Michael’s M&A Playbook: Tips for Portfolio Analysis and the Impact on M&A
As part of regular strategy meetings, companies should always include a portfolio analysis. Portfolio reviews serve as a critical tool for businesses to assess the performance of their products, services, and investments. By conducting a comprehensive portfolio review, companies can identify opportunities for growth, optimize resource allocation, and adapt to market dynamics. Let’s dive into the significance of portfolio reviews, how they contribute to a company's success, and what role they play in an M&A process.
Understanding Portfolio Reviews
As mentioned before, a portfolio review is an in-depth analysis of a company's product offerings, investments, and business units. It involves assessing each component's performance, strategic fit, profitability, and growth potential. The primary objective is to gain insights into the overall health of the portfolio and make informed decisions to maximize value creation. Here are the key benefits of portfolio reviews:
Strategic Alignment: A portfolio review helps companies align their product offerings with their long-term strategic objectives. It allows them to evaluate whether their current portfolio supports their vision and if any adjustments are needed to ensure coherence and relevance in the market.
Resource Optimization: By analyzing the performance of different products or business units, companies can identify opportunities to optimize resource allocation. This may involve reallocating investments from underperforming areas to high-potential segments, thereby maximizing return on investment.
Risk Management: Portfolio reviews provide an opportunity to assess the risk exposure of a company. By identifying any concentration of risk within the portfolio, businesses can take proactive measures to diversify their offerings and minimize potential vulnerabilities.
Growth Opportunities: Through a comprehensive portfolio review, companies can uncover growth opportunities that might have been overlooked. This could involve expanding into new markets, developing new products or services, or leveraging synergies between existing offerings.
Decision-Making Support: Portfolio reviews equip decision-makers with valuable insights to make informed choices. By analyzing the financial and strategic performance of each portfolio component, executives can prioritize investments, divest from non-strategic assets, or explore partnerships and acquisitions that align with their objectives.
How do companies perform a portfolio review? You usually want to understand how the assets perform (i.e., financial indicators), how they fit into your strategy (i.e., strategic fit), what your growth expectations are, and how risky they are (i.e., risk-benefit analysis). Let’s look at some methods:
Boston Consulting Group Matrix
Many companies use the Boston Consulting Group (BCG) matrix that uses growth and market share for the analysis. It may be tricky for some companies to come up with a specific market share, but in this case, you can estimate it. The same applies to future growth.
The approach is to use your products and services and put them in the portfolio. In the area of the “Star,” you have your products that have significant future growth, and your market share is high. You definitely want to keep those products. In the area of the “Cash Cow,” you invested in the past in those products, and now it is time to exploit them financially. Since the future growth is low, you keep the investments at a low level. The area of the “Pet” (which was initially named “dog”) is the area where you want to reduce or stop the investment and sell the product/company if possible. In the area of high future growth but low market share, you need to define whether you want to invest to increase your market share or not. Assuming you keep those products, regularly review their performance and return on investment. Follow this link if you want to read more about the BCG Growth-Share matrix.
Other Portfolio Methods
There are many other portfolio methods that you can use for your analysis. In addition to the BCG matrix, I have often used “future growth” and “profitability” (e.g., business unit EBITDA performance, ROI, EVA, or similar performance indicators) for the analysis. Other companies use a more qualitative approach when they analyze the strategic fit. Here are a few different approaches:
Product Life Cycle (PLC) Analysis: This framework examines the different stages a product or service goes through: Introduction, growth, maturity, and decline. Understanding the life cycle stage of each item in your portfolio can guide strategic decisions regarding resource allocation, marketing efforts, and potential modifications.
SWOT Analysis: Conducting a Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis provides an overview of your portfolio's internal strengths and weaknesses, as well as external opportunities and threats. This analysis can help you identify areas for improvement, capitalize on market opportunities, and mitigate risks.
Market Attractiveness/Competitive Position (MACP) Matrix: The MACP matrix evaluates each product or service based on its market attractiveness and competitive position. It helps identify the most promising offerings that align with attractive markets and have a strong competitive advantage.
Customer Segmentation and Analysis: Segmenting customers based on various criteria (e.g., demographics, behavior, needs) can provide a deeper understanding of how different products or services perform within specific customer groups. This analysis helps tailor offerings and marketing strategies to specific segments.
You can define which method is best for your company, and you can also adjust the different approaches. The important thing is that you have a good understanding of your product and service portfolio in the end. A portfolio review is an essential practice for companies seeking to optimize their performance, remain competitive, and achieve long-term success. By critically assessing their product offerings, investments, and business units, companies can make informed decisions to realign their portfolio, optimize resource allocation, mitigate risks, and uncover growth opportunities. Regular portfolio reviews enable businesses to adapt to changing market dynamics, stay ahead of the competition, and create value for stakeholders.
Portfolio Analysis and M&A: Buy- and Sell-Side Transactions
There are basically three possible outcomes of a portfolio analysis: No change, a buy-side M&A transaction, or a divestiture (i.e., sell-side deal).
No change: Sometimes, it is not necessary to change something in the product and service portfolio. This is often the case when you have recently taken portfolio decisions, and you need to see how those turn out. It usually takes some time until you see the planned outcomes.
Buy-side transaction: One of the outcomes of the portfolio analysis can be the decision to invest in a product or service where you expect significant growth. If you do not already have your own product, you can either develop it yourself or buy another company. Considering the time-to-market if you start from scratch, M&A can be the right strategic tool to enter this market quickly. It is one of the motivations for M&A, as I explained in another article. Most of my articles in the M&A Playbook talk about the buy-side process, which is the reason why I keep it short here.
Divestiture: Let’s dig more into the area that many companies underestimate: A sell-side transaction. If you have a product or service in the area of pets (low market share and future growth), you should consider selling it. You can certainly also try to restructure and/or reposition the product in the market. Make a comparison between those two approaches and decide based on the outcomes how you want to proceed. Let’s take a closer look at those divestitures (i.e., sell-side transactions). Divesting, or the act of selling off assets or business units, can offer several advantages to companies. Here are some key advantages of divesting:
Focus on Core Competencies: Divesting non-core assets allows companies to focus their resources, talent, and efforts on their core competencies. By shedding businesses or assets that are not aligned with their strategic direction, companies can concentrate on what they do best, enhancing their competitiveness and performance.
Streamlined Operations: Divesting can lead to streamlined operations and increased efficiency. By eliminating non-core businesses, companies can simplify their organizational structure, reduce complexity, and improve operational effectiveness. This often results in cost savings and improved profitability.
Capital Reallocation: Divesting underperforming or non-strategic assets generates capital that can be reinvested in more promising areas of the business. Companies can use the funds to fuel innovation, invest in research and development, expand into new markets, or strengthen their core operations. Capital reallocation allows companies to optimize their resource allocation and enhance their growth prospects.
Risk Mitigation: Divesting can help companies mitigate risks associated with specific assets or business units. For example, if a business unit is facing significant market challenges or is in a declining industry, divesting can minimize the company's exposure to those risks and protect its overall financial health. By divesting, companies can reduce their vulnerability to external market forces and enhance their resilience.
Improved Financial Performance: Divestitures can lead to an improved financial performance by eliminating underperforming or non-profitable assets. By divesting such assets, companies can enhance their financial metrics, such as revenue growth, profitability, and return on investment. This can make the company more attractive to investors and positively impact shareholder value.
Strategic Focus and Agility: Divesting allows companies to adapt to changing market dynamics and realign their strategic focus. In a rapidly evolving business landscape, companies need to be agile and responsive to market trends. Divestitures enable companies to adjust their portfolio, seize new opportunities, and pivot their strategy to stay ahead of the competition.
Enhanced Shareholder Value: Divesting can create value for shareholders by unlocking the hidden value of assets. By divesting non-core or undervalued assets, companies can generate a positive impact on their stock price, increase shareholder returns, and improve overall shareholder value.
It is important to note that divesting should be approached strategically, considering the long-term implications and potential consequences. Careful analysis and planning are required to ensure that divestitures align with the company's overall objectives and contribute to its sustainable growth and success. Once you decide that you want to sell a business unit or company, talk with an investment banker or advisor. They can help you with the specifics of a sell-side transaction. Read more about it in my other article.
Implement a Portfolio Analysis in the M&A Process
As you can see, including a portfolio analysis in your strategic review meetings can be very helpful. Let’s summarize the most important topics and tips:
Include a portfolio analysis regularly in your strategy meetings.
Use well-known portfolio analysis approaches and adjust them to your needs.
Analyze which areas in your industry are growing and open up an opportunity for a buy-side M&A transaction.
Address specifically the underperforming products and services and consider divesting them (i.e., sell-side M&A transaction).
Talk with an investment banker or advisor, M&A lawyer, and M&A accounting firm who can help you with the process.
