Using portfolio transformation to drive strategic deals

May 11, 2017


By Michael Niland, US Divestitures Leader, and Chris Rule, US Deals Partner

For many companies, business growth can come from identifying a strength and building on it through an acquisition or strategic alliance. But just as important for growth is determining which pieces of your company don’t fit your strategy and exploring the options for removing them.

That can be easier said than done. Companies often are an aggregation of multiple business units. For large, established corporations, decades of mergers and acquisitions may have resulted in hundreds of business units under the corporate umbrella. Even middle market companies can have several divisions and departments within the enterprise, with some responsible for a significant chunk of revenues, expenses or both.

Getting a clear view of these pieces and how they align with your company’s overall strategy can be difficult. But doing so is the key to portfolio transformation, in which the right mix of businesses can drive future growth for the company and its shareholders.

 

Three key considerations

Transforming a company’s portfolio requires three key considerations by management: shareholder value expectations, market evaluation and capabilities coherence.

Within each company, value usually is highly concentrated. Some of the company’s businesses generate all or most of the stock value, others produce little or no value, and the rest actually detract from its value. Management first needs to clearly understand where its company’s value is concentrated, then build on that. This could mean investing in high-value areas organically through increased output or new products, or pursuing inorganic growth through a merger or acquisition. It also could mean divesting of a neutral- or negative-value business.

This assessment of value concentration shouldn’t happen in a vacuum. Monitoring and understanding the market your company serves can better inform the assessment. For instance, where are market profit pools concentrated, and how are those pool concentrations likely to evolve? Recognizing that and factoring it into your growth strategy could confirm a divestiture decision or reveal other possibilities.

Companies also need to take a candid look at their capabilities and determine which ones most help their businesses compete and win. That might seem like common sense, but companies often don’t invest the time to figure out what they’re really good at and why they’re outperforming competitors in certain areas. This could be a specific technology, a best-selling product, customer service or something else entirely. Management should review how those leading capabilities align with the market profit pools and leverage them across the enterprise as much as possible. If a capability has only a narrow use, it could be a candidate for a high-value divestiture.

 

It takes all three

Value. Market. Capabilities. Evaluating all three is essential to optimizing a company’s portfolio so it can consider where to build and where to contract. You may have a leading product or service, but if the market is challenged, the opportunities to increase value could be limited. Or you may be dying to participate in a hot market or thriving industry, but if your company doesn’t yet have the capabilities to compete, long-term value creation likely will be elusive.

The crucial question that guides any portfolio assessment is “What do we want to be?” Taking that further, “How are we going to create value for customers in the market?” That’s why it’s important to determine how your company can distinguish itself from the competition and win, and what products/services and markets will make that possible. Winning companies connect their strategic direction to the capabilities that make them unique. They make hard choices about products and differentiation, and then stick to them.

 

Not a one-time process

Aligning the pieces of your portfolio with the company’s strategy is tough. Management teams need to have a rigorous approach with the right guidance if they want investors to be confident in the company’s direction.

Portfolio transformation also can’t be a one-time event. Market shifts, technological developments and other factors will prompt adjustments and the need to refresh the mix of businesses.

Finally, transformation must always include elements of capabilities-driven strategic thinking. Again, to pursue what you want to be, you have to be honest and direct about what your company does better than others, and let that drive your decisions on divestitures.

 

For more on trends driving divestitures and other deals activity, please visit our PwC Divestitures page.


Related Links

Contacts

Bob Saada

US Deals Leader Tel: +1 (646) 471-7219 Email: bob.d.saada@pwc.com

Neil Dhar

Tel: +1 (646) 471-3700 Email: neil.dhar@pwc.com