Corporate Development 2012 Leveraging the Power of ...Corporate Development 2012 Leveraging the Power of Relationships in M&A 7 This idea of constant collaboration may be a difficult

Corporate Development 2012 Leveraging the Power of Relationships in M&A

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Corporate Development 2012 Leveraging the Power of Relationships in M&A 3

Contents

5 Corporate development 2012: Leveraging the power of relationships in M&A 6 Centralization not isolation: Structuring your corporate development function for success 11 Perspective: Susan McDonough, Vice President of Corporate Development Operations and Integration, Cisco Systems 13 Strategic alliances: Synchronizing for success 18 Perspective: David L. Hoffman, CFO, Resource Industries Group, Caterpillar Inc. 20 Divestitures: Driving value through separation 24 Perspective: Cliff Peterson, Managing Director, Transactions & Services, Visteon Corp. 27 Striking a balance: The board’s role in M&A 31 Perspective: Chancellor William B. Chandler, formerly of the Delaware Court of Chancery, and Partner, Wilson Sonsini Goodrich & Rosati 35 Lessons in discipline: The impact of activist investors 38 Perspective: Wei Jiang, Professor of Finance and Economics, Columbia 40 Conclusions 41 Profile of survey respondents

Contents


Corporate development 2012: Leveraging the power of relationships in M&A

By the numbers, M&A activity appears to be declining in 2012. The many flavors of uncertainty, including fiscal and political instability in the Eurozone, the seemingly endless stream of new regulation and legislation coming from the U.S. government, and slowing growth in emerging economies like China and India, seem to be conspiring to noticeably depress deal flow. The first quarter showed aggregate deal value down for both global (31%) and U.S. (54%) M&A, compared to the first quarter in the prior year,1 with few, if any, industry or regional bright spots.

Yet behind the scenes, our experience with clients reveals that corporate development teams are working harder than ever to deliver value and growth to their companies. The mandate these days is about doing more with less; creatively finding ways to grow with controlled investment funds. Smaller deals, strategic alliances, and smart divestitures appear to be the result, with corporate development teams tasked to exercise their business planning skills as much as their deal-making skills. This judiciousness is reflected in the most recent Deloitte CFO Signals survey.2 Only 20% of companies are actively pursuing major transactions, according to CFOs, but more than half are seeking smaller, strategic deals to boost growth, synergies, and scale efficiencies around existing businesses.

This data suggests that corporate development teams may wish to acquire some new skills that are often outside the core competency of the classic deal jockey. The ability to collaborate has become paramount, as smaller staffs must leverage expertise both inside and outside of their organizations. This “partnering” takes many forms, involving colleagues, board members, and sometimes even competitors. Mastering the art of collaboration is not easy, but promises to make corporate development an increasingly important stop on the path to becoming a leader.

In this study, we explored how corporate development teams are handling the external and internal pressures they face to deliver value. We garnered input from over 300 professionals who oversee or are involved in corporate development and who responded to our 2012 annual survey, and the perspectives of five notable players who sat down with us for in-depth interviews. They assisted us in commenting on the current state of corporate development organizations and their compensation structure, and then in looking at the opportunities and pitfalls associated with increasingly popular structures such as strategic alliances and divestitures. Finally, we strategize on how corporate development teams can better work with external influences, namely boards and activist investors.

M&A statistics for the full year 2012 may end up reflecting the level of activity going on behind the scenes. The year is not yet over, and we are cautiously optimistic that deal volumes may end stronger than they began. Regardless of the numbers, however, the current environment offers rich opportunities for corporate development teams to grow in influence and importance, and most importantly, to help their companies create significant and lasting value.

Chris Ruggeri M&A Services Leader Deloitte Financial Advisory Services LLP

1 mergermarket M&A Round-up for Q1 2012

2 Deloitte CFO Signals Survey, 2012 Q1 M&A Results, www.deloitte.com/us/cfosignals 2012q1

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Centralization not isolation: Structuring your corporate development function for success

The organization of the corporate development function, including the approach to the function’s structure and compensation strategies, is an important consideration as executives seek to deliver value through M&A deals. At its core, corporate development is a centralized function, a theme which is borne out by this year’s analysis of the department’s organizational structure across the companies responding to our survey. Yet incentive pay for deal-makers is often structured as if the team was decentralized; hinging on the long-term value creation that is generally associated with the success of a deal’s integration into the existing business, rather than a successful close. This disconnect may be frustrating, but ultimately may spur better transactions – and better deal performance.

Roughly 60% of those responding to Deloitte’s annual survey report their teams are centralized, a statistic that holds true whether a company makes few or many deals in a year (figure 1). Others largely use a hybrid model, in which a lean core corporate development staff relies on a network of internal and external resources to provide subject matter expertise. Fewer than 10% responded as having a fully decentralized structure. This centralized approach makes sense: it gives corporate development the

birds-eye view of the company that it needs to properly identify targets and structure deals that fit well into the portfolio.

Ironically, though, the largest group of respondents — more than one third — tags organization as the area of corporate development in greatest need of improvement (figure 2). This suggests that there may be a tension between the inherently centralized nature of the front end of deals, and the deep involvement in operations that is necessary on the back end. “The traditional corporate development function is centralized, but in order to integrate the businesses it helps acquire, corporate development professionals need to have well-established relationships within the business lines, support functions, and with outside vendors,” notes Diane Sinti, Director with Deloitte’s Human Capital Consulting practice. “The function doesn’t have to be more dispersed, but team members do need to find ways to collaborate.” Some companies — close to 20% of respondents — use a hybrid model to help explicitly structure this collaboration between corporate development and the business. But the need for relationships is essential, whether they’re formalized or not.

61%

7%

17%

14%

1%

Figure 1. Organization of corporate development group

CentralizedDecentralizedHybridVirtualOther

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36%21%

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Figure 2. Area in which corporate development needs greatest improvement

TalentOrganizationTechnology & MethodologiesPerformance StandardsOther


This idea of constant collaboration may be a difficult one for “deal jockeys” to embrace. In fact, corporate development professionals rank their ability to generate deal flow and targets as one of the top three ways they add value, far above integration capabilities (figure 3). However, working with operations and support functions on the front end of a transaction may help improve the likelihood of success, in no small part because the business unit may already feel invested in the deal before they are tasked with integrating it or divesting it. "I have a small team, but the reality is that it’s not just the development team that does the transaction, it’s a much wider group,” says Cliff Peterson, Managing Director of Transactions & Services for Visteon Corp. Visteon has closed 14 divestitures in the past five years, relying heavily on deal specialists in various support functions. “To me, the real task is about getting that wider group aligned and on the same page.”

Besides its practical uses, encouraging corporate development team members to work outside their functions may help them build key leadership skills, such as communication and persuasion. Getting the right help at the right time “is the ultimate stealth operation,” says Kevin Knowles, National Operations Leader with Deloitte’s

Human Capital M&A practice, and may rely more on charm than on org charts. About 80% of respondents maintain specialized corporate development resources in finance, and nearly half have such resources in legal or regulatory areas (figure 4). However, when it comes to other often critical deal support functions, like HR and IT, fewer than a quarter of responding companies have specialized resources to support corporate development initiatives. Respondents at companies that close five or more deals each year indicate they tend to devote more resources to each facet, and are about two and a half times more likely to have a dedicated HR resource than the others. We have observed that more resources also often come into play as a deal nears completion; finance, operations, HR, and IT frequently take major roles in M&A due diligence and preparing for post-merger integration, as compared to earlier activities in the deal lifecycle.

Creating a strong sense of collaboration between those who create deals and those who execute them may pay off for everyone involved, since a majority of survey respondents indicate that they are evaluated on how well a deal does after they hand it off to colleagues, whether they like it or not. “I think there may be a real disconnect in the minds of corporate development people between

29%

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Assessing value and risk

Ability to generate deal flow and targets

Ability to drive business strategy

Leadership and organizational influence and alignment

Effective integration/divestiture and synergy capture

Project management

Effective operating model and organizational structure

Effective governance structure

Figure 3. Most important capabilities for an effective corporate development group

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what they do and how they are compensated,” says Mike Kesner, principal in charge of Deloitte Consulting’s National Compensation practice.” Most at-risk pay is based on the performance of an acquired unit over the three years post-close,” he says. Specifically, financial metrics such as the return on investment (ROI) are used at 76% of the responding companies (figure 5). Top-line results also matter, with over half of respondents saying they

are evaluated on post-deal revenues. Many deal-makers feel they should get paid for closing the deal — and all the work that goes before it — but that often clashes with corporate objectives. “Boards want no part of it, at least for the top corporate development officer, because the measure of success from their perspective is not the close; it’s achieving or exceeding the objectives of the acquisition,” Kesner notes.

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Finance

Legal and regulatory

Operations

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Information technology

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Figure 4. Functions with specialized corporate development resources

76%

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NPV, ROI, or IRR

Revenue growth

Strategic factors

Synergy capture

Accretion/dilution

Customer retention

Employee turnover/onboarding

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Figure 5. Metrics used to evaluate the corporate development group’s effectiveness


78%

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23%

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4%

Finance

Legal and regulatory

Operations

Human resources

Sales and marketing

Information technology

R&D/new product development

Other

Figure 4. Functions with specialized corporate development resources

This disconnect may be a sign of the importance accorded corporate development, since the head of the function is compensated similarly to what we have observed for other high-ranking executives, which is to say, on broader measures of corporate performance. Conversely, junior members may be eligible for a bonus tied to more near term criteria, such as the closing of a deal and other key performance milestones.

Overall, however, a reasonably small percentage of compensation is at risk for corporate development professionals: about a quarter of their compensation rests on the bonus, 10% on equity awards, and the balance on base salary (figure 6). Surprisingly, these statistics hold true across our sample of respondents, regardless of company size or the number of deals completed.

67%

23%

10%

Figure 6. Components of compensation of the corporate development team

Salary Bonus Options/equity awardsSalary

Bonus

Options/equity awards

10

As one would expect, companies that close the most deals are more likely to pay at the top end of the scale in an absolute sense. Responding corporate development team members generally make anywhere from $50,000 to $500,000 depending on their seniority, but the range shifts to $100,000 to north of $1 million at the most active dealmakers (figure 7).

More specifically, this year’s survey shows that junior corporate development professionals at responding companies generally make between $50,000 and $100,000 (though nearly half at frequent deal-makers make over $100,000). Senior-level members are most likely to see compensation range from $100,000 and $300,000. The leader of a corporate development organization can expect to make between $250,000 and $500,000 at most companies, the survey suggests, while a fortunate 20% at the top dealmakers earn north of $1 million annually.

All told, the results of our study and experience indicate that both the structure and the task of the corporate

development team are changing in ways that make the function a more essential part of the path to the top. Indeed, over half of respondents said that corporate development is part of the leadership development course at their companies; nearly 70% of those at companies that close five or more deals responded likewise. With this in mind, the key takeaway from this data for corporate development organizations may be that centralization of some functions should never mean isolation. Entering into the complexity of creating deep relationships across the business is likely to lead to better transactions, higher payouts, and, long-term, more promising career paths.

As demonstrated by our research, there can be wide variety in the corporate development organization across and even within companies. “It’s common for the CD function to go through a maturity curve, tied to the growth strategy of the company,” notes Knowles. Indeed, the importance of internal and external “partnering” may be one of the ways to make a good deal better in the years ahead.

Figure 7. Average compensation of corporate development group members

13% 52% 30% 4% 1%Junior-level members

<$50K $50K to <$100K $100K to <$150K $150K to <$200K $200K+

4% 40% 35% 15% 6%Senior-level members

<$100K $100K to <$200K $200K to <$300K $300K to <$500K $500K+

24% 45% 14% 7% 11%Highest-paid member

<$250K $250K to <$500K $500K to <$750K $750K to <$1M $1M+


Perspective

Our survey respondents indicate that they expect strategic alliances to increase at their companies in the next couple of years. Do you agree?

Cisco’s innovation model has always been one that leverages build, buy, and partner as its tools. As such, partnering has always been part of our model and is fundamental to how we do business. We believe that is a strength of ours and expect that to continue in the future.

What positions your Corporate Development team to be successful with alliances

The way we’re structured, our deal team has a very broad tool kit at their disposal to go after the needs of the market that we’re focused on. They consider partnerships, investments, investment-backed alliances, joint ventures, M&A; they have that full spectrum. And it’s not unusual that one type of transaction morphs into another type of transaction, either as we engage in initial dialogue with the other firm, or over time. That flexibility, to make sure that the vehicle is the best one to meet Cisco’s need and the needs of our customers, is an advantage.

How do you determine the best vehicle for any given deal?

You can think of it in two different dimensions. One is around its relevance to our strategic priorities. How much is it core versus how much is it context? Obviously, the closer an area is to our core, the more likely we are to bring that into Cisco through a traditional acquisition. For a technology that is nascent, we are more likely to engage in a minority investment. If an area is further from our core or targeted to a specific vertical where we need to bring technologies or expertise together to meet the needs of a customer, we might do a more traditional alliance.

The other factor is, how well-positioned is Cisco to be able to successfully execute and drive a number one or number two position in that market? If the other company is in a smaller market that would not benefit from our ability to drive scale, or if it’s in a geography where we’re less embedded and want to learn more and gain market access, it would be a good candidate for a joint venture or maybe an investment. We’ve made a number of investments in Korea and China that fit this model.

What does it look like when a partnership morphs?

Our most visible example is probably our relationship with EMC. Cisco has been a partner with EMC for a long time. It was originally a strategic alliance with a go-to-market focus. When EMC took VMware public, Cisco was an investor in the IPO and continued to strengthen our technology and go to market partnership with the VMware business. Together, we then created VCE, the Virtual Computing Environment Company which includes investments from VMware and Intel. This joint venture is approaching a $1B run rate this year. We expect that with the importance of this partnership, it will continue to evolve over time.

A simpler example is the acquisition of Lightwire which we closed a couple of months ago. That was an investment Cisco made a year prior. Our engineers had been working with Lightwire’s team from a development standpoint because it was an area where we wanted to learn more, and the company was very early. When we determined the timing was right, we pulled the business in through an M&A transaction.

Strategic alliances require an amalgam of skills. How would you characterize what’s different in an alliance compared to more traditional M&A?

With a traditional M&A transaction, you do the deal and it’s done. There is a single vision of where you are going that you effectively align on up front. With any type of joint venture or strategic alliance, you are always going to have two distinct companies with two different strategies. Monitoring the alignment of those two strategies is very important as is monitoring the market in which you’re operating. Having a structure in place to continuously align or determine that you’re no longer aligned, is also critical, as is having proactively thought through exit scenarios and options. In general, when our team works on alliances, they have to give much more thought to how things will evolve over time, and how alignment will be maintained while continuing to operate as two separate companies.

That said, these types of partnerships have the same overall objective as all of our work: to deliver on our ability to support our customers in solving their business challenges. We really try to focus on delivering that.

Susan McDonough Vice President, Corporate Development Operations and Integration, Cisco Systems

12

What are key success factors in a strategic alliance?

Our ability to be transparent with our partners and to develop a level of trust and confidence that they’re being transparent with us is critical. Knowing that we can put out on the table, “Look, this is what Cisco wants to get out of this partnership, and we really want to know what you want to get out of it,” is essential for us. We are also very specific about the customer problem we are trying to solve. These factors are primary, regardless of the type of transaction we’re considering, but they’re especially important in strategic alliances.

If you have a common objective and believe you can win in meeting it, then the details tend to be easier to work through. If you’re shaky on the objective, getting to a successful place can be really challenging.

What other challenges can occur with this type of engagement?

We’re a large company so we have partners who become competitors, and competitors that become partners; we have companies that we’re competing with and partnering with simultaneously. You have to face that, and recognize that inevitably things will change, and that it is good for the market and good for your customers. If you work with a high degree of integrity and engagement, then even as you compete with companies, they will respect you. It will be hard for them to not want to also be your partner if customer requirements dictate. Cisco is a company that recognizes that in order to be successful, we need others.

How do you measure the success of strategic alliances?

There are two main questions we consider. One, can we produce solutions that meet the needs of our customers through this alliance? And two, does it generate long-term shareholder value? When we take it down to the transaction level, we have different kinds of tactical measures. If it’s a company in an emerging market that’s very nascent and we want to see how it evolves, we would measure it on market learning and our ability to react quickly as things evolve. Take that to the other

extreme, a traditional M&A transaction; there, we’d look at more traditional metrics such as ROI, retention of talent, and revenues performance. Then for a go-to-market alliance in a specific vertical, we’d look at whether it allows us to be more effective in that industry.

It’s truly transaction specific, but we try to keep it simple and focused on our customers and shareholders while recognizing that all of these transactions have some level of risk. We don’t say “failure is not an option,” or we probably wouldn’t take enough risk or cast our net wide enough.

What advice would you give to someone who is about to embark on a strategic alliance?

For any successful business, it’s important to know your strengths. What is it that you bring to the table? And what is it that others bring to the table that can compensate for things that are not your strengths? If you believe that as a company you can do it all, then you should never go into a strategic alliance. It sounds obvious, but a surprising number of people cannot tell you what their weaknesses are and what they need help with. If you go into an alliance with that mentality, you’re really not set up for success. What’s helpful for us is to have a large amount of respect for our partner. They may be large companies or small, but they all bring value and recognizing that value is critical. The other piece of advice is to spend the time to be crisp and complete in articulating the objectives of the alliance. More clarity and specificity will increase the odds of success.

Perspective (cont.)


Strategic alliances: Synchronizing for success

Joining forces with another company to break into a new market, rather than setting out on your own, may be one of the most challenging forms of deal-making and perhaps one of the most rewarding. Whether the alliance takes the form of a joint venture, an equity stake, a licensing arrangement, or some alternative approach, most will admit how difficult it is to create a strategic partnership that meets expectations of both parties.

And while these arrangements have always been in the M&A mix, executives responding to our survey indicate that they are on the rise (figure 8). More than half expect the volume of strategic partnerships to increase, with the percentage rising to 60% at smaller companies. Only five percent expect them to decrease. “The perception of strategic alliances is changing from a last resort to a preferred investment strategy,” according to Sara Elinson, principal with Deloitte Financial Advisory Services LLP. “Companies in manufacturing and other industries are learning from players in technology and life sciences that have used strategic alliances as both a source of innovation and a tool to manage risk and leverage capital.”

The expected increase in activity is compelling, but given the challenges that may be associated with alliances, this trend may be a wake-up call for M&A professionals to sharpen their skill sets. Forming successful strategic alliances “is not a well-known science,” says Marco Sguazzin, principal with Deloitte Consulting LLP. “With careful preparation and attention to detail, however, you can certainly improve your chances.” Indeed, such partnerships challenge corporate development professionals to become futurists, much more so than traditional acquisitions. “With any type of partnership, you are always going to have two distinct companies with two different strategies,” notes Susan McDonough, Vice President of Corporate Development Operations and Integration for Cisco Systems, which has a long history of creatively partnering with other firms. “People who work on these transactions have to give serious thought to how things will evolve over time, and how they will maintain alignment while continuing to operate as two separate companies.”

54%41%

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Figure 8. Expected change in volume of strategic alliance transactions over the next two years

Increase Little or no change DecreaseIncrease

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The advantages of strategic alliances are clear: they allow each company to leverage core assets and capabilities, better manage risk, and accelerate new market entry. The top reason for the expected increase in strategic alliance volume, according to 35% of survey respondents, is that alliances may be necessary or a more prudent vehicle through which to enter certain markets, including major ones such as China, India and Brazil. Learning the business practices of new markets and building relationships can be a daunting and time consuming process. Strategic alliances may provide a springboard to get there faster. The second most important reason alliances are expected to increase is that they represent a more efficient use of capital; a way to share the cost of an investment

program and lower risk in conjunction with a partner with complementary skills or assets. Our survey results indicate that the impetus for more strategic alliances seems to vary to some extent by industry: executives in financial services, health care and life sciences, and technology, media and telecommunications appear mainly interested in the partnerships as a more efficient use of capital; 30% to 40% in each sector offer this as a top reason for the increase (figure 9). Those in manufacturing and energy say strategic alliances are primarily a way to get into new geographies, with close to half of manufacturing executives pointing to this as a major reason for the increase they expect to see.

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Figure 9. Reasons for expecting an increase in strategic alliance transactions


Even as they proliferate, however, this deal-type is by no means becoming any easier, even for experienced corporate development professionals. More than 40% of survey respondents confess that their teams are not as skilled at forming strategic alliances as at traditional M&A, even as the vast majority of them agree that such skills would offer a company a competitive advantage (figure10). Yet at most respondent companies, the corporate development team is just as likely to be involved in these alliances as they are in traditional M&A, if not more so, creating a need for teams to sharpen their abilities in this area (figure 11). Negotiating a successful strategic alliance often requires a different mindset than many dealmakers may be accustomed too. If you go into a negotiation focused on winning at the expense of your partner, you may wind up losing both. Successful alliances appear to be more about dealmakers constructing a collaborative, forward looking business plan that will create a blueprint for how the business will be run and how benefits will be shared. This requires good business planning skills and a dose of diplomacy.

Where do we start? How to close a deal.

Corporate development professionals cited differences of opinions over how to value contributions to strategic alliances as the most common reason that such deals fail to close, followed closely by a failure to align strategy (figure 12). Determining the value of each party’s contribution to an alliance and associated share of the benefits post-closing is challenging. This is particularly true in alliances where contributions are both in cash and in-kind (e.g., IP, customer relationships, know-how, services, etc.) and where differences of opinion are more likely to exist over how to value such contributions. “Making sure that there is a framework agreed to up-front by the parties to the transaction on how to value contributions — including agreement of what constitutes a contribution, the valuation methodology, and a mechanism to resolve differences of opinion — is critical to moving the transaction along,” says Chris Ruggeri, principal with Deloitte Financial Advisory Services LLP. “And that is all before the alliance even commences business activity.”

19%

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Better skilled at strategic partnering than at more traditional M&A

About the same

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Figure 10. Skill in executing strategic alliance transactions relative to more traditional M&A

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More involvedSame level of involvementLess involved

Figure 11. Involvement of corporate development group in executing strategic alliances compared to more traditional M&A

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Cultural differences may also prove to be an insurmountable obstacle in getting a deal to close; expectations around business basics like compensation and project prioritization can be vastly different from one culture to another. A mismatch of expectations regarding senior executive participation can also create friction.

So what does the architecture of more successful partnerships look like? Survey respondents indicate that strategic alignment of alliance partners is the most critical success factor followed by clarity of roles and responsibilities, decision making, and governance (figure 13). Over time, it is not uncommon for expectations to change and partners involved may find that their goals are not as aligned as they once were. This should be expected and dealmakers should incorporate this possibility into the up-front architecture of the alliance to provide the downstream strategic flexibility to modify or unwind it without losing the marketplace momentum and value it has created.

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Difference of opinion in how to value contributions

Failure to align strategy

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Regulatory

Figure 12. Top factor that delays (or causes to fail) strategic alliance transaction closing

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Other

Effective dispute resolution mechanism

Comprehensive integration and shared services plan

Clarity of roles, responsibilities, decision making, and governance

Startegic alignment of partners

Figure 13. Most important factors in the success of strategic alliance transactions


With the alignment of the partners such a critical factor, more intensive up-front business planning takes on a heightened importance. It seems axiomatic to start with clear performance objectives. Too often companies fail to identify what a potential partner really wants from a deal. Setting the objectives starts with investing in the relationship — particularly when working with foreign partners — since it is vital to be honest about what will and will not work. “Our ability to be transparent with the people we’re partnering with and to develop a level of trust that they’re being transparent with us is critical,” says McDonough. “If you’re shaky on that, getting to a successful place can be really challenging.”

Before moving to the next phase, each side should come up with a very short and precise list of what they must get out of the deal to make it worthwhile — is it market entry, low-cost sourcing, or global distribution? Too often, potential partners “are trying to solve too many goals at the same time,” notes Sguazzin, making it unlikely that they will come away satisfied. And as in most challenging projects, it’s good to make sure that top management is also behind the idea before getting too far.

If the rationale for the deal still seems solid after this exercise, the next critical step is usually to set up a strong governance framework. This is a process for which corporate development teams could take the lead, acting as a liaison between both businesses. Survey respondents overwhelmingly agreed that having clarity around roles and governance in the combined organization is the most important factor in creating a partnership that can thrive.

Will the alliance have a separate management team, or will one of the partners be the primary operator? How will the other partner participate? Who will be the ultimate arbiter of disputes? There are many options, but without a framework to resolve conflict, differences of opinion are more likely to bring the whole deal down.

Beyond the initial set-up, partners also need to come up with a detailed long-term blueprint for the combined organization. This applies particularly to how to handle shifting business conditions and what exit strategies might look like. Even though the plan might evolve, taking a forward-looking view and allowing for the possibility that future value may be unevenly distributed, or that one partner may find their needs changing, may make it less catastrophic when such events happen. It also provides a basis for initial valuations.

Working with partners may never be considered easy. But many of the common pitfalls associated with such deals can be mitigated. In fact, success starts by looking internally. “If you believe that as a company you can do it all, then you should never go into a strategic alliance,” says McDonough. “It sounds obvious, but a surprising number of people cannot tell you what their weaknesses are, and what they need help with. If you go into an alliance with that mentality, you’re really not set up for success.”

Corporate development teams have a prime opportunity to take the lead to make sure crisp goals and thoughtful planning are baked into alliance set-ups, and that they have the resiliency and flexibility to stand the test of time.

18

Perspective

As part of Caterpillar’s 2011 acquisition of mining equipment company Bucyrus, Caterpillar announced that it would transition product distribution and support to its existing independent dealer network. This essentially created the need for a string of divestitures, with your dealers as the likely buyers. Since the time of the acquisition you have completed a number of these sales. Can you tell us more about what this has entailed?

This is a unique situation, and an opportunity that comes along once in a lifetime, or at least I’m sure I won’t see a deal like this again in my lifetime. When Caterpillar bought Bucyrus we knew we were going to integrate most of it, but we also thought there was a strong chance that within a short period of time we would decide to divest the product distribution and support aspects of Bucyrus to our dealer network. Right now, we’re looking at the potential for about 60 divestitures around the globe in the next two years or so.

Normally, most business people might think the biggest concern with a divestiture is “how can we get the most money?” This is not the sole focus with these transactions. Even though these are arms-length negotiations, as our dealers are independently owned and operated, we are primarily focused on delivering maximum value to our end-user customers while recovering the price we paid for the Bucyrus distribution business. We believe that our shareholders will be rewarded because if our dealers are successful in this business, then Caterpillar will be successful. The reason we have a very close relationship and often times an 80-year plus history with our Cat dealers relates to our business model where our success is linked to their success.

Did the dealers do more or less due diligence than any other party might? What is it like working with the dealers as business buyers?

Because we have such long-term relationships with our dealers, there is a level of trust, familiarity and even a history of open and candid discussions that occur as a normal part of our business dealings. Compared to most deals, this trust-based relationship has been a huge advantage and has helped us work through the difficulties we’ve had at times providing information by dealer territory. As we go through the process, we openly work with the dealers to reach a common understanding.

These deals would be much more difficult without the dealer relationship. Normally, when you provide a piece of data in a transaction the other party locks in on it. If it changes later, they may think you’re trying to mislead them, or that you don’t know what you’re doing. Neither of these situations creates a positive atmosphere for negotiations. In our transactions, the dealers are looking at the exact same data that we’re looking at, and typically coming to the same conclusion about value. This sharing of information speeds the process and helps us more quickly get focused on the real prize … serving our customers and making them more successful.

Do you find there’s a trade-off between speed and success, or at least quality?

Yes, the limiting factor is how quickly we can effectively transition and stabilize operations. In most divestiture transactions, the heavy lifting is upfront, getting to closing. In these transactions, it’s not that way; there is heavy lifting before and after the closing, particularly making sure

David L. Hoffman CFO, Resource Industries Group, Caterpillar Inc.


the dealer is operational. On Day One, the dealer has to be able to order parts and invoice customers, they have to be able to pay their new employees and close the books, and they must make all the IT systems work. Our goal is that when the dealer is transitioned, performance for the customer is comparable to historic Bucyrus performance and we have a solid platform to make it much better moving forward.

From a 20,000-foot perspective, it looks pretty simple to take a business and transition it, but it’s all the details that make it hard. We would always like to move faster, but each transaction is unique and each needs to be done professionally and with a focus on quality. Our view is that it always takes much longer to go back and fix something than to do it right the first time.

Do your customers have any influence on the process?

No matter what your business, without customers, and a focus on serving those customers, you won’t succeed! They are a key reason we purchased Bucyrus and the reason we are working to enhance support through the proven capability of our dealer network. Where there is customer pain, we’re working with our dealer to relieve it as quickly as possible. And since Bucyrus territories don’t match up exactly with that of our dealers, our divestiture process is making sure we don’t compromise support to any of our customers.

Perspective (cont.)

How do you keep everything organized, and what role does corporate play?

There is a lot to keep organized when you’re talking about the potential for more than 60 divestitures in about 2 years. To stay on top of things and leverage different functional expertise, we have a series of governance meetings each week. There’s one meeting with cross-functional corporate department heads to make sure that everyone knows what is going on and has appropriate input. Then we have separate meetings with key vice-presidents and group presidents, so they can flag any issues from their perspective. We also leverage outside advisors, to supplement our internal skills and resources, especially in certain geographies. We also have a weekly meeting with our field people, regional managers from around the world, so we get direct input back from dealers and customers. They have a lot of input into priority setting and determining which dealers we’re going to do next. They understand the local markets and customer needs. Of course we have some constructive conflict, because everyone wants dealers in their region to be next in the process.

So it’s a strong governance model, with numerous weekly meetings and communications. Shepherding this corporate initiative that involves the whole company and all functions, takes a lot of effort to make sure everyone is on the same page, and comfortable with the direction and speed things are going

20

Divestitures: Driving value through separation

Carve-outs and divestitures have become an area of increasing focus for organizations, likely a result of external and internal pressures on executives to ensure that their portfolios are making good use of capital. However, many companies fail to get what they are looking for in these transactions, and find that costs can overwhelm benefits. How can corporate development teams help their companies avoid pitfalls and maximize value? Whether the transaction is intended to shed non-core assets, allay regulatory concerns, or respond to other drivers, a key to success for divestitures almost always comes back to one word: preparation.

What do companies want out of a divestiture? Getting value for their assets is the top goal, cited by the largest group of survey respondents (figure 14). Clearly, negotiating a good price matters. The level of chaos such

transactions may create in the existing business is also, apparently, a big concern, with the goal of minimizing disruption to the business the second most common answer cited by survey respondents. Closing the deal quickly and using management’s time efficiently are also important but rank much lower on the list of priorities.

Value is the primary goal, but it can be elusive. What causes divestitures to go wrong, or to miss out on value? The most common failure factor, according to respondents, is inadequate preparation and poor quality information (figure 15). A close second is the complexity of these deals; transactions which may require a company to separate bone from marrow without injuring either part. What these answers suggest is that companies may too often underestimate the difficulty of completing such deals and the level of planning they can entail.

57%

31%

6%

6%

0%

Value realized

Minimal disruption to ongoing businesses

Speed of closing

Efficient use of management time

Limited dissemination of sensitive information

Figure 14. Importance of outcomes that characterize a successful divestiture

28%

22%

16%

14%

9%

7%

2%

2%

Inadequate preparation and poor quality information

Complexity of carve-out and separation issues

A preference for speed of closing over value

Inadequate plan to prevent disruption to the business

Disengaged executive leadership

Flawed sale process

Poor deal team coordination

Other

Figure 15. Factor accounting for the greatest value erosion in divestitures


"From a 20,000-foot perspective, it looks pretty simple to take a business and transition it, but it’s all the details that make it hard,” says Dave Hoffman, Resource Industries Group CFO for Caterpillar Inc. He is currently overseeing a team that is working on what could be more than 60 divestitures expected to take place in about two years related to the company’s Bucyrus acquisition. “We would always like to move faster, but each transaction is unique and each needs to be done professionally and with a focus on quality. Our view is that it always takes much longer to go back and fix something than to do it right the first time." And the time invested planning the transaction often means time saved in executing and closing it.

One reason companies may underestimate the level of work involved in separations may be related to the fact that only 40% of companies review their portfolios for potential divestitures on a routine basis, according to the survey (figure 16). Other factors that may lower the probability of success, as suggested by our survey, are the findings that corporate development teams lead the process at less than half their companies, and more than one-third say their companies don’t devote enough resources to divestitures (figures 17 and 18).

46%

13%

24%

13%

5%

Figure 17. Involvement of corporate development team in divestitures

Leads processSupervises advisor that leads processProvides supportNot involvedOther

5%

56%

38%

More than enough resourcesEnough resourcesNot enough resources

Figure 18. Adequacy of resources devoted to executing divestitures

20%

20%

37%

23%

Figure 16. Frequency of evaluating portfolio for potential divestitures

Several times a yearAnnuallyEvent drivenRarely/Never

22

It is not surprising that we don’t see more corporate development groups clamoring to lead the divestiture process. We all want to be associated with growth-oriented, positive activities. Resources are more likely to be aligned with an acquisition or joint venture, as suggested by our findings. This likely manifests in more of a reactive approach when shedding assets and likely involves staff with limited M&A experience. In the life of an organization, especially over long periods of time, business conditions will likely change; having the strategic flexibility to change direction through the sale of a business or certain assets while maximizing value is an important part of a company’s capabilities set.

Divestitures, carve-outs, and spin-offs are essentially complicated surgeries that require a careful eye and steady hands to make sure that the remaining organization stays healthy and intact. By exerting more influence over dispositions, corporate development teams could go a long way in helping ensure that value doesn’t bleed out before — or after the deal closes.

How can companies become better at divestitures? One way of gaining value starts by taking a buyer’s perspective on the asset under consideration; looking at financial and operating data the way it would appear in a sale process through the buyer’s lens. “Well-prepared sellers do a lot of work behind the scenes and before they start engaging with potential buyers,” says Kathleen Neiber, partner with Deloitte & Touche LLP’s M&A Services practice. “They’ve thought through where the value in their asset is, and have strategized on how to address buyers’ considerations before the sales process even begins.”

Preparing the exiting business unit for post-transaction success is also essential. Whether the parent is selling it, spinning it off as a standalone entity, or retaining some type of equity stake, corporate development should consider what the separated asset might be lacking post-close, such as management or technology, and how it might help identify those gaps for a buyer. Preparation builds credibility with the interested parties, helps eliminate uncertainties, and encourages maximization of value for a seller.

At Visteon Corporation, which has closed 14 complex carve-outs in the past seven years, "our experience is that if you put the time upfront to build the perimeter appropriately, so you really know what you’re selling, and then secondly make sure the data set is right, and then that the transition plan makes sense, you can really go through the transaction fairly quickly," says Cliff Peterson, Managing Director of Transactions & Services for Visteon.

Prepared sellers may be well advised to think about how to fit the puzzle back together with some pieces missing, sketching out how to revamp organizational structures and shared services minus the divested assets. One of the greater challenges with a divestiture is unwinding an integrated business unit without harming the remaining entity. On the top line, the brand that is leaving may have generated cross-sales for other units, which could now face a decline without the brand association. From a back-office perspective, there may be a host of stranded costs; the additional expense that comes when the parent continues to provide support functions to the shed asset, for example, or when a shrinking pool of users at the parent company changes the cost profile of a shared service.

Corporate development, from its central vantage point, may wish to take the lead in catching trouble spots before they happen and create plans to mitigate them. One way to help ease the transition for both seller and buyer is to develop a Transition Services Agreement (TSA) from the very beginning of a deal. Such agreements typically spell out how long and at what level a seller will continue to offer services such as IT support to a separated business, creating value for buyers by affording them time to integrate new assets properly. TSAs can also be a benefit to the seller, because with agreement from the buyer, and attention to how they are structured, they generally give the parent company more time to restructure their systems and mitigate stranded costs.


More specifically, here are some important steps in preparing to separate out part of the business, based on our experience:

Make sure that all the stakeholders are aligned

Without support at both the corporate and business unit level, a divestiture runs a higher risk of failure. It’s important to spend the time upfront to address potential concerns with internal constituents, and to create a more consistent message for external stakeholders, such as investors and shareholders. Get support functions, particularly HR, on board early to get data like employee records in order, help iron out details of the separation, and keep employees focused and positive.

Create a plan for how the divestiture will happen, function by function

By creating blueprints for how the separation will happen, from personnel to facilities to back-office services deal teams can enhance the potential savings associated with reducing their companies’ days of negotiation and volumes of disappointment among potential buyers. Don’t forget HR, Finance, IT, Compliance, Legal and Regulatory, Sales, and Distribution.

Do due diligence on yourself

”You may know your business, but do you know it in the way your buyer is going to look at it?” says Neiber. Taking the buyer’s perspective will help a company be smarter in communicating investment considerations to buyers, negotiating value, setting time lines, and other elements of the deal. Generally in concert with an outside advisor, well-prepared sellers have gathered market data to get a more accurate assessment of the business’ valuation, and have developed their own positions and solutions on potential sticking points that could emerge during negotiations.

The key takeaway here: being prepared applies to divestitures as much as any other type of transaction. Don’t let the details slip through the cracks. A detailed disentanglement plan, a sense of the buyer’s strategy, and supportable information to help underpin key investment considerations and potentially assuage buyer concerns can save both time and money, and increase the probability of success.

24

Perspective

Visteon is well-known for the many divestitures it has closed over the past decade. Can you walk us through a bit of the history?

As you know, Visteon is an automotive supplier which in 2011 had approximately $8 billion in revenue. It was spun off from Ford in 2000, and as a spin-off, we were created with a number of businesses that didn’t necessarily relate to each other. We knew from the outset that we would be on a path of doing extensive restructuring work to improve the business. Since 2005, we’ve had a string of 14 divestitures, and they’ve all been complex carve-outs of existing businesses; nothing so “easy” as a stand-alone business. Most of these were fully integrated within Visteon, with commingled IT systems, or other business processes. They were truly complex divestitures.

How often do you review your portfolio of businesses for possible divestiture candidates?

At least annually, we do strategic assessments, but more recently, as the process has accelerated, it’s more of an ongoing exercise. We have used financial advisors to help us decide which assets make sense to be bundled together, which ones don’t, and how to prioritize our portfolio actions. Initially, it was relatively easy. We had businesses where the financial performance was just not up to our standards, so it was a matter of striking at the lowest-hanging fruit. But as time has gone on, it’s been more of an assessment of, “Here’s a profitable business, but does it make sense for us? Can we be a premier player in that space?”

Why is it so important for Visteon to be one of the top players in a market?

The auto supply industry globally has been consolidating down across all the sub-segments. There are few automotive OE customers — only about a dozen — so you have to be able to make products globally, and you have to be able to reinvest in technology. Only the top few suppliers in any segment are going to be able to do that. Our strategic assessment process has been about asking, “Do we have the skills to become the premier player in this segment? In the automotive supply industry, we also have the advantage of a long view into the future. Automotive manufacturers source business to suppliers several years out, so about 90% of the projected revenues in our plan are sourced three to five years before selling product. That

means it’s actually pretty easy to quantify whether or not we’ll be a segment leader through organic growth.

As an example, in a recent transaction, we agreed to sell our automotive lighting business. The business was profitable, but we were the number six player in a rapidly consolidating segment. We simply weren’t on a path to become a top player, so we used that as our motivation to divest. At some point it’s better to exit a business through a sale to another player and get the highest possible value for it, and move onto something where you can be a true global leader.

How long do you expect a carve-out to take?

The carve-out process takes time. It can take three to six months to prepare for a transaction, several months to accomplish the transaction itself, then 12 months or more of transition services. But Visteon’s experience shows that if you put in the time upfront to build the perimeter appropriately, to really define the transaction, and then secondly make sure the data set is right, then the process pays off and the transaction will go quickly and efficiently.

What role does corporate development play in the divestiture process?

My team is a small team; there are seven of us including me doing the transaction work. Everyone on the team has a slightly different experience set and we all contribute to the many phases of a transaction. In reality, though, it’s not just the development team that does the transaction; it’s a much wider group.

Within Visteon, we get a much wider team involved very early in a transaction — including HR, IT, and finance people from around the company. The members of this group are all the key participants in planning for and preparing for a divestiture. One of Visteon’s strengths is that it’s generally the same individuals on every transaction: the same HR people, the same IT people, the same finance people. They all have other jobs, but they have become the carve-out experts. They’ve done it before, they know what to look at, and who to call. My belief is that to maximize transaction value, a company must identify issues, including carve-out concerns, very early in the process, and then share those issues with prospective bidders in a controlled manner. This makes the whole process go faster and smoother and increases the value received in the ultimate closing of a transaction.

Cliff Peterson Managing Director, Transactions & Services, Visteon Corp.


With finance in particular, the internal financial data is very good for running the business, but it may not exactly align with the perimeter of the business we are selling to a buyer. It takes a fair amount of work to remove items like administrative overheads that will not go with business, and adjust the one-time items that are Visteon-related, to make those financials appropriate for an outside buyer. The IT team is another key participant in the M&A process. Our manufacturing plants generally commingle business from a number of product lines, so carve-outs require a great deal of care. The IT team must make sure that the plant processes and systems are properly identifying and capturing data related to the business we’re selling. We have to do a fair amount of data verification to make sure we’re fairly representing a business to a buyer.

In fact, as we even start to think about a segment or business that might make it to the list of something we divest, our team would go to work on it well in advance of a decision to actually sell. We add some analysis, like whether it would be a difficult carve-out or an easy carve-out, and what it’s attached to in terms of corporate systems. Although over time we have been able to jump those hurdles, and now are pretty much able to divest any business we need to.

How much of the information you gather internally do you share with buyers?

In our view, a seller needs to be very open with the buyers very early in the process, even in the initial bidding rounds of the auction. Every business has strengths and weaknesses. If a seller is open about the business issues and includes descriptions of and potential solutions for those issues in early diligence materials to buyers, much of the uncertainty is removed. That means the final bids are more consistent, and more likely to be maintained through closing. Visteon uses electronic data sites for all our transactions. In every data site is a description of our business data processes, and insights about the carve-out process, including our estimates of how long it might take. We are very upfront about it. Frankly, most buyers, especially sophisticated ones, find it refreshing when we deal with issues openly. When a seller is not open about the issues, the buyer can only assume the worst. If you deal with the issue, the buyer can assign a more appropriate value to the transaction.

In one recent transaction, we had a very small environmental issue that we identified right up front, in the offering memorandum actually. I believe that open approach helped us gain value, because bidders weren’t factoring in uncertainty. They knew the size of the problem they had to address. In the end, the bid values held through closing. We’ve had a couple of bids where prices have even gone up between the second and third rounds, because we were able to make the case that the identified issues were not as serious as the buyer thought, and offer some solutions.

In a way, the corporate development team has to be the buyer’s representative inside the organization. We make sure that the transaction data set is something the buyer can understand and use to evaluate a business. With this approach, we are a very confident seller in transaction negotiations.

You regularly offer TSAs to your buyers. Why is that, and how do you mitigate stranded costs?

We approach a TSA as a mutually beneficial concept. To buyers, transitional services allow them the appropriate amount of time to integrate the business. Buyers appreciate the time because it allows for efficient integration into their processes and helps them avoid taking actions that are suboptimal for them. To the seller, the TSA is equally valuable, because it allows us time to work on our administrative costs and get stranded costs out of our business. The TSA is a great way to share overhead costs during the transition timeframe.

We are thinking about TSAs from the very start of the transaction. Our TSAs are largely constructed around the IT environment, so as we prepare data for a buyer, the IT team is looking at how a business is able to be carved out, how they could transfer capabilities to the buyer. They are identifying plans before we even run an auction. In several divestitures, where we knew in advance we were making changes to our IT system to improve our cost base, we shared our plans with buyers and were able to make these changes during the transition process. So there is remarkable flexibility in a transaction if you can be open with buyers.

Perspective (cont.)

26

How do you minimize disruption to the business being sold, particularly regarding employee stress about a transaction?

Even though we work widely across the organization, we go to extremes to keep divestiture work confidential until the moment we have a signed agreement. When we have signed the transaction, then we go into communication mode — maybe over-communication. We work with corporate communications to develop materials we can use with customers and employees, and we work with the buyer, so they can ideally use it for their purposes too. Then we frequently will bring a buyer in and let them stand up in front of employees within 24 hours of an announced transaction to deliver their message to employees about the business going forward. We also go out of our way to protect our employees; we very much negotiate on their behalf in terms of getting them situations they can live with. We expect the buyer to offer them our terms or better, and our employees know that we’re doing that.

What are the key success factors for a divestiture, for Visteon, and how do you assess the performance of your transactions?

It’s a lot more than price. Obviously, you have to get the right price for the business, or it’s not worth it to your shareholders. But we also look at success in terms of whether we were able to carve out an asset without disrupting the rest of the business. How did we fare on customer continuity — both from a buyer’s perspective and the remaining part of Visteon? Also, do we have a plan for stranded costs? Did the TSA add value? And frankly, what is the value left behind? We also look back and evaluate whether we were pleased with how quickly we delivered the transaction. We always want it to go faster, but these things take time.

Perspective (cont.)


Striking a balance: The board’s role in M&A

It is hard to understate the impact that the financial crisis has had on business practices. One of the greatest effects seems to have occurred in the boardroom, where a heightened sensitivity to risk appears to have spurred more scenario planning, more judicious deployment of capital, and requests for better business intelligence from management. Not surprisingly, this caution may be playing out in the board’s consideration of M&A activity. Greater than 40% of respondents note that their boards have become more involved in M&A over the past two years, primarily in the form of asking for more frequent updates and deeper details about evolving deals (figures 19 and 20).

3%

4%

8%

16%

27%

42%

Figure 20. Most significant way board of directors involvement in M&A has increased

Requirement for more frequent board updates/check-points during the deal process

More time spent by the board deliberating transactions

Board desire for more detailed transaction information

Enhanced M&A governance policy and process

Increased board usage of outside advisors

Other

With board members focused on being better stewards of corporate capital, corporate development teams face two key challenges: (1) how to provide a regular flow of high-quality information without excessively taxing their teams; and (2) how to help the board add value not just by protecting the company, but also by using its collective experience to serve shareholders by more diligent and intentional involvement in the company’s M&A and growth objectives.

Overall, 64% of respondents said that one of their top two board requests was more-frequent updates and checkpoints during the deal process; 47% put more

41%

56%

3%

More involvedNo changeLess involved

Figure 19. Change in involvement of the board of directors in M&A over past two years

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detailed transaction information in this category. Those trends hold particularly true at highly acquisitive firms. Executives at 55% of the companies responding to the survey that close five or more deals in a year say they are being asked to give more-frequent updates, compared to 37% at companies with fewer deals in the mix.

“The board wants precision and detail; directors are asking for the assumptions being put into the financial models, where the market-based metrics come from, and how well the corporate development team has vetted the projected performance of the company,” says Elinson.

Considering that 91% of all acquisitions valued at or over $100 million now result in litigation, this is hardly surprising. Although “there is no single blueprint for how to run a sale or acquisition process,” says former Delaware Court of Chancery Chancellor William B. Chandler, “boards in any setting have an unremitting duty of care under our law, and that duty of care requires that the board inform itself of all reasonably available material information before it makes a decision.”

The results of our study suggest that a tremendous amount of board time is now spent on M&A — and a lot of corporate development time appears to be spent on preparing for those discussions. But more time does not necessarily mean better decisions or better outcomes. That’s is more likely to be true when board members have knowledge or experience gaps regarding a potential transaction; while they may feel compelled to get as much data as possible to play the role of protectorate, they may not be able to use it as effectively as desired. The challenge for corporate development executives here is balancing the resources required to develop high-quality information for the board with the resources needed to advance the deal.

We’ve observed a few leading practices from corporate development teams. First, they tend to provide the board with a standard and consistent package of information for each transaction, covering deal rationale, transaction status, and summary financial impacts, so the board can more efficiently glean pertinent information from update to update and deal to deal. While this may seem

obvious, many corporate development teams fail to get the “packaging” right. Some companies may leave no role for standard processes by allowing communication to be driven by the management at different business units, the different advisors for each deal, or simply the assumption that standard processes can’t fit the variations that every deal brings.

Another leading practice is to incorporate logical alternative scenarios into the deal analysis — including what could happen if you don’t do the deal. By considering and presenting transaction alternatives, the corporate development team may help the board meet certain fiduciary responsibilities, and provide an analysis that could also be useful if the board requests a fairness opinion from a financial advisor.

Streamlining the information flow to the board is just one way that corporate development helps the board, however. To more fully satisfy directors, corporate development executives also need to be good project managers, the survey suggests. When asked to name the top ways that corporate development assists the board in M&A, respondents overall ranked “managing the deal process” as the most important facet, above other options such as making a business case for the transaction, and offering insight on valuation and risk.

In fact, process may be a primary concern for board members, considering it may be the only way to protect themselves when lawsuits occur. “Judges are law-trained experts who specialize in procedure and process; they are not experts in business,” says Chandler. And while most judges are strongly inclined to defer to the experts on business, and those experts are the directors and managers, “they must also get comfortable that the business decision makers followed a careful process that was designed both to minimize conflicts of interest, and to maximize the flow of material information to the board.” With this in mind, corporate development professionals have a prime opportunity to help the board fulfill its duty by proactively creating a strong process with few impediments to communication.

In spite of the necessary attention to process, M&A policy


and governance the board might provide was the least popular selection by executive respondents when asked where the board adds the greatest value (figure 21). This may suggest that corporate development is truly seeking to have the board be an additional advisor to assist in serving the growth interests of the company, rather than limiting their value added to being solely a protector of corporate assets. Not surprisingly, roughly 90% of respondents indicate that M&A experience is at least somewhat important in assessing an individual’s overall qualifications as a board member (figure 22).

43%

25%

22%

11%

Figure 21. Greatest value added by the board of directors in M&A

Constructively evaluating and challenging transaction objectives

Networking and relationships with potential business partners and/or targets

Providing deal advice and counsel to management

Establishing M&A policy and governance

28%

61%

11%

Figure 22. Importance of M&A experience as a qualification for board members

Very importantSomewhat importantNot important

30

Different corporate development teams utilize boards in the M&A process differently. However, it is clear that at the larger responding companies, and at ones that are more acquisitive, the board’s ability to constructively evaluate and challenge transaction objectives appears to be far the most important way in which outside directors make M&A smarter and better. This element of dialogue with the board was at the top of the list for most respondents at companies of $1 billion or more in annual revenue (54%) and those at companies that close five or more deals annually (66%). Management benefits from the outside perspectives that board members bring, as they can often offer insight from analogous situations to the transaction at hand, and foresight about potential pitfalls to avoid during the integration process.

Executives at smaller companies and ones that close fewer deals indicate that along with the board’s constructive evaluation and challenging, they find that the advice and networking relationships provided by board members are often equally as helpful as their analysis of a particular deal. In fact, 30%-31% of respondents from companies with less than $1 billion in annual revenue selected each of these three areas as the greatest value added by the board in relation to M&A.2

2 See Lessons in discipline: The impact of activist investors section.

These tensions between one of a board’s governance roles (to protect) and its advisory role (to serve) may have only been heightened by the financial crisis. Most agree that the current and recent past economic environments have intensified pressure on boards to be more fully engaged in managing enterprise risks, including those introduced by deal-making, and at the same time, in delivering earnings growth, increasingly driven by M&A. When the financial crisis fades into history, corporate development executives may be well-served to continue honing their strategies for more effectively interacting with the board, both as the driver of the M&A process for the company and the engine of the growth mandate.


Perspective

Our survey results suggest that boards are increasingly involved in M&A transactions. Why is that occurring?

All M&A events are fundamentally extraordinary moments in the life of a corporation. They’re not common, they’re not typical, and they’re usually transformative events, so it’s quite natural that when such events are occurring, a board would be keenly aware and actively involved in the process. And that’s particularly true when you’re selling the company, an end-stage or last quarter event. As Vice Chancellor Travis Laster wrote in a recent decision: “The buck stops with the board.”

Under Delaware law, directors have both a fiduciary duty and a statutory obligation that they must fulfill whenever the company is being sold or is involved in some type of M&A activity. So, to the extent your survey indicates that boards are becoming more actively involved in the M&A process, I consider that to be a very good and very wholesome development.

Are there any recent changes that would compel directors to scrutinize M&A more closely?

Right now, according to well-documented studies, 95% of all M&A transactions result in litigation, frequently multi-form litigation occurring simultaneously in several different jurisdictions. From my perspective, it is a staggering statistic. Five years ago, I believe, it was less than 45%, and 15 years ago, it was 10%. So despite continuously improving corporate governance and increasingly independent directors, we now have 95% of all transactions challenged and attacked as involving breaches of fiduciary duty? One has to wonder how that can be possible. And it is, I submit, more than a mere rhetorical question; it is a phenomenon that cries out for examination and explanation. Every director, whether of a public or private company, needs to be highly conscious of that quite sobering, if not daunting, statistic. Directors need to be prepared to defend their decisions and withstand the scrutiny that is inevitable when lawsuits are filed — and in this area you can be sure of one thing: lawsuits will be filed.

Conflicts of interest in M&A have been getting a lot of attention recently. What should the board consider when it comes to potential conflicts?

One of most important duties of every director is to inform herself or himself of any conflicts of interest and to deal with them. This applies to conflicts in the context of management as well as advisors — financial, legal or otherwise — involved in the transaction. Directors need to assure themselves of the independence of the advisors retained by the company. They need to pay careful attention to what types of conflicts exist, which advisors are implicated, and how the company will address them. To be clear, I’m not saying that all conflicts are always per se forbidden. But, I am saying two things: that directors need to be fully informed, ex ante, about the existence of conflicts, and that directors need to make careful, informed decisions about whether the conflicts are indeed disabling, and if not, how the process should be structured to minimize or attenuate the identified conflict.

In addition, directors need to carefully review any conflicts related to the management team, particularly policing in advance the relationships that might be forged with the acquirer after closing on the deal. The Board needs to make sure those arrangements or discussions don’t occur until after the essential terms of the deal are finalized. For example, the Board should be very specific with management about when and how management can engage in those types of conversations, who can have them, and who is responsible for making sure the management team stays inside the boundary lines. Frankly, in this particular setting — when the company is being sold — directors should avoid the tendency to be too flinty about getting the best advice; this is a critical decision and directors should not hesitate to retain experienced and reputable legal counsel to design that process so as to withstand the intensive scrutiny that the directors’ decision will inevitably receive.

Chancellor William B. Chandler III, formerly of the Delaware Court of Chancery

Partner, Wilson Sonsini Goodrich & Rosati

32

Perspective (cont.)

What do you consider leading practice in terms of board engagement in the M&A process and how the board engages with executive management and the corporate development team?

Well, much of my earlier answer responds to this question as well. But in general there is no “one-size-fits-all” approach to this issue, and the specific answer will be context specific. There are some Boards, for example, that get really deep into the weeds or the details of a sale transaction or an acquisition process. Other Boards tend to delegate much of the sale negotiating process or the acquisition strategy to the management team or to the Board’s advisors. Those latter Boards, for perfectly understandable reasons, prefer to occupy more of an oversight role. Both models just described, however, have been blessed by the courts in particular settings.

The key is that when Boards delegate to management or to its advisors, it should not ordinarily be a totally un-chaperoned M&A process; the Board cannot just delegate all responsibility and then “check out” of the process. Directors need to make sure that the advisors and management are communicating with the directors in real-time regarding material information as the deal develops. If a Board is going to delegate, that model of proceeding can be acceptable and in proper circumstances will pass judicial muster — if you can show that the Board is actively, not passively, supervising management and the advisors, that the Board is obtaining the information it needs to be informed and is thus able to make critical decisions as the transaction unfolds.

Delaware law recognizes that directors need this freedom, this flexibility, to structure M&A processes that make sense for their individual companies in light of the culture of the particular boardroom. In short, there is no standardized, uniform template for Board involvement that establishes ex ante how much or how little the Board should delegate the M&A process to management and the advisors.

What question do directors most often ask you?

Directors frequently ask me how they can avoid litigation risk. I tell them it is almost impossible to avoid being sued. As the statistics unequivocally demonstrate, we live in a litigious age, so you stand a very high probability of being sued, especially if you engage in M&A transactions. Directors need to understand that basic reality, and then prepare for it.

Now, there is something you can do to minimize the liability risk. Basically, I tell directors there are three things they should bear in mind: Number one is process, number two is process, and number three is process. It may sound simplistic, but it’s the truth. Boards should retain high quality advisors to assist the Board in structuring, and then executing, a thoughtful, robust process that will withstand judicial scrutiny.

Judges are law-trained experts who specialize in procedure and process; judges understand process, but they are not experts in business. Judges are strongly inclined to defer to the experts on business, and those experts are the directors and managers. At the same time, judges must get comfortable that the business decision makers followed a careful process that was designed both to minimize conflicts of interest and to maximize the flow of material information to the board. Courts devour process; they are all about process. Now, I realize that in this day and age, it’s probably impossible to eliminate every appearance of every conflict of interest, and in some cases, it might not be good to do so even if it were possible. But it’s absolutely essential that the Board be fully informed ex ante about conflicts, and that the Board evince a vigorous process for handling those conflicts. Sometimes that means making hard decisions about recusal, not sitting on a special committee, or even about whether you’re going to retain a particular advisor. What is key, however, is that directors be fully informed before decisions are made or actions taken, and be able to show that they were informed. Only then can directors be in a position to make the hard decisions. If they do it right, show they used their considered judgment based on all material information and made the decision in good faith, they will be in a very strong position. Just remember: The buck stops with the board.


What’s the most common mistake you see made by directors?

I get this kind of question quite often from board members: the CEO or maybe an individual director has just had lunch with a friend at a private equity firm or perhaps a colleague at a competitor company, and the “casual” conversation turns to a potential transaction; and maybe there is a “jaw dropping” offer made, an over-the-moon proposal, and they want to “sign it up” right away. When asked what they have done to check with other interested buyers, I discover that they’ve done nothing. However, there is assurance that they “know” this is the best proposal they could possibly ever receive, they just know this. And my reaction is, “Well, I’m sure you think you “know,” but do you understand that you will be sued, and in depositions or at trial the shareholder’s lawyer will ask you to describe precisely how you knew this was the best offer anyone would make for this company?” My general advice, when directors pose this hypothetical, is to urge them to pause and think it through carefully, take some time, consult with knowledgeable and skilled legal counsel, build a credible and robust process and record of your decision making, allow your counsel to structure that process, perhaps using post-signing market checks, go shops and similar mechanisms that have helped boards survive judicial review in Delaware. Then, if you’re going to sign up that “knock out” over the transom offer, at least you will be able to defend yourself and look the judge in the eye when you describe how and why you recommended this transaction to your stockholders. If a director follows these general prescriptions, he or she should be able to sleep much better at night.

Actually, I find that most directors intuitively understand and agree with this advice. They know that when it’s an end-stage deal, when there will be no tomorrow for the company, they know that’s when Revlon kicks in, and the judicial examination becomes much more rigorous. It’s interesting; every director I talk to seems to know the Revlon doctrine. What is fascinating is how pervasive this bit of Delaware law has become, perhaps too pervasive in the sense that it has become almost a caricature of its original self.

When Revlon was originally decided it looked almost nothing like the Revlon claims we typically see filed today. When Revlon was decided in 1985, the Delaware Supreme Court was concerned that the seller’s board was tilting the playing field in favor of one particular buyer and against the other buyer. The Court emphasized that once the Board has decided to sell the company, its singular job is to achieve the highest price reasonably available; the Board should not be about protecting their personal interests or advancing the interests of the management team. That was the original Revlon decision. Today’s Revlon claims are usually pretty far removed from the claims that gave rise to the original Revlon decision over 25 years ago. Today, Revlon claims typically involve assertions that the Board failed to contact a sufficient number of potential acquirers or that they failed to disclose material information regarding why the Board believes this transaction (and not some other theoretical deal) delivers the maximum value reasonably available, or whatever the case may be.

Recognizing that boards regularly retain financial advisors on deals to provide fairness opinions, what can the board do to get the most out of a fairness opinion?

There are many things Boards could and should be doing regarding fairness opinions; I am skeptical that Boards are getting the value that they deserve from these opinions. First, Boards need to be much more engaged and involved upfront in the retention process, especially regarding selection of financial advisors. There is an understandable, but unfortunate, tendency, in my opinion, to delegate too much authority to management in the retention process and to defer too much to certain relationship concerns. Boards should be engaged in the selection effort, and

Perspective (cont.)

34

instruct or direct management (if the Board itself does not take the lead) in the questions and issues that need to be explored with potential financial advisors regarding expectations during the assignment, disclosure of conflicts, previous work for the buyer or seller, anticipated involvement (or preclusion of involvement) in financing the transaction, etc. There is a whole list of questions that I believe should be carefully explored with any potential advisor—whether financial, legal or otherwise. Second, the Board should exert its negotiation leverage in the retention process. Who will be the advisor, what are the terms of the engagement, how will the advisor’s compensation be structured, how much is contingent and how much is fixed? The Board should, within reason, be actively involved in and informed about that process, setting the parameters of what they expect the financial advisor to do, how they expect them to go about it, and the boundaries for the advisor vis a vis counterparties.

Next, the Board should be very clear with management about internal data that the financial advisor is going to have access to and how they’re going to deploy it. What process will they use to gather that data? What models will they be using to come to their opinion? Even — and this is not for every board — if you’re going to use peer companies, who are they selecting, why are they using those particular companies or transactions? Are they truly peers of this target company? Are they truly comparable

transactions to this one? Personally, I would be asking questions, or expecting my advisors to ask questions, at that level of detail.

Finally, on the back end, when the advisors actually deliver the fairness opinion, directors really need to drill down, ask questions and question answers, in order to fully understand why the advisor is recommending this transaction or not. If I were on the Board, I would want the advisor’s board presentation materials several days in advance of the formal presentation, for the simple fact that I need time to review, digest and absorb the material and be prepared with questions, as well as to assure that I have ample time to understand how the advisor is portraying my company in its analysis. That way, when the presentation is actually made, directors will be far better positioned to understand the presentation and, if necessary, to challenge key assumptions. It is all well and good to rely on advisors — indeed, under Delaware law directors are protected if they retain and rely on qualified experts — but ultimately the responsibility rests with the directors. Again, remember this fundamental piece of advice: The buck stops with the Board.

Perspective (cont.)


Lessons in discipline: The impact of activist investors

One of the ambitions of this survey is to spot trends in the marketplace early and analyze their potential impacts on corporate development behavior. We have been hearing and reading a lot about activist investors, so in this year’s survey, we explored what corporate dealmakers think about activists and how they affect the M&A environment.

Newspaper headlines sometimes associate the term “activist investor” with nasty proxy battles, negative media attention and major disruptions to business activities. Yet respondents to Deloitte’s survey seem to have a healthy understanding of how these investors work and less trepidation about them. More than one-third of corporate development executives view the impact of activist

26%

29%

39%

52%

Increase transparency

Increase competition or deal price

Force carve-outs or break-ups

Put companies in play that otherwise would not have been in play

Figure 24. Expected impact of activist investors on M&A over the next 12 months

investors on M&A to be positive, nearly twice the number who consider it negative (figure 23). The most popular response, offered by 46%, is that activist investors will have no impact on M&A.

When we asked respondents to indicate the specific ways in which activists might impact M&A, more than half of them expect volleys from activist investors to put more companies in play this year and about 40% forecast more break-ups or carve-outs (figure 24). Close to 30% indicated that activists could increase competition or deal price and 26% believe it will lead to increased transparency.

35%

19%

46%

Positive

Negative

No impact

Figure 23. Positive/negative impact of activist investors on M&A over the next 12 months

36

According to Columbia University business school professor Wei Jiang, who has been studying the behavior and impact of hedge fund activists over the past decade, about 40% of the 2,000 or so activist investor overtures in the past decade have involved some element of M&A. Activists are increasingly coming to the table with specific action plans for the companies they are targeting. In about 30% of those cases, the activist is actually forcing the assets into play. In other cases, the activist may be opining on who the buyers should be, or encouraging a target to accept an offer that is already on the table. Corporate development teams should consider regular monitoring of 13D filings of targets they are following since that is where activist hedge funds often signal their intentions.

Whether you take a sanguine approach to investor activism or a sullen one, the reality is that the phenomenon is probably here to stay. Such activism has been on the rise in recent years, and a whopping 97% of respondents expect the level to rise or stay the same or rise in the coming year (figure 25). Indeed, social media seems to have only intensified such efforts. The Securities and Exchange Commission filings that activist investors make to announce their positions are now more easily broadcast to other investors, many of whom may end up supporting the causes of the activists.

What’s clear is that sticking your head in the sand is not an option. So the question is, can savvy corporate deal-makers turn the presence of activist investors to their advantage? “Activists reinforce the need for companies to be continuously thinking about how to optimize shareholder value, and continuously monitoring their strategic alternatives,” says Hector Calzada, a Deloitte Corporate Finance LLC managing director. The presence of activists means that a company should consider regularly evaluating its strategic alternatives in the normal course of business. This year, we learned that only 38% of respondents review their portfolio of businesses for underperforming or non-core businesses with any degree of regularity (figure 16).The rise of activism suggests that companies may want to make this a more regular part of strategic consideration and corporate development is well positioned to contribute.

Additionally, in Deloitte’s 2011 Corporate Development Survey, most — about 70% — of corporate development executives reported that their companies did not consider the synergies and interdependencies among various acquisitions when evaluating deal performance.3 As we noted last year, this silo view may increase the risk of missing the enterprise-level perspective that activist investors are surely taking. Just because a deal has the potential to earn a return that is greater than the company’s cost of capital does not mean it is optimizing shareholder value. In fact, a series of deals that enhance an intangible like customer experience across the company could have a greater impact on value than a single deal that more immediately adds to revenues. Taking a more critical and broader view of the company’s M&A program is one way to help inoculate a firm from unwanted attention. It is particularly important to be able to communicate the value of a prospective deal, so that its announcement doesn’t trigger a call to action among investors. “When attempting to make a large acquisition, a company has to make sure they can articulate really, really well the synergies of the deal, or they themselves may become targets of hedge fund activists,” says Professor Jiang.

3 Corporate Development 2011: Scanning the M&A Horizon

33%

64%

3%

Increase

Stay the same

Decrease

Figure 25. Expected change in activity by activist investors over the next 12 months


Executives in some industries may need to be especially aware of being in a fish tank (figure 26). Manufacturing executives have significantly higher expectations of an increase in deal volume due to activist investors, with about half of them indicating that more activity was likely over the coming year. Respondents from the energy industry, however, are forecasting minimal impact; fewer than 20% of them expect to see activists sparking more deals.

These variations are likely due in some part to the inherent complexity of certain industries. While investors might be able to find some quick operational fixes for a manufacturing company, highly regulated industries portend wading through a thicket of regulations and authorities before effecting any change, increasing uncertainty and potentially adding months or even years to the process.

What do activists look for in target companies? “Hedge funds do not target failing companies,” Professor Jiang notes. Rather, “they want a company to have a good income statement and a bad balance sheet; ideally a mature cash cow with underperforming assets that have been kept with the company for too long.” According to Professor Jiang, markers of attractive characteristics

34%

49%

38%

30%

29%

27%

23%

17%

Figure 26. Expected increase in deal volume as a result of activist investor activity over the next 12 months

Total

Manufacturing

Health Care and Life Sciences

Financial Services

Technology, Media & Entertainment, and Telecommunications

Professional Services

Consumer Products

Energy

for activists are companies with below-average dividend payouts and relatively high CEO compensation compared to peers; a board that is perceived as being friendly to management, and a number of takeover defenses, like poison pills. They are looking for solid companies where small changes can produce quick results, generally within two years. To date, activist funds have tended to be opportunistic without any industry specificity. As certain funds gain deeper industry experience, we wonder whether they may focus here to gain an edge especially as the space grows more crowded.

Professor Jiang also noted that hunters can quickly become the hunted. “As numerous academic studies show, acquisitions tend to underperform from a shareholders’ perspective,” she observed. With that premise, hedge funds target “companies on the lookout for acquisitions without an economically sufficient reason.” This reinforces the importance of the role corporate development plays in making sure a company’s acquisition strategy and investment thesis is on strategy, valuations are well-developed and supportable, diligence is thorough, and integration is fast and flawless to quickly capture synergies and other expected deal benefits.

38

Perspective

Wei Jiang, Professor of Finance and Economics, Columbia Business School

Hedge fund activism seems to be on the rise. Is that true and if so, why?

Since 2010, hedge fund activism has come back with strong force, and I expect this trend to continue over the next several years. Social media is definitely boosting it. One key to success for hedge fund activists is the support of other shareholders, since they tend to hold 5% to 10% of a company; far from the 51% they’d need to make change on their own. Institutional investors, who are otherwise reticent to get involved, are often willing to support the activists’ agenda. And while historically, it’s been very difficult for shareholders to communicate and coordinate with each other, social media now acts as a broadcast vehicle whenever a hedge fund files a 13D. That’s a form required by the Securities and Exchange Commission within 10 days of an investor accumulating a 5% or greater interest in a public firm, and one that often portends shareholder activism. The Internet makes it easier to track the 13Ds, and if other investors agree with them, they’re more likely to participate.

So corporate acquirers who are in competition for these assets should be monitoring 13D filings?

Absolutely. When hedge funds want to put up a “for sale” sign, they make it pretty clear through a 13D, either in an Item 4 or in a public letter attached to the filing. That’s how the news gets disseminated.

Hedge funds are usually known as short-term investors. Why do they bother to get so deeply involved in a company’s strategy?

Hedge funds are not usually known for being long-term investors, but activists are much longer-term than people give them credit for. They hold a stock for two years, on average, which I’d characterize as intermediate term. That’s often why they take substantial actions. If it’s just purely cosmetics, staying in an undiversified position for two years is very costly.

Do hedge fund activists always try to put a company in play?

We have data for the past decade, and about 40% of the 2000-some cases we collected have some element of an M&A play. Hedge fund activists could try to block a deal, or ask a target with an offer in hand to get a better deal; they might or push for a company to put itself up for sale, to go private, to divest a segment or a significant piece of their assets. In most cases, it’s the announcement of a merger or acquisition that is the catalyst, but there are also many times — about one-third of the 40% — where the hedge fund activists forced the company into play; pushing it to sell a peripheral segment or put the entire company up for sale.

So what typically happens once a company or a division is under the microscope?

Hedge funds are often focusing on a particular part of the business that is underperforming; not damaged, but not a good fit with the overall company strategy. After a hedge fund intervention, targets tend to divest the assets, and the assets tend to show significant improvement in the new hands. Looking at manufacturing plants that could be tracked through government census data, my co-authors and I found that underperforming plants that were sold after hedge fund intervention experienced a 17% increase in productivity within two years of the sale.

Who are the buyers?

Generally, these situations attract some attention from private equity buyers, as well as strategic ones. In about one-third of the cases, the investors have a particular acquirer, or list of possible acquirers in mind; in the rest, they just want the company to put up the “for sale” sign, but may have a particular advisor in mind that they want the company to work with.


Perspective (cont.)

Have you studied how the market tends to react to hedge fund activism?

Overall, the stock market response to hedge fund activism is very positive. A stock on average tends to trade up 6% or 7% when hedge fund activists get involved, and it’s a permanent change in price. We followed those returns for two more years, and it’s a random walk up and down, but the 7% increase sticks. If the activism targets the sale of the firm, the announcement return is even high, on the order of 10%.

Do hedge funds tend to specialize in certain industries?

Not as a general rule; they tend to be generalists rather than specialists, though there is a slight trend toward some specialization. For example, I have observed some funds developing some expertise in retail where they’ve targeted larger retailers over the past several years, but it doesn’t confine them to retail. They accumulate some information about the industry, so that’s why it’s more likely for them to do several deals in it.

What makes a company an attractive target, from a hedge fund’s point of view?

Hedge funds target mature companies that have strong fundamentals, but a management team that got a little too complacent. They do not target failing companies. They’re looking for a company with handsome cash flow that it’s not paying out to shareholders; ones with low dividends compared to its peers, and where the CEO pay is a little bit high. They want a company to have a “good” income statement, or strong fundamentals, and a “bad” balance sheet, or room for improvement in capital reallocation. The ideal target is a mature cash cow, with underperforming assets that have been kept with the company for too long.

There was one situation where a strategic acquirer attempted an acquisition by offering more than a 70% premium to the stock price. The target rejected it, saying it undervalued the company, which is basically saying the stock market is worthless. That’s when hedge fund activists got involved, saying this is crazy, and it’s not good for the shareholders. I still see a lot of room for this kind of deal, where there’s not a lot of necessity for specialization.

A board that is perceived as being friendly to management, or has a number of takeover defenses, like a staggered board and poison pills, is also an easy target for a hedge fund. They’ll often ask a company to revoke these, and in fact, these practices have decreased dramatically among public companies since 2005 — activist hedge funds could take some credit for this change.

Would you recommend that corporate acquirers maintain some relationships with hedge funds as a source of deal flow?

Actually, an acquirer could well become a target for hedge fund activism. As numerous academic studies show, M&A is not obviously beneficial to acquiring companies. Acquisitions do not accomplish the benefit of diversification, from a shareholders’ perspective, since they could have bought shares separately in the two companies that combine. Hedge funds focus on companies on the lookout for acquisitions without an economically sufficient reason. So, when attempting to make a large acquisition, a company has to make sure they can articulate really, really well the synergies of the deal, or they themselves may become targets of hedge fund activists.

So, should public companies welcome the attention?

Most corporate executives don’t like hedge fund activists because they think about proxy battles, and nasty letters. But only one quarter of cases involve nasty public battles. Some are confrontational, but not the majority, or at least hedge funds do not begin with the intention of being confrontational. On average, hedge fund activism is overwhelmingly positive. It improves productivity, and improves payouts to shareholders.

It’s not great for the existing management team, though. After a hedge fund intervention, CEO pay tends to be cut, by $1 million on average, and CEO turnover tends to increase; double the normal rate. But shareholders are happy.

40

Conclusions

The findings in this study make it clear that corporate development teams can make or break a deal’s value, often in subtle and underappreciated ways such as being able to connect well with internal and external stakeholders. So what do these findings mean in real life? How might professionals involved in corporate development work think about reshaping their roles? A number of key lessons seem to emerge:

• Regardless of the official structure of the corporate development organization, deal-makers should consider viewing themselves as partners with the business units and critical support functions such as HR and IT. Learning how to partner and influence within the business helps build strong leaders, and also makes it more likely that an acquisition, carve-out or alliance will be successful. It may also mean a better payday, as incentive pay for corporate development executives typically hinges on the long-term success of a deal, not its close.

• Developing a reputation as a “partner” of choice in the marketplace may be a competitive advantage. With more firms looking for creative ways to join forces with other firms, short of the capital-intensive acquisition route, learning how to establish and maintain relationships with other companies may create a clear competitive advantage going forward. While these deals are hard, one of the secrets to success appears to be relatively easy: make sure both sides know — and express — what they want to get out of the partnership.

• Breaking up is also a form of partnering. While most companies give short shrift to divestitures, those that regularly review their portfolio and plan carefully for shedding assets can reap exceptional value. One of the keys to success here is building a network of internal experts across the organization, particularly in critical support functions like HR and IT, who can help sketch out the trajectory of a divestiture before it becomes a reality. Creating strong relationships with potential buyers by being open and transparent is also important. One executive told us that bids regularly increase after his company discloses potential problems in the units to be sold because buyers can then factor in specific solutions, rather than attempt to price their uncertainty.

• A partnership between the corporate development organization and the board of directors may be one of the few antidotes to the extraordinary legal pressures that directors face with every transaction. Corporate development organizations that can more effectively and efficiently keep board members apprised throughout the life of a transaction — from idea to offer to close — may be lowering stress and legal bills at the same time. They are also more likely to benefit from the wealth of experience and insight that board members can offer.

• The smartest companies make partners out of potential enemies. The presence of activist investors, who often have their own corporate development agendas, often makes executives sweat. Instead, these agitators should be a reminder of the need to be constantly looking for opportunities to optimize shareholder value through creative transactions.

As corporate development professionals focus harder on influencing their organizations, they are sure to add more value both to their firms, and, ultimately, themselves.


Profile of survey respondents

Deloitte surveyed professionals involved in corporate development decisions at their organizations. The survey was conducted online from April 3 to 20, 2012, and was completed by 309 respondents.

Twenty percent were heads of Corporate Development and another 20% of respondents were Corporate Development executives. In addition, 15% of respondents were CFOs and 8% were CEOs or Presidents. The remainder included board directors and executives in finance, HR, tax, accounting, and other functions involved in M&A (figure 27).

8%

15%

20%

20%

12%

1%

9%

3% 6%6%

Figure 27. Role

CEO/President

CFO

Head of corporate development/M&A

Corporate development/M&A executive

Corporate development/M&A staff

Board Director

Controller/Finance executive/staff

Human Resources/Talent

Tax/Accounting executive/staff

Other

42

Thirty-two percent of the professionals surveyed were from companies with annual revenues of over $5 billion, with 19% having revenues of $1 billion to $5 billion (figure 28). There was strong representation from both public companies (53%) and private companies (47%).Respondents belonged to a wide cross-section of industries (figure 29).

27%

22%19%

32%

Figure 28. Annual revenue

<$250 million

$250 million - <$1 billion

$1 billion - <$5 billion

$5 billion+

34%

10%19%

6%

4%2%

10%

14%

1%

Figure 29. Primary industry

Consumer & Industrial Products

Energy & Resources

Financial Services

Health Care Providers & Plans

Life Sciences

Media & Entertainment

Professional Services

Technology & Telecommunications

Other


Contacts

Chris Ruggeri M&A Services Leader Principal Deloitte Financial Advisory Services LLP +1 212 436 4626 [email protected]

David Carney M&A Services Leader Principal Deloitte Consulting LLP +1 917 319 8310 [email protected]

Eva Seijido M&A Services Leader Partner Deloitte Tax LLP +1 212 436 3322 [email protected]

Hector Calzada Managing Director Deloitte Corporate Finance LLC +1 404 631 3015 [email protected]

Sara Elinson Principal Deloitte Financial Advisory Services LLP +1 212 436 5665 [email protected]

Maureen Errity Director Center for Corporate Governance +1 212 492 3997 [email protected]

Larry Hitchcock Principal Deloitte Consulting LLP +1 312 486 2202 [email protected]

Kathleen Neiber Partner Deloitte & Touche LLP +1 212 436 3056 [email protected]

Marco Sguazzin Principal Deloitte Consulting LLP +1 415 783 6860 [email protected]

Justin Silber Principal Deloitte Financial Advisory Services LLP +1 404 942 6960 [email protected]

Diane Sinti Director Deloitte Consulting LLP +1 212 618 4313 [email protected]

Alan Warner Partner Deloitte & Touche LLP +1 415 783 5958 [email protected]

Acknowledgment

A special thank you to Yolonda Baker, Joshua Bronstein, Bruce Brown, Ellen Clark, Beth deTuro, Erica Donaldson-Dipyatic, Sarah Gerlock, Angela Hoidas, Marcus Holzer, Opal Joshi, Jack Koenigsknecht, Jessica Kosmowski, Joost Krikhaar, Arnold Lara, Daniel Mucisko, Dana Muldrow, Sonya Murphy, Joanna Ostaszewski, Shelley Pfaendler, Lisa Phin, Srikanth Reddy, Ellen Regan, Ramakrishna Sadhu, Priyanka Sharma, Steve Wagner, and Andrew Wilson for their contributions and assistance.

Deloitte M&A Services

Deloitte’s Merger and Acquisition professionals advise strategic corporate buyers and private equity investors throughout the entire M&A deal lifecycle. From strategy development and target screening through transaction execution, integration, and even divestiture, our M&A professionals have the domain knowledge, extensive industry experience and global reach to provide a tailored approach designed to address unique needs and help build value for clients.

Visit www.deloitte.com/us/cd.

Copyright © 2012 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited

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