This Friday, the London Business School Private Equity and Venture Capital Club hosts its annual Private Equity Conference. I will moderate the closing panel discussion called “Value Creation: Overtaking Leverage?” that will explore how buyout firms can create value not by piling on debt, but by improving the operating performance of their portfolio companies. This is a particularly topical issue right now, as debt has become more expensive, financing terms more onerous, and market conditions more challenging for portfolio firms.
In preparation for the panel, I have reviewed recent research–largely by financial economists–on private equity, operational improvement, and value creation. Recent papers provide some very helpful, and in some cases surprising, insights into how late-stage private equity firms add value. Below is a selective review of papers that bear on a set of questions related to how leveraged buyout firms create economic value through operational improvements. (For comprehensive reviews of private equity trends, see papers by Cumming et al. and Kaplan and Stromberg).
- Do leveraged buyout firms create economic value? Excluding fees, leveraged buyout firms
In my last post, I argued that turbulent markets demand portfolio agility–an organization’s capacity to reallocate cash, people, and other resources from stagnant or declining businesses into promising opportunities, and do so in a timely manner. Effective portfolio agility consists of both investment and disinvestment. Unfortunately, most companies are better at getting into new businesses than they are at getting out of declining subsidiaries or ones that no longer fit as the corporate strategy evolves. Firms can rarely avoid disinvestment forever, but they often delay the inevitable for far too long. These delays consume scarce resources, and starve promising initiatives of the cash they need to succeed.
Research has shown that companies regularly divest businesses to re-balance their portfolio. In a study of 9,276 deals completed by 86 of the Fortune 100 firms in the 1990s, Belen Villalonga and Anita McGahan report that the median number of divestitures was 17 for firms they studied. Divestitures were almost as common as major acquisitions–the median for firms in their sample was 19 completed acquisitions over the same time
Market turbulence increases the value of agility–an organization’s ability to identify and seize opportunities to create economic value faster and more effectively than rivals. Organizations must align several features, including information systems, culture, and priority setting, to achieve agility. This post focuses on how incentives can help promote agility, using the case of consumer goods maker Reckitt Benckiser (RB) to illustrate the argument. If executives want to promote agility, they should ensure that their performance management system achieves the following five objectives.
1) Attract the “right” people in (and weed the “wrong” people out). Companies (including RB) often state that their incentive system attracts the “best” people, but this is not quite right. “Best” implies a rank ordering of
My last few posts have discussed agility, or an organization’s capacity to identify and seize opportunities to create economic value consistently faster and more effectively than rivals. Multiple organizational attributes promote agility, including incentives, corporate culture, information systems, and the processes to translate corporate priorities into individual objectives. My next several posts will analyze how different companies, including Reckitt Benckiser, Goldman Sachs, Anheuser Busch InBev, and America Latina Logistica have built agility into their organizations. (Note although I have had discussions with executives at these companies, all information in this and subsequent posts comes exclusively from public sources).
We start with Reckitt Benckiser, a company that is not a household name, although many of the products it sells are. With 2008 revenues of £6.6 billion, Reckitt Benckiser (RB) squeezes exciting growth out of boring categories year after year. The company sells leading products in categories including fabric care (Vanish, Woolite), surface-care (Lysol, Harpic), air fresheners (Air Wick), and over the counter health care (Strepsils, Gaviscon, and Clearasil).
Competing against much larger firms such as P&G ($79 billion in revenues for year ending June 2009) and Unilever (€41 billion in 2008 revenues), RB must rely on agility rather than sheer size to win in the market place.
The final stage in globalizing is less a step and more a long march. After adopting a global mindset and giving their commitment teeth, executives must make a series of organizational changes–large and small–required to execute on their global strategy. To succeed on the global stage, a company must align its organizational realities with its lofty ambition.
Improving the organizational attributes required to compete globally often takes the best part of a decade, particularly for large complex enterprises. Samsung’s Chairman Lee was forced to realign most aspects of the group’s business model to deliver on his commitment to global leadership. When transforming their company to compete globally, owners and executives should focus on five key aspects of the organization: Strategic frames, Along with the Samsung case described in an earlier post, CEMEX (a leading global cement producer), provides another example of transforming an organization for global competition
Strategic frames refer to what managers see when they look at the world, and include definition of market, focal