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Portfolio Reviews

One of the biggest differences between investment bankers and corporate development officers is the tail.  As a general matter, bankers do the deal, close the deal, and walk away.  While they certainly want their clients to be successful with a deal (in part to motivate future deals) they’re generally won and done.

Corporate development officers live with their deals for a long time.  One of the valuable roles that corporate development can play is to be an unbiased arbiter of not only whether to do a deal, but also how it has delivered.  Often in partnership with the strategy function (and I would argue the two groups need to be tightly aligned if not fully commingled) corporate development is well placed to provide leadership with regular (annual?) reviews of the performance of deals.  As is true of anyone involved in the deal, there’s a natural tendency to avoid recognizing failure.  But we all know that it’s inevitable.

The classic McKinsey study suggested that well north of ½ of all M&A deals fail to deliver value.  So even if you’re radically outperforming the market, if you do a regular stream of deals you’ve got some stinkers in the mix.  An honest evaluation of underperformers serves several purposes.  It gives leadership confidence in the analysis of deals (if the report says everything is a home run I don’t believe the report).  It allows the business to identify problems and proactively pivot to save deals that are salvageable.  This could be anything from taking a closer look at pricing and sales process, to pivoting the product roadmap or identifying the need for additional investment.

The portfolio review is a valuable tool allowing the business to reset expectations from the initial business case which in most companies can sit like a [xx around the neck] of the business even in the face of changing client, market and competitor realities.  And finally, the portfolio review allows leadership to identify assets that – for any number of reasons – are no longer valuable to the company and should be shut down or divested.  In driving the portfolio review process, there are a few key lessons that can help corporate development be effective:

  • Frame the process without blame.  No one will want to participate and contribute to a process that could put a target on their back.
  • Get leadership support for the process and clarity on ownership.  Without the C-suite at your back, it will be hard to get uniform engagement and access to data.  And beyond financial data, you will want operating data to inform the analysis.  It’s not enough to know revenue goals were missed.  You need to know why.  And it needs to be clear that you own the process and have the [right] to require participation.  Otherwise, some will certainly opt out and your results will skew to the good news.
  • Celebrate the winners.  This is not a witch hunt but an unbiased evaluation, so make sure to note what worked and not just focus on what didn’t.
  • Own the metrics and the format.  Successful corporate executives are adept at spinning a story.  You need to ensure that the approach is uniform and reveals real performance.  The business leaders can add commentary, but the core analysis needs to be untainted by spin.
  • Pull off the bandage quickly.  Identify problems and deals that are going sideways early and force decisions on how to deal with them quickly.  The worst thing is not a failed deal, it’s a failed deal allowed to fester.  This is particularly common in a strong market where there’s a tendency to bury bad news in a wave of good news.
  • Present your playbook of solutions.  Delivering an unbiased assessment is a good start but just plopping a bunch of problems on leadership is not sufficient.  A good portfolio review, and by extension the corporate development or strategy owners, provides a path forward.  This is not just for the bad deals.  For great deals you should surface the question of how to accelerate success.  Should the deal get additional capital above what was budgeted in the original business case?
  • Be transparent.  While everyone may not embrace the need for a portfolio review, they will be more accepting of one where they know in advance what is required of them, what the output will look like and what decisions will be driven off of it.  Ideally you will have a template and even exemplars for the report and the individual deal evaluations.
  • Offer lessons learned.  This is not just about evaluating current deals but also about improving future deals.  Whether it’s a weakness in diligence or integration, or a failure to evaluate customer need or market opportunity, both successes and failures offer valuable lessons for future deals.  This will also be good evidence of your willingness to improve your own processes, not just effectively criticize the business for theirs.

M&A can be a hugely valuable tool for growing a company but is also a very high stakes game.  It requires and deserves a thorough and transparent assessment of performance.  It’s crazy to me how much more effort can go into the evaluation of small bets.  You should never apply more rigor to a $100K operational investment than you do to a $50M acquisition.  So, let’s not be penny wise and pound foolish.