Not
every company saw the need for a corporate development team in the
mid-1990s. One that did was Eastman Kodak Co. Digital photography was
taking off, eroding the company's core franchise, and transactions
would figure prominently in the strategic repositioning getting under
way. So, David Monderer told the audience at the Corporate Dealmaker
Forum in New York last October, Kodak took a small group that had been
assembled to manage some divestitures and began to turn it into an
acquisition machine.
"We started to develop specific, disciplined policies to do
acquisitions," says Monderer, who ran Kodak's corporate development
unit for 11 years before turning to consulting in 2006. "As the company
did more and more deals, we grew the organization accordingly and over
time started to bring in technical experts to help with due diligence
and help understand the businesses that we were buying, and then with
integration. We changed processes as we went, and we learned from
mistakes." At its peak the Kodak corporate development team numbered
25, reflecting the urgency of the strategic shift and the resulting
high volume of acquisitions and divestitures -- about 200 all told
under Monderer, valued at more than $9 billion.
Kodak's more centralized approach to corporate development
contrasted with some of the other philosophies laid out at the forum.
That was to be expected, since the panelists represented a wide variety
of companies (including Reuters plc, Honeywell International Inc.,
Wyeth and Avaya Inc.) facing an equally diverse set of strategic
issues. But that just made it all the more exciting for the panelists
(as well as audience members from companies such as General Electric
Co., Verizon Communications Inc. and E.I. du Pont de Nemours and Co.)
to explore all the common ground they share.
Basic business rules, all agreed, can help with many corp dev
challenges. One is the importance of monitoring results -- say, after
the manager of a business unit completes an acquisition. "We put a
process in place where every single deal was reviewed every quarter for
two years by a committee consisting of the CEO, the CFO and myself,"
recalled Monderer. "It was phenomenal what that did. Before that, some
transition plans were being forgotten or superseded, especially for
small deals. For example, if you had an assumption that you were going
to add a manager for a specific function, it may have been cut in the
next budget cycle. Well, if you're going to have to go before the CEO
eight times, senior management is going to pay attention to the details
that drove the deal."
CD Forum panelists and attendees packed a lot into a single
afternoon: an overview of the corporate development function, led by
Monderer and Anne Madden, corporate development vice president for
Honeywell, followed by lively panel discussions on striking the right
balance between helping and directing business leaders, and on the
often frustrating art of joint-venturing, which the two keynoters also
participated in. Highlights from those two panel discussions begin
below.
Our next CD Forum takes place on Feb. 27 in Chicago. Look for details on our website. We hope to see you there. -- The Editors
Striking a balance
Madden: Saying no to deals--nicely
There are three primary touch points at Honeywell where we could say
no to deals. The first is when we ask our business units to draft a
preliminary screening request on a proposed acquisition target. It's a
two- or three-page brief that indicates the strategic rationale for the
deal, the linkage to our strategic growth plan, what it may add to our
product portfolio or geographic footprint, the value it offers our
customers and/or the new market it may open for us. That document gets
reviewed by legal, strategy, the sponsoring operational unit and
corporate development, the group that I lead. At that time, the
decision is made to move forward, or not.
The second touch point is referred to as the "four horsemen." This
nonbinding committee consists of me, our general counsel, CFO and head
of strategy. We review transactions before an indicative valuation is
put forth to any seller. This team reviews the strategy developed in
the initial phase of discovery, the range of proposed valuation and the
associated risks/rewards. Many deals are killed at this stage because
they are deemed not worth the resource dedication and effort to move
into full-blown due diligence.
The third point is the final binding review with our chairman and
his staff. All aspects of the deal are reviewed, and due diligence
findings are presented. The review team either agrees or disagrees with
moving forward with a formal bid. At this stage, the proposed deal is
well vetted by the deal team, assumptions are tested and we have a
clear understanding of the long-term value, strategic fit and the
integration requirements for the target business. Deals that reach this
stage are typically approved and prepared for bid, but it serves as the
final review to ensure that we're making the best deals at the right
price.
Anne Madden is vice president of corporate planning and
development and global head of M&A at Honeywell International Inc.
in Morris Township, N.J.
Frankel: Managing them forward
I've been in companies where business leaders want to buy everything
at almost any price. But I've also had the experience where business
leaders are so unfamiliar with corporate development that it frightens
them. Putting so much of the company's money to work, being responsible
for an integration is so scary to them that they push back. You have
the challenge of moving them forward toward deals that make sense. So
just as it is important to manage them backwards, it's important to
manage them forward. They need to see that corporate development can
give them access to capital to do things that they wouldn't otherwise
be able to do. If you don't have their support, you're not going to
have their teams engaged.
Michael Frankel is senior vice president for corporate development at Information Resources Inc. in Chicago.
Zieser: Corp dev should lead
The development function is a very unique function. It cannot be a
corporate staff function in my mind. I see it as a line execution
function because you have to have that mentality in development in
order to move the business forward. I also think, generally speaking,
that the development function should lead all transactions. The
business unit should not lead, though you have to have clear,
responsible sponsorship from the operating unit. It's very helpful to
have actual operations experience to bring to the development function.
You have a perspective on things that you wouldn't have if you did not
actually work in an operational unit. I also think the development
function works best in a very small group. We have a small, skilled
team at Meredith. We leverage a network of outside consultants and
industry investment banks that are on the front lines of our markets. A
large development function tends to be bureaucratic, at least in my
experience.
We did a couple of things with the development function when we
formalized it at Meredith. One of the first things was to sit down with
the board of directors and the senior management team and develop
specific acquisition criteria. So in the case of a traditional magazine
acquisition, we would have specific criteria around advertising, the
rate base, circulation dynamics. If we were looking at a traditional
television station, we would have specific criteria around market size,
network affiliation, operating margins. As we moved into the new-media
world, we developed specific acquisition criteria not just generally
for interactive properties, but for specific types of interactive
properties, whether they were consumer-oriented or whether they were
B2B or something else.
This provided a way for us to get on the same page with our board of
directors and with our senior operating management, so that we weren't
spending three to six months on a deal only to find that the board of
directors was going to shoot it down or we were not going to have
operational support.
John Zieser is chief development officer at Meredith Corp. in Des Moines, Iowa.
Glynn: The dilutive-accretive dance
One of the challenges we have when we come into a deal is that
corporate development isn't communicating with the business units. The
place we see that most is when a deal is dilutive. I can't tell you how
many deals where we hear it's not dilutive, it's accretive. And when
it's done, it's dilutive. That's when the real fun starts. Where all
kinds of problems start is when the corporate development people say,
we told the board it's accretive. Go figure out a way to make it
accretive. It's important that very early on there's communication
between the businesspeople that are saying here's the reason we did the
deal, the corporate development guys that are trying to put some sanity
around that, and the accounting people. We come in about that point to
translate how the financial reporting might ultimately work. If you
don't have all pieces of the puzzle communicating, it gets to be very,
very challenging.
John Glynn is a partner at PricewaterhouseCoopers in New York
Managing joint ventures
Monderer: Think about your exit
Acquisitions are one of the most complicated transactions a company
can do. There's determining whether it fits strategy, doing the
transaction, and finally integrating the target. With a JV, you're
doing that and adding all types of ongoing agreements and relationships
that you have to manage for a very long time. I have seen some JVs that
were very successful and some that were just total disasters.
One major reason to do JVs is to expand in undeveloped countries
where, by law in some countries, you must have a local partner. You
really need to be careful when you get outside the U.S., not just in
developing countries but in developed countries because law and
practice may be two totally different things. How much you can rely on
contracts is variable and what minority versus majority means can be
very different than in the U.S. For example, I saw a JV in another
country which had a 51% share for one company compared to the partners'
49%. That control premium, which is usually quite costly, should make a
big difference in terms of control. But in this case, it was viewed
more as having only 2% greater ownership.
It's also vital to think about your exit strategy up front. I think
the best exit example I've seen was for a JV in Japan. It's difficult
talking about a "prenup" with any partner, but it's especially awkward
in Japan. 'We're essentially getting married, so why are we talking
about divorce?' The first problem is just getting them to sit and talk
about it. In this case, each party turned out to be contractually well
protected if the business was a failure and dissolution was the way
out. And for a very successful business result, a dual auction process
was created where one party could buy out the other. But neither party
was protected if the business was just mediocre and they didn't want to
be involved in it any more. It ended up with what was termed the
"one-yen put," where the U.S. firm could simply put their shares to the
Japanese firm for a yen. But even this can be difficult to decide and
agree in which direction the put should go.
David Monderer is a consultant and former head of corporate development at Eastman Kodak Co. in Rochester, N.Y.
Lint: It's never a first choice
We've put ourselves into four JVs over the last 12 or 14 months. For
example, we entered into a JV to start up a news cable channel in India
called "Times Now." That was basically a necessity, because as a
foreign investor, you can't own any more than 26% of an Indian
entertainment venue. We also put ourselves together with the Chicago
Mercantile Exchange to create a new greenfield business in foreign
exchange trading. There it was basically 50-50 based on capital
employed with no particular valuation.
The only way these deals would have gotten done was as joint venture
properties. I don't think anybody ever goes in and says, "Wow, let's
have a joint venture." Anybody who does has never had to actually
structure one or manage one. More often than not, it's not what happens
in the boardroom of the JV, it's what happens at the operating
agreement level that makes a JV work. The last day you're on the same
page is the first day of the alliance. That's when the vector between
what the two partners want to get out of it starts to grow. That's why
it gets more and more difficult over time to bring it back to some sort
of compromise.
A lesson we learned on exiting a JV came with the Dow Jones-Reuters
venture. We threw those employees together, but in many respects, they
maintained their employee status with one company or the other. But the
pulling apart and putting this back together seven years later--my
advice is always go with the pain and suffering up front. Separate the
employees, separate benefit plans, make them standalone and you won't
have to worry about untangling the spaghetti on the back end.
Eric Lint is executive vice president and global head of business development at Reuters Group plc in New York.
Hamill: Sharing the risks
Approximately one-third of our 2005 sales of $18 billion came from
products that we have either in-licensed or are otherwise partnered
with a third party. In drug development, we're dealing with
earlier-stage projects that are at various stages of regulatory
approval. We look at our licensing and alliance areas as being risk
mitigators because you put milestone payments out for success and share
that risk with your partner. So in addition to seeking innovation, risk
mitigation is a key component of why we look at alliances and licensing
arrangements as an excellent vehicle for us.
It's the operational teams that have to make an alliance work. If
it's a research collaboration, our scientist is lined up with their
scientist, and they're both held accountable for making sure the
project moves forward. We try to allow the responsible scientist to be
allocated 100% on that project. For that scientist, the milestones are
about the compound getting to that next step, and his or her bonus
compensation will track with that success as well.
Harry Hamill is vice president of corporate strategic projects at Wyeth in Madison, N.J.
Goldberg: You've got to align
Because in the tech business things tend to change so quickly, Avaya
as a company really has not found the right model for leveraging
minority investments or joint ventures. The major exception is the JV
we did with Tata Telecom in India, primarily because of the need to
invest in India through a partner who recognized and understood the
regulatory environment and had the relationships with customers. But
even in that transaction, because of the imperfect market, because of
the preference to control our destiny, we eventually assumed majority
control. It's a publicly traded company with its own board, but
majority-owned by Avaya.
In any JV you have to focus on post-deal integration. You've got to
align management teams. They have to integrate all their systems and
then go to market and manage their customers. You can't just send a JV
team out there on their own and hope they get the returns that they're
expecting. Even though you may have two existing P&Ls coming
together that are formidable by themselves, they still have the same
little issues that are faced by every new venture.
In telecom in particular, post-deal integration for JVs has been
difficult. Sony and Ericsson put their phone businesses together, and
they really haven't held their share against Motorola and Nokia.
Siemens and Nokia just put together their wireless infrastructure
businesses, so you have the Finns going together with the Germans.
Huawei, which is a Chinese data network product company, had a JV with
3Com. It's now 3 years old, and there's a process going on to exit it.
It just hasn't worked because of the difficulty in forcing together
complementary businesses but distinctly different cultures.
Andrew Goldberg is vice president for corporate development at Avaya Inc. in Basking Ridge, N.J.
Saksena: High-level review
I'm a supporter of alliances and joint ventures, given that so much
of our market is driven by innovation, globalization and convergence of
technology. So we have to support these, we have to bring our partners
along with us. While in general I agree with my fellow panelists that
JVs can be value destroyers, when the solution that you're selling
requires 40 different companies to work together, you better check your
ego out and make it work for the sake of the client. Otherwise you're
not going to get the deal--somebody else will. In most of our bids,
partnerships are a sheer necessity.
At IBM, some of our nonequity alliances are larger than some of the
Fortune 500 companies. So we have a degree of rigor and maturity around
managing those alliances that's probably not necessary in other
industries. It starts with a chairman-level review of both the
companies. It could be almost every quarter, every six months or every
nine months depending upon the nature of the alliance and how much
value both companies are placing in the alliance. Then there are
lower-level alliances where client executives, sales teams and others
will have a monthly or a quarterly get-together and they informally
monitor the alliance. So it's the whole spectrum.
Sonny Saksena is a partner, strategy and change, at IBM Global Business Services in Armonk, N.Y.
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