Identifying opportunities early is necessary, but not sufficient, to seize them. A company must also be able to strike decisively when the time is right. Managers at Brazil’s Banco Itaú recognized that the privatization of state banks freed a new set of valuable resources – customer relationships and locations which had not been obtainable previously, and Itaú spotted the value in these banks before its peers. Equally important was top executives’ willingness to declare the acquisitions as the main effort and redeploy whatever human and financial resources were required to seize the moment. Below some key insights:
- Mobilize best people for golden opportunity. As with experiments, it is critical to put the best people on the best opportunities. Itau’s CEO commissioned one of the most senior members of his team, a Senior Vice-President and Board Member, to spearhead the analysis of opportunities created by the privatization process. And this SVP, in turn, quickly appointed some of the bank’s most promising executives to form a fifty-person task force to evaluate the opportunity and create a post-acquisition plan in case Itaú decided to make an acquisition. Make no mistake, the managers appointed to lead this initiative were not corporate rejects whose careers were stagnated, rather they were among the most promising managers in the company, responsible for running its most profitable lines of business. Assigning them to this opportunity represented a real commitment on the part of Itaú executives.
- Rapid approval processes. Sometimes, seizing a golden opportunity comes down to signing a deal faster than competitors can act. Efficient decision- making and capital approval processes provide the reaction speed to respond quickly when a fleeting opportunity arises. In our study of successful Brazilian firms, most of the companies had a small group of investors and senior executives who could make large decisions quickly without cumbersome approval processes. Contrast this with multinationals working in Brazil, which must often send proposals through multiple layers for approval before reaching headquarters for final agreement. Banco Itaú’s family ownership facilitated quick decision-making.
- Operational excellence. Operational superiority positions firms better to execute when golden opportunities arise, be they acquisitions, new product development, foreign expansion, or new businesses. Itaú, for example, built the foundations for its growth through acquisition by focusing on operational efficiency between 1986 and 1995. During this period, top executives rationalized costs, invested heavily in information technology and restructured key processes. Such investments allowed the bank to reach record efficiency levels and integrate its acquisitions.
- Slack financial resources. Part of the reason Itaú was able to execute so quickly on its acquisitions was the company’s strong balance sheet. The company reinvested most of its retained earnings in the business throughout the 1990’s, in contrast to other family-run banks that made large dividend payments to owners. Between 1990 and 2003, the net worth of Itaú grew five-fold, largely through re-investments of retained earnings. Much of current financial theory relies on the assumption that capital is always available to finance good opportunities, but managers in unpredictable markets like Brazil know that this is far from true. Capital is often unavailable when the most attractive opportunities arise.
- Cadre of general managers. Access to financial capital is critical, but human resources are equally important to seize golden opportunities. In order to keep a pool of talented executives to capitalize on opportunities, Itaú began to train a new generation of managers after 1986, rotating them among business units and funding two-year MBAs degrees in international business schools. Between 1990 and 1998 more than 70 managers were sponsored by the bank to study abroad, and more than 300 participated in a local in-company MBA. Itaú’s pool of talented managers helped the bank capitalize on the privatization of the state-owned regional banks.
- Structure deals to manage downside risk inherent in golden opportunity. Even the most attractive opportunity entail risk. Clever managers recognize there is no reward without risk, and take steps to manage the downside while pursuing the upside. Itaú, for example, structured sophisticated contractual guarantees when acquiring banks to avoid assuming risks from hidden liabilities, or disruptions from potential strikes which could interrupt the acquired bank’s operations after the deal closed. Itaú negotiated a series of guarantees with the government when structuring the privatization of the Banerj bank. In order to minimize chances of political tampering, Itaú insisted that Brazil’s Central Bank, and not the local Government, insured the buyer against undisclosed liabilities. Moreover, Itaú negotiated an indemnification in case strikes at the acquired banks after the privatization caused losses.