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The Role of M&A in Realigning Business Portfolios

Home » Insights » The Role of M&A in Realigning Business Portfolios

The Role of M&A in Realigning Business Portfolios

by Khadija Tahir

This is generating pressure on 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 number 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 economic 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’ portfolios sold underperforming assets to raise cash during the bad times but ineffectively utilized the proceeds. Today, these organizations discover that they are not well to address a changing economic and competitive environment.

Many companies view portfolio realignment as part of the broader. The ongoing process of adding new and divesting old assets/businesses to address value enhancement and 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 that this portfolio to a company’s goals and aspirations.

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. Equally important, considerable thought and analysis should be applied when assessing whether an underperforming 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 removed.

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 organization 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.

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