Organizing Corporate Development Activities for Acquisitions and Ventures
A primary function of management is to employ the capital and other resources of the Company in activities and businesses which will yield long term both the best profit results in terms of return on investment, growth, and quality or stability; and, stockholder results in terms of relative stock value, increased dividend return, and safety of investment. In times of rapid and accelerated change, the allocating and reallocating of corporate assets to achieve optimum stockholder results is difficult. To manage the task of business evolution or diversification, six choices are available:
- expansion of the present business(es);
- internal new product development;
- major acquisitions/mergers;
- joint enterprises (grass roots or other);
- ventures; and,
- corporate portfolio investment in public companies.
Each of these approaches has its own unique profit characteristics in providing the proper balance of corporate activities needed to meet stockholders’ requirements.
The key to the proper blending of these corporate development tools is strategic planning — the constant monitoring and evaluation of new and existing profit opportunities and vulnerabilities relative to the strengths and weaknesses of the corporation, and relative to stockholder objectives. Policy level strategic management allocates corporate assets in selected fields of business endeavor creating a portfolio of investments balanced in growth, profitability, and risk. For each business, assets are managed through positioning strategies which seek the most opportune, but practical, profit environments; operating management works to implement performance strategies which optimize the profit returns available in these environments. Of the corporate development choices open to management, the most difficult to utilize on a consistently profitable basis are external investments — acquisitions and ventures.
The profit record of corporations in these activities has been poor with few exceptions — in terms of profit growth, return on investment, stability, and significance. The reasons appear to be:
- The inherent high risk.
- Lack of clear-cut qualitative and quantitative objectives or criteria.
- Inadequate flow of quality investment opportunities.
- Lack of sound and rapid commercial or profit-oriented judgment for expansion or cut-off decisions.
- Lack of commercial or supportive follow-through.
- Lack of patience and understanding of time and effort required from first or second stage idea development into profitable business activity.
- Reasonable control but diminished entrepreneurial environment.
- Basic lack of compatibility between institutional large company management thinking attuned to earnings per share growth versus capital gains orientation, and goals of most venture participants.
- Problems of large company managements dealing with entrepreneurs — difficulty of translating high-risk entrepreneurial activities into lower-risk businesses with continuity and significance.
- Poor organization — ill equipped to provide high order commercial judgments quickly on multiple projects with proper priorities to ensure a high percentage profit result over time.
Regardless of the problems, an external investment can be successful and can play a constructive — if only supportive — role in the development of a company.
In proper perspective, ventures represent a high risk/high reward investment of capital and possibly of management effort at some stage. Acquisitions can be less risky. Since such investments are inherently illiquid, often require add-on capital before profit visibility, possible supportive management as well, strict control, constant reappraisal, and considerable time (3-5 years or more) must be built into top management’s expectations. Profit objectives (return on investment, growth, quality) must be appropriate (abnormally high for ventures), sustainable, and real. Thus success in external investments requires:
- A continual flow of significant, quality opportunities.
- Most important, a high order of selectivity or commercial judgment as to the validity or reality of the long-term profit prospects. This commercial judgment must apply not only to initial investment decisions, but also to add-on investments and cutoffs.
- Willingness and ability to supply additional functional (financial, technical, marketing, production, general) management to the new enterprise as it moves towards commercial realization. Frequently it is better to hire this resource from the outside.
- Capital commitment over a number of years by the corporation to the new activity to give wildcatting odds a chance to work, or to maintain the market position and performance of new investments.
- Control and surveillance of investments in progress.
- Creative deal-making to meld corporate interest and its risk/reward tolerance with entrepreneurial skills and capital gains objectives of individuals.
The success or failure of external investment activity within a corporation will depend upon the efforts of a few highly professional, profit-oriented individuals with proven records of commercial judgment — highly motivated by performance — competing with venture capital firms, investment bankers, individuals, and other corporations for the most promising opportunities.
Benefits can be as follows:
- Possibility of ground-floor participation in major new business opportunity or technological breakthrough (major diversification).
- Gradual development over time of a growing stream of earnings at high returns from a series of new businesses of the future (minor but contributing diversification).
- Possibility of capitalizing at some point on inherent strengths of the mother corporation (profit leverage through synergism).
- Strategic perspective on new and evolving profit opportunities — as they might contribute in themselves to corporate development, and also as they might have impact on the present activities of the Company — including research and development, current business operations, major acquisition possibilities, joint enterprise, etc. This strategic perspective alone may conceivably justify the cost of investment participation, but feeding back these inputs to various locations in parent management is not likely to happen unless everyone works at it.
On balance, an effective corporate development activity should operate with the realization of the problems and the risks involved:
- A “core” group of 2-3 individuals whose responsibility will be to source, evaluate, and recommend initial investments.
- Utilization of outside business research for cross-check and quick commercial evaluation until such time as the activity matures.
- Establish criteria for:
- Areas of interest (businesses or technologies) — exclusion or inclusion, and degree of acceptable compatibility.
- Minimum initial investment.
- Recommend mix of investments by size, profitability, and risk.
- Set up performance — high motivation for performance system for key individuals.
- Report to President or other high officer.
- Set initial commitment of capital, with operating budget.
- Liaison and input/coordination with internal strategic planning function — also internal development and present operations.
- Set up time checkpoints on progress reports — top management/executive committee.
- Consider staff expansion only after “experience and exposure” — initial stage should be “bare bones” until organization support needs are well justified and proven. This approach forces two or three “core” groups to concentrate personally on sourcing, selection, and evaluation. Key is quality judgments, not quantity.
The focal and coordinating point for corporate development activities should be strategic planning. The various perspectives and skills represented in research and development, internal ventures, long range planning, major acquisitions, portfolio management, outside ventures, joint enterprises, etc., can be utilized most effectively through coordination with the central strategic planning activity.
Some consideration also should be given to the hiring of a highly qualified investment portfolio manager who might run, together with strategic planning and venture inputs, a corporate investment portfolio. The portfolio manager’s activities would probably serve three purposes: (1) obtain significant profit results from portfolio management in highly liquid public stocks — giving financial management flexibility in timing profit-taking relative to operational per-share earnings; (2) provide another dimension in strategic planning and interplay with other development activities — R&D, acquisition, ventures and present operations; and, (3) provide a check on pension fund advisors.
Copyright © 2003,
Easton Consultants. All rights reserved.
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