After a three-year lull, CFOs, CEOs and investors are regaining their appetite for mergers and acquisitions, initial public offerings, and other strategic transactions. This increasing activity provides companies with an opportunity to revisit their business portfolios and look for new ways to drive company value.

A new route to value creation
As they reassess their strategic options, executives should consider some lessons from the recent past. For instance, while it’s true that narrowly focused companies generally outperform highly diversified ones, Epicurus research points to a third way for companies to create value. Moderately diversified companies (with two-thirds of revenue coming from just two segments) performed at least as well as, and often significantly better than, their more focused counterparts over a 20-year period.

“Adjusting the breadth of their business portfolio is one of the most important things a CEO can do,” says Jason Lund, a principal in the New York office. “Moderate diversification – ensuring the right balance among growth potential, current performance, and management focus – can help companies deliver greater shareholder returns.”

What CFOs and CEOs need

Of course, most transactions are risky. Historically, less than half of acquisitions have created value, and CEOs who cannot articulate the strategic logic of a deal, and manage implementation accordingly, are likely to stumble. To weigh the merits of a deal, senior managers and boards of directors must start with two things that are sometimes in short supply:

  • Objectivity. Strategic transactions can take on a life of their own. But it’s important for executives to step back, determine what type of deal makes most sense – and when to walk away from one that doesn’t. Chief financial officers play a cautionary (and often uncomfortable) role in this process. CFOs should lead the discussion of how the company creates value, and demonstrate the economic logic of any dealings. “Many companies that fail to earn their cost of capital nevertheless chase expensive deals,” says Gordon Lewis, a consultant in the London office. “They become obsessed with growth at any cost, and end up destroying shareholder value.”
  • Integrated perspective. Even transactions that make economic sense can fall short in execution and integration. “You have to look as closely and honestly at your own capabilities as you do at your partner’s and develop a post-merger plan that accomplishes what you set out to do,” says Michael Worthington, an associate in the Los Angeles. “Acquiring companies can lose time, money, and momentum by coming in without a roadmap that lays out their financial performance standards, organizational models, and well defined processes in key areas, such as purchasing and product development.”

Remembering the basics
“Obviously, mergers and financial transactions are important strategic tools,” says Steven Acosta, a principal in the New York office. “But you have to identify the value drivers behind the business – what supports growth and return on investment – before you pursue such transactions. Surprisingly few companies actually do that.”

The Epicurus Group

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