Tech M&A Update 2013
- 1. 12 Global technology M&A update: July–September 2013 Kripa Rajshekhar Transaction Advisory Services EY +1 312 879 3224 kripa.rajshekhar@ey.com Barak Ravid Transaction Advisory Services EY +1 415 894 8070 barak.ravid@ey.com Top of mind As innovation accelerates, portfolio management becomes a “must have” The relentless acceleration of advancing technology constantly makes new things possible, while continually creating newer, faster, lower-cost ways of doing what is already possible. That’s why there are so many technology start-ups and so much investment in technology innovation — especially around the five disruptive technology megatrends (mobile, social, cloud, big data analytics and accelerated technology adaptation). And, as the growing number of corporate divestitures suggests, that’s also why there is so much need for established technology companies to be proactive in managing their business portfolios. With few exceptions, however, technology companies have not been really proactive portfolio managers. “The increasing numbers of divestitures in global technology M&A so far this year underscores the need for proactive portfolio management,” says Barak Ravid, Transaction Advisory Services, EY. When companies institutionalize portfolio management with well-defined strategies and proactive processes, they are better able to divest business units at the optimal time, balancing their portfolio smoothly, over time, with fewer bursts of transaction activity. As the graph on the left side of Figure 5 indicates, most companies end up investing more than is optimal in maturing businesses. But as the right side suggests, proactive portfolio management can drive competitive advantage. Aligning your portfolio with rapidly evolving markets Further, one of many possible outcomes of a rigorous portfolio management process is to divest business units that have either matured or have a lower profit growth potential or are no longer in line with strategic objectives. Because proactive portfolio management actually starts with in-depth analysis of customers and markets, it detects market changes, compares a company’s portfolio with current market needs and identifies any gaps that need to be filled in order to align the portfolio with the market. “Effective portfolio management helps you see where to invest in organic growth, where inorganic options such as M&A may be best and where to lower investment — or divest — in mature businesses to help fund those growth activities,” notes Kripa Rajshekhar, Transaction Advisory Services, EY. The move toward integrated security portfolios A current example of portfolio management is in information security, and was discussed in our Q213 M&A report.1 According to that report, corporate customers are reacting to the greater complexity of modern information security challenges by seeking single- source, end-to-end solutions providers that can “hide” the complexity and take responsibility for the overall solution. That, in turn, is driving consolidation among providers of different types of security solutions, as they seek to achieve the product breadth and scale that customers want. Portfolio management starts with the “right” metrics To maximize the value of a portfolio management process, it’s important to start by defining metrics for portfolio evaluation. Though what’s “right” will vary from company to company, too often companies choose metrics that are backward-looking, such as historical operating profit. Instead, “business lines should be compared in the context of future market and profit opportunity, asset investment and intensity, tax considerations, manufacturing synergies or IP use across lines,” says Rajshekhar. Portfolio management processes generally break down into some easily defined — though not always easy-to-execute — steps that fall into two broad categories: • Portfolio strategy (value identification) • Define the relevant metrics • Assess the portfolio • Identify gaps and opportunities • Prioritize resulting initiatives “The increasing numbers of divestitures in global technology M&A so far this year are actually a lagging indicator of the need for proactive portfolio management.” Barak Ravid Transaction Advisory Services EY
- 2. 13 • Portfolio operations (value realization) • Identify and evaluate targets for inorganic growth • Realign investments in mature businesses, including options for divesture or “ramp down” Rajshekhar emphasizes that it is important to include objective external factors (that many organizations overlook) at every step of the process, along with internal factors and short- and long-term objectives. And when assessing a portfolio, it’s important to evaluate each unit on a stand-alone basis, as well as its contribution to the whole portfolio. Harder than it looks Both Ravid and Rajshekhar acknowledge that several factors make portfolio management hard to execute. For example, the external metrics that are so important to understanding a business line’s future potential are not easy to measure against. “Most companies have very good data on which of their products are selling well and which are not, but they typically don’t combine it with robust data on what the market and their competitors are doing, how that’s going to be changing and what customers are going to be wanting in the future,” explains Ravid. Further, differing internal points of view can create hurdles in multiple dimensions. First, most forecasts are made independently, by business line managers with different goals and perspectives, and therefore, are difficult to compare objectively. Second, to arrive at the correct investment prioritization, subjective perspectives of different stakeholders must be overcome. “Consistently prioritizing investment opportunities may be the most difficult part of portfolio management,” notes Rajshekhar. Third, even after achieving consensus on investment priorities, connecting capital allocation to strategic planning can be a challenge. “Capital allocation is typically led by the finance department, and strategic planning is business-unit-led — this makes it hard,” says Rajshekhar. “These are difficult conversations that are hard to have objectively within the organization, because there are always competing interests, whether at the corporate level or the business unit level. That’s why so many organizations never really achieve effective portfolio management without engaging a trusted third party that can bring external data and an independent perspective to help reduce the noise and drive objective decision-making,” Rajshekhar explains. Accelerating change demands iterative portfolio management As challenging as it can be to do portfolio management well just once, the constantly shifting technology landscape demands that it be done regularly — at least annually. For example, technology companies serving data centers have been evolving for several years from individual providers of servers, storage, networking and software to integrated providers of all four. This trend requires the companies to continually reassess their portfolios. As in the information security example, customers’ need to hide complexity via seamlessly integrated solutions is driving the changes. “These technology companies are recognizing they need to evolve their revenue models from selling products to providing solutions on a subscription basis — and so they are missing lots of pieces in their portfolio to enable that, from bits of technology to areas of geographic support,” explains Ravid. What is more, the data center technology landscape is rapidly evolving, even as the companies evolve their portfolios. Flash storage use is climbing, software-defined networking is emerging and rising use of big data analytics is demanding new software architectures and approaches. Companies involved in this trend would find continual portfolio management a distinct competitive advantage. Whether your organization is participating in the data center trend or is otherwise caught up in the transformative disruptions being driven by the five megatrends, investing in effective portfolio management is key to maintaining competitiveness — or even getting ahead of the changes. Global technology M&A update: July–September 2013 Source: EY analysis, 2013. Figure 5: Aligning investment levels with future profit potential necessitates proactive portfolio management Profit potential Investment from company in a product Actual investment Embryonic Growth Maturing Declining Optimized level of investment Typical business potential life cycle Dollarvalue Age of business line Investment surfeit Profit potential Common Strategically aligned but implementation is challenged Competitive advantage can be driven by enhancements in value identification and/or value realization Frequent Not adequately equipped for portfolio management Rare Streamlined sustainable processes but insufficient strategic intelligence HighLow HighLow Portfoliostrategy (Valueidentification) Best-in-class portfolio managers Process management (Value realization)