M&A needn't be a loser's game

Three out of four acquisitions fail; they destroy wealth for the buyer's shareholders, who end up worse off than they would have been had the deal not been done. But it doesn't have to be that way, argue the authors. In evaluating acquisitions, companies must look beyond the lure of profits the income statement promises and examine the balance sheet, where the company keeps track of capital. It's ignoring the balance sheet that causes so many acquisitions to destroy shareholders' wealth. Unfortunately, most executives focus only on sales and profits going up, never realizing that they've put in motion a plan to destroy their company's true profitability--its return on invested capital. M&A, like other aspects of running a company, works best when seen as a way to create shareholder value through customers. Some deals are sought to help create better value propositions for the business or to better execute current strategies--or to block competitors from doing these things. But most deals are about customers and should start with an analysis of customer profitability. Some customers are deliciously profitable; others are dismal money losers. The better an acquirer understands the profitability of its own customers, the better positioned it will be to perform such analyses on other companies. In this article, the authors show that customer profitability varies far more dramatically than most managers suspect. They also describe how to measure the profitability of customers. By understanding the economics of customer profitability, companies can avoid making deals that hurt their shareholders, they can identify surprising deals that do create wealth, and they can salvage deals that would otherwise be losers.     

Ownership structure and divestiture decisions: Evidence from Australian firms

Divestitures create shareholder value by helping firms to optimize their portfolio of assets. However, firms may forego value enhancing divestitures because of agency problems. More specifically, large controlling shareholders may prefer to retain the assets in order to extract private benefits of control at the expense of minority shareholders. In this paper, we explore the role that other blockholders play in constraining the largest shareholder's influence. The results indicate that divestiture activity decreases with the ownership of the largest shareholder. The presence of another significant blockholder appears to curb this negative bias towards divestitures. Our findings provide an economic rationale for the higher performance of firms characterized by more balanced ownership structures. Involvement of family owners also appears to provide similar benefits.     

How Preussag Became TUI: A Clinical Study of Institutional Blockholders and Restructuring in Europe

Between 1997 and 2004, Preussag, a diversified German conglomerate of "old economy" businesses, transformed itself into TUI, a company focused almost entirely on tourism and logistics. We analyze how Preussag executed this change, and how the change contributed to Preussag's underperformance in the stock market. We find that only the divestitures created value, that the strategy to invest in tourism destroyed value, and that the acquisition premiums Preussag paid were mostly unjustified. The case shows how divestiture programs increase the liquid resources available to management and casts doubt on the positive governance role of institutional blockholders.     

Creating new growth platforms

Sooner or later, most companies can't attain the growth rates expected by their boards and CEOs and demanded by investors. To some extent, such businesses are victims of their own successes. Many were able to sustain high growth rates for a long time because they were in high-growth industries. But once those industries slowed down, the businesses could no longer deliver the performance that investors had come to take for granted. Often, companies have resorted to acquisition, though this strategy has a discouraging track record. Over time, 65% of acquisitions destroy more value than they create. So where does real growth come from? For the past 12 years, the authors have been researching and advising companies on this issue. With the support of researchers at Harvard Business School and Insead, they instituted a project titled "The CEO Agenda and Growth". They identified and approached 24 companies that had achieved significant organic growth and interviewed their CEOs, chief strategists, heads of R&D, CFOs, and top-line managers. They asked, "Where does your growth come from?" and found a consistent pattern in the answers. All the businesses grew by creating new growth platforms (NGPs) on which they could build families of products and services and extend their capabilities into multiple new domains. Identifying NGP opportunities calls for executives to challenge conventional wisdom. In all the companies studied, top management believed that NGP innovation differed significantly from traditional product or service innovation. They had independent, senior-level units with a standing responsibility to create NGPs, and their CEOs spent as much as 50% of their time working with these units. The payoff has been spectacular and lasting. For example, from 1985 to 2004, the medical devices company Medtronic grew revenues at 18% per year, earnings at 20%, and market capitalization at 30%.     

Comparing acquisitions and divestitures

We study the acquisition and divestiture activity of a sample of 1305 firms from 59 industries during the 1990–1999 period. Consistent with the importance of restructuring activity during the 1990s, we find that half of the sample firms are acquired or engage in a major divestiture. Consistent with the notion that economic change is a source of the observed restructuring activity, we find significant industry clustering in both acquisitions and divestitures. We also study the announcement effects of the two forms of restructuring and find that both acquisitions and divestitures in the 1990s increase shareholder wealth. Moreover, the wealth effects for both acquisitions and divestitures are directly related to the relative size of the event. The symmetric, positive wealth effects for acquisitions and divestitures are consistent with a synergistic explanation for both forms of restructuring and are inconsistent with nonsynergistic models based on entrenchment, empire building and hubris.     

THE ART OF STRATEGIC DIVESTMENT

Divestiture makes sense only as part of a sound, long-term strategy. Before simply shedding business units, companies must consider all the options, and be willing to constantly review, replenish, and trim portfolios as markets change and evolve. In so doing, a company increases not only its flexibility but also its chances of adding shareholder value.
This article examines the corporate restructuring "big picture," in which divestments are only one alternative. It reviews additional measures besides divestments, such as outsourcing, joint ventures, asset swaps, and using new technologies to cut costs, and provides case studies of each. It also raises some interesting issues regarding divestiture, such as ways to sell a business unit without strengthening a competitor's hand, as well as strategies for improving a business unit's valuation in preparation for sale. The authors, who are M&A advisors at Accenture, conclude that "a carefully planned and well-executed restructuring that involves divestiture can be as significant a victory for management and shareholders as a successful acquisition."     

剥离重组长期效应与股权结构的实证分析

1998年至2006年间的58家剥离重组事件的股东长期超常回报在事件前年度与对照组无差异,事件后年度显著低于对照组;在事件发生后年度,剥离行为能促进企业债务结构与盈利能力的改善,但有效期间和影响程度有限。剥离母公司各项财务指标中,EPS的超常增量变化与股东长期超常回报显著正相关;由于剥离企业的各类股权结构与股东长期超常回报不具显著的线性相关性,说明代理理论无法有效解释剥离行为效应。     

Tailored logistics: the next advantage

How many top executives have ever visited with managers who move materials from the factory to the store? How many still reduce the costs of logistics to the rent of warehouses and the fees charged by common carriers? To judge by hours of senior management attention, logistics problems do not rank high. But logistics have the potential to become the next governing element of strategy. Whether they know it or not, senior managers of every retail store and diversified manufacturing company compete in logistically distinct businesses. Customer needs vary, and companies can tailor their logistics systems to serve their customers better and more profitably. Companies do not create value for customers and sustainable advantage for themselves merely by offering varieties of goods. Rather, they offer goods in distinct ways. A particular can of Coca-Cola, for example, might be a can of Coca-Cola going to a vending machine, or a can of Coca-Cola that comes with billing services. There is a fortune buried in this distinction. The goal of logistics strategy is building distinct approaches to distinct groups of customers. The first step is organizing a cross-functional team to proceed through the following steps: segmenting customers according to purchase criteria, establishing different standards of service for different customer segments, tailoring logistics pipelines to support each segment, and creating economics of scale to determine which assets can be shared among various pipelines. The goal of establishing logistically distinct businesses is familiar: improved knowledge of customers and improved means of satisfying them.     

Value acceleration: lessons from private-equity masters

The most successful private-equity firms regularly spearhead dramatic business transformations, creating exceptional returns for their investors. To understand how those firms do it, the authors studied more than 2,000 PE transactions over the past ten years and discovered that the top performers' success stems from the rigor with which they manage their businesses. This article describes the four management disciplines vital to the success of the best PE firms. First, for each business, they define an investment thesis: a brief, clear statement of how to make the business more valuable within three to five years. The thesis, which guides all actions by the company, usually focuses on growth. PE firms know that the demonstration of a path to strong growth produces the big returns on investment. Second, they don't measure too much. They zero in on a few financial indicators that most clearly reveal the business's progress in increasing its value. They watch cash more closely than earnings and tailor performance measures to each business, rather than imposing one set of measures across their entire portfolio. Third, they work their balance sheets, mining undervalued assets, turning fixed assets into sources of financing, and aggressively managing their physical capital. Last, they make the center the shareholder. Corporate staffs in PE firms make unsentimental investment decisions, buying and selling businesses when the price is right and bringing in new management when performance falters. These firms also keep their corporate centers extremely lean. By adopting these four disciplines, executives at public companies should be able to reap significantly greater returns from their own business units.     

Strategy as revolution

How often does the strategic-planning process start with senior executives asking what the rest of the organization can teach them about the future? Not often enough, argues Gary Hamel. In many companies, strategy making is an elitist procedure and ?strategy? consists of nothing more than following the industry's rules. But more and more companies, intent on overturning the industrial order, are rewriting those rules. What can industry incumbents do? Either surrender the future to revolutionary challengers or revolutionize the way their companies create strategy. What is needed is not a tweak to the traditional strategic-planning process, Hamel says, but a new philosophical foundation: strategy is revolution. Hamel offers ten principles to help a company think about the challenge of creating truly revolutionary strategies. Perhaps the most fundamental principle is that so-called strategic planning doesn't produce true strategic innovation. The traditional planning process is little more than a rote procedure in which deeply held assumptions and industry conventions are reinforced rather than challenged. Such a process harnesses only a tiny proportion of an organization's creative potential. If there is to be any hope of industry revolution, senior managers must give up their monopoly on the creation of strategy. They must embrace a truly democratic process that can give voice to the revolutionaries that exist in every company. If senior managers are unwilling to do this, employees must become strategy activists. The opportunities for industry revolution are mostly unexplored. One thing is certain: if you don't let the revolutionaries challenge you from within, they will eventually challenge you from without--in the marketplace.     

Funding growth in an age of austerity

Everyone knows that corporate growth--true growth, not just agglomeration--springs from innovation. And the common wisdom is that companies must spend lavishly on R&D if they are to innovate at all. But in these fiscally cautious times, where every line item of every budget in every company is under intense scrutiny, many organizations are doing just the opposite. They tighten their belts, subject nascent product-development programs to rigorous screening, and train R&D staffers to think in business terms so the researchers will be better able to decide whether an idea for a product or service is worth pursuing in the first place. Such efficiency measures are commendable, say authors Gary Hamel and Gary Getz. But frugality is not a growth strategy, they point out, and, in truth, there is very little correlation between corporate performance and the amount spent on innovation. Companies like Southwest, Cemex, and Shell Chemicals have shown that businesses don't have to spend a fortune on R&D to reap the benefits of innovation. To produce more growth per dollar invested, companies must produce more innovation per dollar invested. Hamel and Getz explain how businesses can dramatically improve their innovation yields. They offer these five imperatives: Increase the number of innovators among existing employees (whatever their job titles) by involving them in innovation processes and events. Focus on developing truly radical ideas--ones that change customers' expectations and behaviors and industry economics--not just incremental ideas. Look for innovation sources outside the organization, as well as inside. Increase the learning from small, low-risk experiments. And commit to long-term, consistent development efforts.     

The uncompromising leader

Managing the tension between performance and people is at the heart of the CEO's job. But CEOs under fierce pressure from capital markets often focus solely on the shareholder, which can lead to employee disenchantment. Others put so much stock in their firms' heritage that they don't notice as their organizations slide into complacency. Some leaders, though, manage to avoid those traps and create high-commitment, high-performance (HCHP) companies. The authors' in-depth research of HCHP CEOs reveals several shared traits: These CEOs earn the trust of their organizations through their openness to the unvarnished truth. They are deeply engaged with their people, and their exchanges are direct and personal. They mobilize employees around a focused agenda, concentrating on only one or two initiatives. And they work to build collective leadership capabilities. These leaders also forge an emotionally resonant shared purpose across their companies. That consists of a three-part promise: The company will help employees build a better world and deliver performance they can be proud of, and will provide an environment in which they can grow. HCHP CEOs approach finding a firm's moral and strategic center in a competitive market as a calling, not an engineering problem. They drive their firms to be strongly market focused while at the same time reinforcing their firms' core values. They are committed to short-term performance while also investing in long-term leadership and organizational capabilities. By refusing to compromise on any of these terms, they build great companies.     

Cracking the code of change

Today's fast-paced economy demands that businesses change or die. But few companies manage corporate transformations as well as they would like. The brutal fact is that about 70% of all change initiatives fail. In this article, authors Michael Beer and Nitin Nohria describe two archetypes--or theories--of corporate transformation that may help executives crack the code of change. Theory E is change based on economic value: shareholder value is the only legitimate measure of success, and change often involves heavy use of economic incentives, layoffs, downsizing, and restructuring. Theory O is change based on organizational capability: the goal is to build and strengthen corporate culture. Most companies focus purely on one theory or the other, or haphazardly use a mix of both, the authors say. Combining E and O is directionally correct, they contend, but it requires a careful, conscious integration plan. Beer and Nohria present the examples of two companies, Scott Paper and Champion International, that used a purely E or purely O strategy to create change--and met with limited levels of success. They contrast those corporate transformations with that of UK-based retailer ASDA, which has successfully embraced the paradox between the opposing theories of change and integrated E and O. The lesson from ASDA? To thrive and adapt in the new economy, companies must make sure the E and O theories of business change are in sync at their own organizations.     

The founder's dilemma

Why do people start businesses? For the money and the chance to control their own companies, certainly. But new research from Harvard Business School professor Wasserman shows that those goals are largely incompatible. The author's studies indicate that a founder who gives up more equity to attract cofounders, new hires, and investors builds a more valuable company than one who parts with less equity. More often than not, however, those superior returns come from replacing the founder with a professional CEO more experienced with the needs of a growing company. This fundamental tension requires founders to make "rich" versus "king" trade-offs to maximize either their wealth or their control over the company. Founders seeking to remain in control (as John Gabbert of the furniture retailer Room & Board has done) would do well to restrict themselves to businesses where large amounts of capital aren't required and where they already have the skills and contacts they need. They may also want to wait until late in their careers, after they have developed broader management skills, before setting up shop. Entrepreneurs who focus on wealth, such as Jim Triandiflou, who founded Ockham Technologies, can make the leap sooner because they won't mind taking money from investors or depending on executives to manage their ventures. Such founders will often bring in new CEOs themselves and be more likely to work with their boards to develop new, post-succession roles for themselves. Choosing between money and power allows entrepreneurs to come to grips with what success means to them. Founders who want to manage empires will not believe they are successes if they lose control, even if they end up rich. Conversely, founders who understand that their goal is to amass wealth will not view themselves as failures when they step down from the top job.     

CFOs and strategists: forging a common framework

Companies have become increasingly polarized into two divergent camps: those who consider shareholder value the key to managing the company and those who put their faith in gaining competitive advantage. Indeed, that age-old debate between investing for the long term and showing outstanding short-term results is back - only this time the camps are flying banners with the new buzzwords of corporate America: competitive advantage and shareholder value. In this article, Alfred Rappaport attempts to settle the debate once and for all, arguing forcefully that establishing competitive advantage and creating shareholder value both stem from a common economic framework. In fact, long-term productivity is the hinge from which both sustainable competitive advantage and consistent results for the shareholder hang. But many managers refuse to accept this theory and cling to the mistaken belief that the market does not actually value the long-term productivity of their company but judges it only by its short-term performance. They then jump to a second mistaken conclusion: assuming they must depart from the shareholder-value model to improve their competitive position. Rappaport attacks these mistaken beliefs, showing that the stock market does value the long-term productivity of a company and that it is not necessary to depart from the shareholder-value model to improve a company's competitive position. Maximum returns for current shareholders will materialize only when managers maximize long-term shareholder value and deliver interim results that attest credibly to sustainable competitive advantage.     

Creating corporate advantage

What differentiates truly great corporate strategies from the merely adequate? How can executives at the corporate level create tangible advantage for their businesses that makes the whole more than the sum of the parts? This article presents a comprehensive framework for value creation in the multibusiness company. It addresses the most fundamental questions of corporate strategy: What businesses should a company be in? How should it coordinate activities across businesses? What role should the corporate office play? How should the corporation measure and control performance? Through detailed case studies of Tyco International, Sharp, the Newell Company, and Saatchi and Saatchi, the authors demonstrate that the answers to all those questions are driven largely by the nature of a company's special resources--its assets, skills, and capabilities. These range along a continuum from the highly specialized at one end to the very general at the other. A corporation's location on the continuum constrains the set of businesses it should compete in and limits its choices about the design of its organization. Applying the framework, the authors point out the common mistakes that result from misaligned corporate strategies. Companies mistakenly enter businesses based on similarities in products rather than the resources that contribute to competitive advantage in each business. Instead of tailoring organizational structures and systems to the needs of a particular strategy, they create plain-vanilla corporate offices and infrastructures. The company examples demonstrate that one size does not fit all. One can find great corporate strategies all along the continuum.     

Getting offshoring right

The prospect of offshoring and outsourcing business processes has captured the imagination of CEOs everywhere. In the past five years, a rising number of companies in North America and Europe have experimented with this strategy, hoping to reduce costs and gain strategic advantage. But many businesses have had mixed results. According to several studies, half the organizations that have shifted processes offshore have failed to generate the expected financial benefits. What's more, many of them have faced employee resistance and consumer dissatisfaction. Clearly, companies have to rethink how they formulate their offshoring strategies. A three-part methodology can help. First, companies need to prioritize their processes, ranking each based on two criteria: the value it creates for customers and the degree to which the company can capture some of that value. Companies will want to keep their core (highest-priority) processes in-house and consider outsourcing their commodity (low-priority) processes; critical (moderate-priority) processes are up for debate and must be considered carefully. Second, businesses should analyze all the risks that accompany offshoring and look systematically at their critical and commodity processes in terms of operational risk (the risk that processes won't operate smoothly after being offshored) and structural risk (the risk that relationships with service providers may not work as expected). Finally, companies should determine possible locations for their offshore efforts, as well as the organizational forms--such as captive centers and joint ventures--that those efforts might take. They can do so by examining each process's operational and structural risks side by side. This article outlines the tools that will help companies choose the right processes to offshore. It also describes a new organizational structure called the extended organization, in which companies specify the quality of services they want and work alongside providers to get that quality.     

An Unconventional Conglomerateur: Henry Singleton and Teledyne

Capital allocation involves decisions about raising and returning capital, and about acquiring and selling companies—all of which can have major effects on shareholder value. Rather than judging CEOs by growth in revenues or earnings, the author argues that they should be judged by increases in the per share value of the companies they manage and also in comparison with the returns generated by peer firms and the broader market. Successful CEOs have been able to overcome the “institutional imperative”—the tendency of managers to focus on the sheer size of their enterprises and to avoid doing things that might be seen as unconventional. In this chapter from his recent book, The Outsiders, which provides accounts of eight remarkably successful and long‐tenured CEOs, the author describes the successful management by Henry Singleton of the conglomerate Teledyne from 1963 to 1990, a period during which the company's shareholders enjoyed annualized returns of over 20%. During the 1960s, the company produced high returns mainly by making large acquisitions funded by new equity issues. During the 1970s and '80s, by contrast, Teledyne used massive share repurchases to return excess capital to shareholders. Thus, Singleton adjusted his capital allocation strategy in response to changes in product and financial markets—and to changes in the perceived difference between market and intrinsic values. When investors provided capital with relatively low required rates of return, as in the 1960s, Singleton was an aggressive buyer investor in a wide range of businesses. But when interest rates were high and equity valuations were low, as in the 1970s and early 1980s, Singleton used share repurchases to create value by reducing investment and limiting growth. The company's shareholders were well rewarded in both environments.     

Lead from the center. How to manage divisions dynamically

Conventional wisdom holds that a company's divisions should be given almost total autonomy--especially under conditions of uncertainty--because they are closer to emerging technologies, customers, and competitors than corporate headquarters could ever be. But research from Michael Raynor and Joseph Bower suggests that the corporate office should be more, not less, directive in turbulent markets. Rapid changes in an industry make it difficult to predict where and when synergies among divisions might emerge. With so many possibilities and such uncertainty, companies can't afford to sacrifice their ability to flexibly execute business strategy. Corporate headquarters must play an active role in defining the scope of division-level strategy, the authors say, so that divisions do not act in ways that undermine opportunities to collaborate in the future. But neither can companies afford to sacrifice the competitiveness of their divisions as stand-alone businesses. In creating corporate-level strategic flexibility, a corporate office must balance the need for divisional autonomy now with the potential need for cooperation in the future. Through an examination of four corporations--Sprint, WPP, Teradyne, and Viacom--the authors challenge traditional approaches to diversification in which a company's divisions are either related (they share resources and collaborate) or unrelated (they compete for resources and operate as stand-alone businesses). They argue that companies should adopt a dynamic approach to cooperation among divisions, enabling varying degrees of relatedness between divisions depending on strategic circumstances. The authors offer four tactics to help executives manage divisions dynamically.