement and marketing....
About Joyk
Aggregate valuable and interesting links.
Joyk means Joy of geeK