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Introduction

Corporation = multiple businesses

Businesses differentiated by who, what, how (customer, product, place)

Corporate strategy = portfolio selection + portfolio organisation

Ownership

Ownership matrix: Parent vs business, public vs private

Shares ≠ votes. Example: Family owns 80% of parent, which owns 40% of business (but 60% of voting rights). Family have 32% of shares and 48% of votes. But as family has 80% of parent (majority), they can control all 60% of voting rights.

Influence

Influence matrix: Directive vs evaluative (whether HQ makes decisions or set goals), standalone vs linkage (how closely businesses work together)

Advantage

Business advantage

Willingness to pay/supply (= max selling price, min production costs)

WTP advantage: higher WTP, same WTS (same product, higher price)

WTS advantage: lower WTS, same WTP (same product, lower costs)

Corporate advantage

Businesses more valuable owned jointly than separately

Note: don’t need business advantage in each business

Competitors

Of a business: after the same customers

Of a corporate: mutual funds, private equity, conglomorates

Matrix: Joint ownership (selection) vs joint decision making (modification)

Benefits from selection are more likely to be gained in inefficient markets

Sum-of-the-parts (SOTP) analysis

Enterprise value (EV) / earnings (E)

(EV - debt) / # shares = expected share price

EV_SOTP = E_actual * (EV/E)_(single business peers) → see if grouped business is over- or under-valued compared to others

Earnings are a fixed input - cannot make predictions whether separation will affect earnings

SOTP cannot be used for determining corporate advantage

SOTP analysis of Tencent by Credit Suisse (p21): https://research-doc.credit-suisse.com/docView?language=ENG&format=PDF&document_id=807252250&source_id=emcsplus&serialid=HHM2DwTa67aWc1hZmMe8K0wc6VdaOQOcYqzogGJ0EhE%3D

Synergies

Shared resources (land, labour, capital) in the value chain (e.g. R&D, procurement, manufacturing, distribution/logistics, branding, sales)

High modification, high similarity: consolidation → Remove redundancy e.g. shared HR function

High modification, low similarity: customisation → e.g. sharing R&D to transfer technologies

Low modification, high similarity: combination → Achieve economies of scale e.g. shared procurement / reduced number of suppliers

Low modification, low similarity: connection → e.g. shared distribution

Bargains

Low entry costs (e.g. underpriced company)

Diversification

Value together > value individually + costs of change

1. Find synergies

“How”, not “what” or “why” → assess each stage of the value chain

2. Identify resource gaps

What current resource gaps exist, and how could diversification fill them?

How many new resources are needed for diversification, or how many can come from existing businesses?

3. Identify candidates (for inorganic growth)

  1. Insider generalist (experience in industry to enter) → if resource gaps are large
  2. Insider specialist
  3. Outsider (no experience in industry to enter)

4. Evaluating ally or acquire

  • Alliance
    • Non-equity (low ownership → lower cost, lower risk, less chance of partner demotivation)
    • Equity (high ownership → better coordination, cooperation, exclusivity)
    • Joint venture
  • M&A

If no good options, move to organic

5. Evaluating organic (vs inorganic growth) options

  • Easy to copy (competitors) → barriers to entry e.g. patents
  • Easy to catch up (with competitors) → network effects, reputation; current capabilities
  • Easy to substitute → online sales instead of overcoming competitor shops

Divestitute

Value together < value individually + costs of change

1. Find synergies

“How”, not “what” or “why” → assess each stage of the value chain

2. Identify better parents

Other company has better synergies, so business is more valuable to other company

  1. Companies in the same sector
  2. Companies in a different sector
  3. Investment companies

3. Choosing divestiture mode

  1. Sell-off: full sale
  2. Spin-off: split and distribute shares to original owners
  3. Equity carve-out: partial/slow sale
  4. Split-up: separation

Resource allocation

Financial

Fund those with highest NPV of projects (assuming NPV is positive)

Risk / uncertainty

BCG matrix: Market growth vs market share (question marks, stars, cash cows, dogs) → fund question marks with stars and cash cows

Synergy

Synergistic portfolio framework

Synergistic portfolio framework

Incoming benefit = (EV of business before spin-off) - (EV of business after spin-off)

Outgoing benefit = (EV of portfolio before spin-off) - (EV of portfolio after spin-off)

Invest above the line (Fits, Givers, Takers)

Exploration - may invest in Altruist, Paraside, or Misfit, if risk appetite is high

Social

Positive NPV becomes negative if “unfair” (e.g. no funding)

Glossary

4Cs Synergies: A framework for seeking synergies. The focus is on operational synergies, and hence on value chains. The 4Cs stand for consolidation (see Consolidation), combination (see Combination), customization (Customization), and connection (see Connection).

Activist investor: A shareholder (see Shareholder) who uses its equity stake (see Equity) to (publicly) influence decision making.

Acquisition: See M&A.

Alliance: When a firm partners with another firm. In an alliance, the relationship is important and involves substantial collaboration, yet firms remain independent. Alliances can be between more than two partners.

Ansoff matrix: Matrix to categorize new businesses in terms of similarity of products and customers relative to existing businesses.

Bargain: Buying a firm for less than what it is worth (compare Undervalued).

BCG matrix: Boston Consulting Group matrix. A framework for allocating resources across businesses.

Better parent: Another owner who can pay more for a business than what that business is worth to you.

Board: Board of directors. Group of decision makers at the top of the organization ultimately responsible for corporate strategy.

Bondholders: see Debtholders.

Business: A business can be described using the main choices about customers, products, and value chain activities. These choices are the “who/what/how” choices: who are the customers, what are we selling them, and how do we produce what we are selling and get it into the hands of the customers?

Business modification: A corporate strategy based on modification of businesses aims to create more value through operating businesses jointly rather than separately (compare Business selection).

Business selection: A corporate strategy based on selection of businesses aims to create more value through holding businesses under joint rather than separate ownership (compare Business modification).

Business strategy: The strategy a firm uses to compete in a single business.

Cash flow rights: A share (see Share) entitles a shareholder (see Shareholder) to part of the company’s earnings (see Dividends). See also Voting rights.

CEO: Chief Executive Officer, the highest ranked manager of a company.

Collaboration: Parties working together. Successful collaboration requires successful coordination (see Coordination) and successful cooperation (see Cooperation).

Conglomerate: A multi-business firm active in businesses that appear unrelated.

Control premium: Additional amount paid for shares (see Share) that give a controlling interest, i.e. an ability to influence corporate strategy.

Coordination: The alignment of actions between parties.

Cooperation: The alignment of incentives between parties.

Combination: One of the 4Cs synergy operators (see 4Cs Synergies). Pooling similar resources to achieve scale.

Competitive advantage: If the gap between your willingness-to-pay (see WTP) and willingness-to-supply (see WTS) is greater than the gap between your rival’s willingness-to-pay and willingness-to-supply.

Connection: One of the 4Cs synergy operators (see 4Cs Synergies). Pooling dissimilar resources to facilitate their joint use.

Consolidation: One of the 4Cs synergy operators (see 4Cs Synergies). Modifying similar resources to eliminate redundancy.

Corporate advantage: If the value of the businesses is worth more owned jointly than separately.

Corporate headquarters: Administrative unit that makes strategic decisions that cut across multiple businesses (also referred to as corporate HQ).

Corporate strategy: The strategy a firm uses to compete across multiple businesses.

Customization: One of the 4Cs synergy operators (see 4Cs Synergies). Modifying different resources to make them work better together.

Cost of entry: The cost of entering a new business, e.g. the cost of building resources, cost of acquiring resources, and the cost of setting up an alliance.

Debt: To fund itself, a firm can issue debt (and equity, see Equity). With debt, the firm gets money in return for the promise to repay later plus interest.

Debtholders: holders of debt (see Debt, and compare Shareholders).

Directive control: If corporate headquarters (see Corporate headquarters) is heavily involved in the strategic decisions of the businesses beforehand, for example by approving, vetoing, or ordering decisions (compare Evaluative control).

Diversification: Entering a new business.

Divestiture: Exiting a business.

Divestiture mode: Ways of divesting, including sell-off (see Sell-off), spin-off (see Spin-off), and equity carve-out (see Equity carve-out).

Dividends: Part of a firm’s earnings paid out to its shareholders (see Shareholders).

Dual-class shares: Two types of shares for the same firm. Typically, one type gives more voting rights (see Voting rights) than the other type.

Enterprise value: How much a company is worth. Enterprise value equals equity value plus debt value minus cash reserves.

Efficient market: When asset prices fully reflect available information (compare Inefficient market). If a market is efficient, then it is difficult to find a bargain (see Bargain).

Equity: To fund itself, a firm can issue equity (and debt, see Debt). With equity, the firm gets money in return for an ownership stake and future earnings.

Equity alliance: An alliance (see Alliance) in which at least one partner takes an ownership stake in the other partner. A non-equity alliance is an alliance in which no partner takes ownership in the other.

Equity carve-out: Divesting part of a business by selling part of a business’ shares (see Shares) to the public and keeping the rest. This is also called an initial public offering (see IPO).

Equity value per share: The value of 1 share (see Shares).

Evaluative control: If corporate headquarters (see Corporate headquarters) leaves the responsibility for the strategic decisions with the businesses, but evaluates those decisions afterwards through monitoring of outcomes and financial targets (compare Directive control).

Growth mode: Ways of growing or diversifying, including equity or non-equity alliance (see Alliance and Equity alliance), M&A (see M&A), and organic growth (see Organic growth).

HQ: Headquarters (see Corporate headquarters).

Inefficient market: When asset prices do not fully reflect available information (compare Efficient market). If a market is inefficient, then it is possible to find a bargain (see Bargain).

Inorganic growth: Entering a new business with the help of another company (compare Organic growth), including equity or non-equity alliance (see Alliance and Equity alliance) and M&A (see M&A).

IPO: Initial public offering. The first time shares (see Shares) of a previously private company are sold on a public stock exchange.

Joint venture: A new company created by two or more parties. If by two parties, ownership is often, but not always, shared 50-50.

M&A: Mergers and acquisitions. When one firm buys another firm. In an acquisition, the target firm becomes part of the acquiring firm. In a merger, both firms dissolve and become part of a new entity.

Merger: See M&A.

Multinational: A company active in more than one country.

Mutual fund manager: Someone who runs a mutual fund. On behalf of its investors, a mutual fund makes investments in many firms to diversify risk. Typically, a mutual fund does not get involved in the corporate strategy decision making of the firms in which it has investments.

Net debt: Debt (see Debt) minus cash.

Net present value: See NPV.

Network effect: If the value of a good or service depends on how many other people are using that good or service.

Non-equity alliance: See equity alliance.

NPV: Net Present Value, the current value of future incoming and outgoing cash flows.

Overvalued: When the price of a firm is more than what the firm is worth (compare Undervalued).

Organic growth: Entering a new business on your own, without the help of another company (compare Inorganic growth).

Parent: A legal entity (an individual, a group of individuals, or an organization) that owns and operates one or more businesses.

Private equity investor: Someone who runs a private equity fund. On behalf of its investors, a private equity fund makes investments in private firms or public firms that then become private. Typically, a private equity fund gets involved in the corporate strategy decision making of the firms in which it has investments.

Private firm: A company whose shares (see Shares) cannot be traded on a public exchange (compare Public firm).

Public firm: A company whose shares (see Shares) can be traded on a public exchange (compare Private firm).

Pyramids: Triangular structures built by Egyptians more than 4,000 years ago. Also, an ownership structure by which ownership of a business goes through a chain of other companies. For example, a family owns company A, which then has an ownership stake in company B, which then has an ownership stake in company C.

R&D: Research and development.

Resource allocation: The assignment of (financial) resources by corporate headquarters (see Corporate headquarters) to the businesses.

Resource gap: The difference between the resources required to operate in a new business and the resources a company currently has or controls.

Sell-off: Divesting a business by selling that business to another company.

Shares: A unit of ownership in a company (see also Equity). A share comes with cash flow rights (see Cash flow rights) and voting rights (see Voting rights).

Shareholders: Holders of shares (see Shares).

SOTP: Sum-of-the-Parts analysis, a technique to value a multi-business firm.

Spin-off: Divesting a business by distributing the shares (see Shares) of that business to the shareholders (see Shareholders).

Split-up: Creating shares (see Shares) in the underlying businesses and distributing these shares to the shareholders (see Shareholders) of the parent company. Shares in the parent company are discontinued.

Subsidiary: A company owned or controlled by another company.

Synergy: When the value of the businesses is worth more operated jointly than separately.

Synergistic Portfolio Framework: A framework for allocating resources across businesses, which may or may not have synergies (see Synergy) with other businesses in the portfolio.

Value chain: The set of activities to produce and bring a product to market.

Voting rights: A share (see Share) gives a shareholder (see Shareholder) the right to vote on important matters, e.g. the selection of board members (see Board) or the approval of an acquisition. See also Cash flow rights.

Undervalued: When the price of a firm is less than what the firm is worth (compare Overvalued).

WTP: Willingness to pay, the maximum buyers are willing to pay for your products.

WTS: Willingness to supply, the minimum for which suppliers are willing to sell your inputs required for your product.