Value Creation through Corporate Development

1. Value Creation through Corporate Development Phanish Puranam Asst. Professor of Strategy & Information Management ppuranam@london.edu 020 7262 5050 x3020 www.london.edu/faculty/ppuranam

2. Corporate Development (CD) • The set of managerial actions that enable (relatively) discontinuous changes in corporate scale and scope. • Modes of CD: Internal Corporate Ventures, Alliances, Minority Equity Investments, Joint Ventures,Mergers & Acquisitions

3. CD: A Map

4. CD: Key Issues • Which mode? • How to manage a given mode? • How to build a business process and capability around CD?

5. CD :Sequence of choice & actions TARGET/ MODE DEAL MAKING STRATEGY IMPLEMENT EVALUATE

6. TARGET/ MODE DEAL MAKING STRATEGY IMPLEMENT EVALUATE

7. STRATEGY • Diversification & Geographical expansion • Managing value chain • Access new resources and capabilities • Consolidation • Preemption

8. A simple test STRATEGY If CD is to create shareholder value, it must meet this simple test: Does CD generate shareholder value in excess of that generated by the shareholders acquiring a portfolio of stocks in the relevant companies? Implication:Synergy is all important!!

9. STRATEGY Another way to frame this question: What is the unique value creation potential in linking the two companies by (any mode of) CD?

10. STRATEGY

11. TARGET/ MODE DEAL MAKING STRATEGY IMPLEMENT EVALUATE

12. Which Target? TARGET/ MODE • Prospecting as a way of life • Network • Reputation effects • Automating the process (Dave & 2 temps)

13. What Mode? TARGET/ MODE • Should we form a • Non-equity partnership • Equity Partnership • Joint Venture • Acquire

14. TARGET/ MODE Costs Benefits 25% 50% 100% 0% Ownership

15. Benefits of ownership Authority to align incentives and create organizational integration mechanisms critical for synergy realization Appropriability protecting and building core capabilities Costs of ownership Commitment “lemons” and “papangos” Implementation one time costs of restructuring, org. change. TARGET/ MODE

16. Benefits Firm 2 TARGET/ MODE Costs Firm 1 Benefits Firm 1 Costs Firm 2 25% 50% 100% 0% Ownership

17. TARGET/ MODE DEAL MAKING STRATEGY IMPLEMENT EVALUATE

18. Deal Making DEAL MAKING • Valuation • Bidding/Negotiation • Due Diligence

19. Valuation range DEAL MAKING Valuation with synergies Reservation price Valuation with option value Comparable Transactions Market value Book value

20. Due diligence DEAL MAKING In experimental situations, subjects who were personally responsible for choosing targets, and who made their decisions in a public context, were more likely to ignore negative information arising from due diligence. Escalation of commitment

21. Due diligence DEAL MAKING Continue Withdraw Revised valuation is correct OK Mistake! Original valuation is correct Mistake! OK Signal Detection

22. TARGET/ MODE DEAL MAKING STRATEGY IMPLEMENT EVALUATE

23. Implementation IMPLEMENT • How will the two organizations be coordinated ? • Who will be responsible for managing the coordination mechanisms? • Implementation almost always means organization change- which is never painless.

24. Implementation IMPLEMENT Benefits Costs Autonomy Integration

25. Benefits of integration Coordination alignment of incentives, creation of communication channels critical for synergy realization Costs of integration Disruption loss of incentives, disturbing productive routines. Implementation maintaining integration mechanisms in place over time- particularly difficult in partnerships. IMPLEMENT

26. CD as a business process CD team Involved Business Unit TARGET/ MODE DEAL MAKING STRATEGY IMPLEMENT HR/Legal HR/Legal MIS/IT MIS/IT Finance EVALUATE

27. Advantages of dedicated CD function • Disciplined process • Involvement of all relevant parties coordinated by CD function. • Accumulation of tacit experience, growing skills with specialization (can dispense with investment bankers). • Creation of codified “tools”