Analysing the need and process of portfolio realignment

Shareholder pressure for companies that are not performing well usually leads to the perception that management is not doing enough to boost shareholder value. This is generating pressure at many companies to evaluate business portfolios thoroughly.

Many corporate portfolios, when disaggregated, may exhibit a wide range of contributions to shareholder value. While the majority of segments may perform well, certain businesses may consume a large amount of corporate assets while making small or no contributions to overall value. This is because they perform poorly as measured by returns on capital.

Portfolio realignment is becoming crucial for management. Some companies that did not realign their business portfolio prior to an economical downturn have been unable to dispose of their value-destroying businesses. Today these companies may be finding their growth and profitability hampered by complex operations, uneven performance, and the need for fundamental improvements in the businesses. 

Some companies sold under-performing assets to raise cash during the bad times but ineffectively utilised the proceeds. Today, these organisations may be discovering that they are not well positioned to address a changing economic and competitive environment. 

Many companies view portfolio realignment as part of the broader, ongoing process of adding new and divesting old assets/businesses to address value enhancement and to align with fresh corporate vision. 

A company’s portfolio-realignment process should begin with a view of the end-game – what an optimal grouping of assets/businesses might look like. It is believed that this portfolio should be tailored to a company’s goals and aspirations while balancing three characteristics: being strategically sound, creating value, and being resilient.

What follows summarises broad steps to be taken in a portfolio review:

1) Analysing/disaggregating the portfolio and disposing of value-destroying businesses that are not long-term strategic businesses;

2) Structurally improving the profitability of other established businesses according to their portfolio roles (cash generating, growth engines);

3) Growing new business through 

 internal development or mergers and acquisitions (M&A) to support long-term growth and to align with the company’s strategic vision;

4) Evaluating/re-evaluating the new business’s fit with goals and criteria.

The first step is an important part of a self-funding approach to unlock value and increase investment potential among core portfolio segments. Improving the core business begins by assessing and understanding the current and potential future position of each business, and then defining its appropriate role. 

During this process, management should address both the strategy and the structure of each business to help identify drivers/destroyers of value, associated costs and growth opportunities. 

By disaggregating its portfolio with the analysis, a company can develop a picture of how individual business segments are creating or destroying value, and better determine its solutions going forward; investment to strengthen the core and growth, as well as divesting the value-destroyers among others. 

However, companies should be careful to move directly to high-growth opportunities without first removing existing impediments to success. This may include divesting, shrinking or not growing business with low returns. Growing businesses with existing impediments may actually accelerate enterprise value destruction and tie up cash needed to support high-growth opportunities.

Equally important, considerable thought and analysis should be applied when assessing whether an under-performing business can or should be fixed, as not all businesses can be improved to the point where they are worthy. In such cases, the business should be considered removing.

For businesses that remain part of the enterprise, the next step is to make them more accretive to value by improving returns and/or generating profitable growth. This may include customer and channel enhancement, supply-chain improvement, and new business models.

Once an organisation completes the portfolio clean-up and improvement stages, it should be in a better financial and operational position to pursue the remaining stages of realignment – growing new business through internal development and/or M&A, and evaluating the new portfolio’s fit.

The direction and goals of new business growth should be focused on the above-mentioned portfolio analysis and process. Growth for the sake of growth may consume critical cash and management time and can lead to value destruction rather than value enhancement. 

The portfolio-realignment analysis may sound simple but in fact the approach, process, and information required for analysis can be quite comprehensive. The process also requires substantial management time and inputs. 

However, by approaching the process holistically and rigorously, companies can certainly improve strategic soundness of operational resilience and drive value-creation.

 

Thavee Thaveesangsakulthai is a partner in financial advisory services of Deloitte Thailand.