Corporate Development Strategy
Thriving in your business ecosystem
Relationship advice for corporate developers
by Mark Jamrozinski and Heather Blumberg
Most of the corporate development professionals we have the pleasure of working with are focused on pursuing their firm’s overall corporate strategy. They all approach strategy execution in different ways but, in the end, each of them is weighing the costs and risks of organic growth vs. inorganic growth. It’s the name of the game, and understanding the trade-offs can make – or break – everything.
In our latest global corporate development survey – Corporate development strategy: Thriving in your business ecosystem – we wanted to determine how senior investment leaders are using creativity and advanced thinking to enhance their deal-making. After all, hard work alone may no longer be enough to ensure success, and while most deals look good on paper, in reality 75% of integrations fail to add meaningful value, according to a previous Deloitte survey. Leaders will need to adapt to an increasingly fast-paced and changing environment to succeed tomorrow.
Four aspects of our report in particular resonated with us, each dealing with different but complementary ways leading corporate development professionals are driving dealflow that we think Canadian companies will need to address.
The first lesson?
- Make your firm irresistible – buyers who are easy to transact with, have strong references with former partners, make fair offers, demonstrate integrity and, perhaps above all, view their acquisitions as the beginnings of broader partnerships are the most successful. Your M&A reputation is an excellent complement to the time-intensive effort of having to constantly originate opportunities and continuously develop relationships with potential sellers. Don’t go to them, draw them to you.
It’s the best time to do so. Why?
- Foreign exchange rates are anything but ideal at the moment, giving a strategic price advantage to US buyers over Canadian ones. It is often the perception that, in order to maximize value, Canadian sellers must go to foreign buyers. After all, the Canadian market is already one of the smallest in the developed world. But if you make your firm irresistible, size doesn’t necessarily matter.
According to our survey, 60 percent of corporate development leaders are investing in their reputations as preferred acquirers, leading to strong, long-term relationships and recognition as part of the fabric of the community. A new level of flexibility will be required, though. Teams hampered by too much bureaucracy may miss opportunities with attractive targets that aren’t beholden to convention. Investment in specific technologies to manage dealflow and relationships more efficiently may also be required.
Be your (ever-better) self
Our survey also showed that corporate development leaders are innovating more. In fact, this is now such an imperative that the corporate development community believes “innovation-centered” M&A is set only to increase over the next two years. Unfortunately, Canadian firms are not as prepared for this shift as they should be. According to the survey, 87 percent are not ready for this kind of disruption, while 43 percent believe they're more ready than they are.
The shift brings new risk, of course – but also new ways of managing it. In particular:
- The capabilities of individual team members will have to evolve into a new complement of skills, methodologies and subject matter expertise.
- Service providers and corporate development groups will also need new due diligence techniques to analyze this new risk.
But the real challenge for corporate development professionals will be managing change itself. Their skills and expertise are not becoming less important; it’s just that other skills are ascendant. The paradigm is shifting and evaluating transactions purely on financial and operational metrics won’t cut it. Creativity and flexibility, in particular, will be especially valuable in innovation-centered M&A.
It’s also likely that corporate developers will have to adapt to new deal structures, and that might include levels of ownership or control they’re not accustomed to. We know companies that are celebrated for being innovative are often the result of passionate entrepreneurial collaboration. It shouldn’t be surprising, then, that deals with companies like these will often feature stipulations about continued involvement of key staff at some level – whether they are founders or not.
We also learned from our survey that leading corporate developers are taking shareholder activism more seriously.
- Nearly 60 percent of respondents to this year’s survey say they see shareholder activism affecting transaction activity in their industry.
- Meanwhile, 24 percent say their own companies are more likely to engage in M&A as a result of activism.
All of this is not necessarily a “bad” thing, but shareholder activism is on the rise as they increasingly assert their views on the ways in which companies deploy capital and manage performance.
What does this mean? Leading corporate development teams should:
- Address shareholder concerns by preparing a comprehensive and objective understanding of the intrinsic value of their business, which can then be compared with expected market values of transaction alternatives.
- Provide an informed analysis of market conditions and update it often.
Companies that lack a cohesive corporate strategy, combining both organic and inorganic growth and a management team that can execute, may be targeted by activist shareholders and risk losing the support of the investment community.
Extended family matters
Losing the support of the investment community – major shareholders and research analysts especially – can also happen in other ways. That’s why leading developers are using investor relations (IR) professionals in a more appropriately expansive way.
Both management teams and IR professionals need to understand the importance of communicating M&A events to the marketplace. Many stakeholders who rely on IR communications, especially about value creation and synergy targets, use what’s communicated as a minimum expectation.
In the context of M&A, then, IR professionals should be:
- Involved in, and knowledgeable of, stress-testing and articulating deal rationale, value drivers, integration approach, and synergy targets.
- Testing the markets’ appetite for the company’s growth strategy.
- Communicating targets and regularly communicating performance against those targets.
According to our survey, however, most companies aren’t doing this. Only 20 percent of respondents say IR is critical to achieving deal targets. To them, IR is simply about disseminating information and answering questions after the fact. But it should be a key business partner that advises on shareholder perspectives during the entire process.
Living happily ever after
Corporate development is moving into a new era. While the playbooks, disciplines and structures companies have perfected over the past few decades remain essential, they’re no longer sufficient. What’s needed now and for the future is fresh thinking, a high tolerance for disruption, and the ability to quickly and nimbly convert change into opportunity.
It’s not going to be easy, but we really believe that sometimes you just have to say “I do.”
Special thanks to Christian Caron, Marco Jaeger and Robert Olsen for their stories and insights on this topic.