In an M&A climate where any asset is potentially for sale, companies face intense pressure to actively manage their portfolio of businesses, say McKinsey & Co. consultants Lorenzo Carlesi, Braam Verster and Felix Wenger in the firm's latest newsletter. With PE firms, hedge funds and their spawn, along with strategic buyers, picking through commercial detritus across the globe in search of value, execs can no longer blindly follow the conventional corporate strategy of simply dumping underperforming businesses and investing in better ones.
"Managers must constantly examine a company’s entire portfolio of businesses and opportunities as if they were planning to reinvest all its capital," the consulting firm says.
To this end, managers should calculate the net returns over five to 10 years resulting from all the possible permutations of their portfolio mix. The options range from holding on to a business, to gradually increasing investment in it, to divesting the assets, McKinsey says. This can help avoid the main mistake corporate buyers make when they revamp their mix of businesses: Company leaders misjudge the cost of entering and exiting a particular sector or industry, including goodwill or startup expenditures.
Of course, PE firms have been using similar portfolio management techniques for years. Can’t public companies just copy their moves? Fat chance, given the fidelity most corporate boards continue to show management, even in this era of brawnier governance. —Alain Sherter
See report in The McKinsey Quarterly (free registration required)
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