Is your portfolio fit for the future or fashioned only on the past?

By

Steve Krouskos

EY Global Vice Chair – Transaction Advisory Services

Driving growth and investment priorities for global EY TAS. University of Florida alumnus. Son, husband and father of four.

7 minute read 7 Jun 2018
Related topics AI Blockchain Growth Disruption

Knowing what to buy, what to keep and what to divest is critical to thriving in a Transformative Age.

The accelerating pace of digital disruption is leaving many companies struggling to play catch up. As new technologies power innovation, barriers to entry are shrinking in most industries, sectors are rapidly converging and business models look starkly different in comparison to just a few years ago. Executives are having to ask hard questions about what their organization is today and what it needs to be tomorrow.

In EY’s 2018 Digital Deal Economy Study, 90% of companies said they are elevating digital priorities in their strategic planning over the next two years. But organizations must avoid change just for the sake of change. And they need to do more than stick a digital plaster over their existing business.

Forging a successful digital future will likely mean buying transformative assets, as well as building capabilities in-house. We are in an era of portfolio transformation — 70% of respondents in EY’s 18th Global Capital Confidence Barometer view portfolio transformation as the top item on their boardroom agenda.

But how can you best manage your portfolio to futureproof your business?

Companies need to understand what is changing in their sector and how evolving technology will affect their business. They need to identify strategic gaps in their portfolio that may put them at a competitive disadvantage in the future. That knowledge is critical to help you decide what to buy, what to keep and what to divest.

You can’t just ask customers what they want and then try to give that to them. By the time you get it built, they’ll want something new.
Steve Jobs
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1

Chapter 1

Divesting for digital growth

Sale, now on

Organizations need to think hard about how they are going to free up capital to invest in digital and innovation. Leading companies strategically divest non-core or underperforming businesses to fund digital innovation and refocus their core businesses.

This is why divestments are increasingly a fundamental component of successful portfolio transformation. According to EY’s 2018 Global Corporate Divestment Study, 87% of companies plan to divest within the next two years, double the number reported in the 2017 study.

With the global economy improving, credit still freely available and corporate earnings at record levels, current dealmaking conditions make this an opportune moment to divest. Indeed, companies are already in the regular rhythm of selling assets in order to raise capital to invest.

The challenge is deciding what, where and when to divest. The balance between speed of decision and execution needs to be judged finely in order to extract the most value and lay the foundation for future success.

  • Companies who decide to divest in order to focus on top-performing assets, particularly where new technology can provide a competitive edge, are 21% more likely to achieve an above expectation sale price than opportunistic divestments.
  • Furthermore, companies that divest to fund new technology investments are 48% likelier to achieve a higher valuation multiple on the remaining business post-divestment than those that divest without planning on how to reinvest the proceeds up-front.
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Chapter 2

Taking a holistic view to find the right divestment strategy

Identifying the right questions to ask

It is critical that companies have regular portfolio reviews so they are ready to act quickly and decisively. Respondents to the 18th Global Capital Confidence Barometer said the main action taken following the completion of a portfolio review is identifying an asset at risk of disruption that should be divested.

While external disruptions may trigger tactical change, the basis of key decisions — like what parts of the business to sell and what types of new assets to acquire — should always be the organization’s long-term strategy. This means organizations need to take a more holistic view of their capital decisions, regularly assess their portfolios to be able to respond appropriately and assess current uncertainties against longer-term trends. Companies that divest because of internal measures, such as profitability, are 25% more likely to have a successful divestment than those that divest because of external forces.

Three key questions to ask when considering a divestment

  1. Are you divesting based on strategic reasons or disruptive forces? In the face of both market disruption and impatient shareholders, the best approach is to review your portfolio more frequently and use analytics to make more effective, quick decisions.

  2. Where does the value lie in your divestment? Sale preparation is vital, even for the best-performing unit. Especially in disrupted industries, being flexible about the scope and structure of a deal can be the ultimate key to success. Thinking like a buyer is critical.

  3. Do you know what will change your valuation tomorrow? Understanding your performance, opportunity and perception gaps through rigorous portfolio reviews is the best protection against value erosion. These reviews should be fortified through descriptive, predictive and prescriptive analytics. Because perhaps the most value-damaging action a company can take is holding on to an asset too long.
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Chapter 3

Importance of a data-led approach

Deeper analytics driver higher sales price

Whether you’re divesting for bottom-line cost efficiencies or pursuing technology driven top-line opportunities, taking a data-driven approach to decision-making is essential. Companies are increasingly using analytics, artificial intelligence (AI) and instantaneous data gathering to make faster and better-informed decisions about their portfolio.

By distilling and analyzing their financial and operational data, and combining it with relevant external data, a business can create a detailed picture of their portfolio. This gives management a greater ability to understand current valuations, manage company growth objectives and allocate capital more effectively.

Businesses that apply data-driven analytics consistently to drive decision-making are 33% likelier to exceed price expectations in their divestments.

A data-driven portfolio review process, however, requires having the right people in place. Nearly two-thirds of companies struggle to find people with the right blend of technical and analytics skills to lead the process.

To that end, ramping up your analytic skills is critical. Given that a complete set of these skills is rarely found in one person, building teams with a mix of talents is vital.

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Chapter 4

Drive innovation through alternative deal structures

Partnerships, alliances and joint ventures

As businesses pursue new technology-driven opportunities, they must weigh up the pros and cons of buy vs. build. This decision-making process has led to some companies considering alternative strategies to accelerate innovation and react to rapid sector convergence.

Partnerships, alliances and joint ventures are one way for businesses to access new technology, skill sets and markets more rapidly than through organic growth or M&A, with 22% taking this approach as their primary driver of digital strategy over the next year (vs. 74% picking M&A), according to our Digital Deal Economy survey. This tactic also enables companies to access innovation in a more flexible framework without stretching their available capital.

However, these arrangements come with their own risks and require careful management, equitable risk- and reward-sharing and constant oversight to become a success. Here again, understanding the evolving external environment and aligning strategic digital goals — aided by a robust, regular portfolio review process — are the primary drivers of success.

Many companies are also investing in building digital ecosystems through separate investment vehicles. Creating corporate venture capital arms or incubators have become an increasingly popular way for executives to future-proof their business.

But even here, the challenge is when — and when not — to integrate these innovation offshoots with the main business. It’s all part of the innovator’s duality — and the right answer will vary case by case, depending on conditions, the limitations of the current business and where the strength of the asset lies. Once again, taking a holistic view of business risks and opportunities and conducting regular portfolio reviews are all vital in making the right call.

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Chapter 5

Making more than an educated guess

Three key takeaways

Staying ahead of the pack in a period of rapid transformation is about making the right choices at the right time for the right reasons. How do you know which part of your business you should focus on and which part you should offload?

Those companies that better understand how evolving technology and sector convergence affect their core business are more likely to beat expectations. Equally, those that take an “‘always-on approach to strategic reviews, using data and analytics capabilities to constantly reassess their current portfolio, can make more informed decisions about their strategy and make their portfolio fit for the future.

Three key takeaways that help drive portfolio transformation in this Transformative Age:

  1. Are you utilizing tomorrow’s technologies today? Technology is a transformer. The increasing use of AI, RPA and big data is revolutionizing the way boards assess and optimize their operations — and encouraging them to make bold decisions on what to buy and sell to gain prime market position. Companies need to be certain their strategic decision-making processes enable them to take advantage of emerging technologies.
  2. Can you strategically manage your own ecosystem or will the external environment manage you? The pace of convergence and disruption is compelling companies to look across a broader landscape to understand their relative competitive position. Companies should recognize the new realities of today’s markets and develop new ecosystems to spot future growth opportunities — and identify emerging threats.
  3. Is your portfolio fit for purpose? Buying and selling can be the fastest way to transform your portfolio and reshape the future direction of your business. Being able to proactively respond quickly to emerging opportunities — and threats — is a must in the warp-speed world of business today.

Summary

Those companies that understand sector convergence and emerging technologies, and take an always-on approach to portfolio assessment will be likely to beat expectations.

About this article

By

Steve Krouskos

EY Global Vice Chair – Transaction Advisory Services

Driving growth and investment priorities for global EY TAS. University of Florida alumnus. Son, husband and father of four.

Related topics AI Blockchain Growth Disruption