CDOs talk disruption & deal making

On Monday we got together with leading Corporate Development Officers (CDOs) to discuss their changing role in disrupted markets. In many ways, the challenges they face are familiar ones.  CDOs have always contended with disrupted business models and decisions about where to position their company in the supply chain. What’s changed is the pace of change. This has put companies under pressure to get in early before they know who the “winners” will be – whilst technology, regulation and changing behaviours constantly shift where the value lies in the supply chain. As a result, CDOs are looking at vastly different target populations, employing very different deal tactics and challenging some of the fundamental assumptions that shaped deal making for decades. It’s a fascinating time to be doing deals and we were very lucky to hear such great insights from some of our leading CDOs – which we’ve captured in this week’s blog.

 Prepare to disrupt – and to be disrupted

The problem with spotting the disruptive “winners” is that in their early years, they might seem like fairly small fry.  As Mark Hutchinson from EY’s Open Innovation Group put it, the use of a technology normally doubles from a small base, which means it can stay bubbling under the surface for a long time before breaking out into the mainstream.  It’s also true that some of these technologies and ideas die quietly away during this period, which obviously makes it harder to know which one to back. All this uncertainty can leave companies paralysed. But, companies that haven’t adapted and have failed to reinvent themselves in the face of such competition have failed themselves. Doing nothing isn’t an option.

Large companies can be especially prone to paralysis given the amount they are likely to have invested in the status quo. This can make it hard for management to make big leaps of faith –  particularly when there are shareholders and investors to keep onside. It’s tough for all companies to value the unknown and work out where they should position themselves in the ever expanding supply chain.  Technological convergence in car manufacturing illustrate just how large technology eco-systems are becoming – much too large for companies to be present end-to-end. This is a new world, which requires new types of investments and alliances and where value might  exist in unfamiliar places.  For example, does the value in apps exist in their intellectual property or their reach and network?

No change – and all change

To help address what these challenges mean for deal making, we asked a panel of Corporate Development Officers (CDOs) from a cross-sector of industries to talk about what disruption meant to them and their companies– with contributions from our CDO audience. We normally talk about ‘disruptive’ influences in the context of the internet and technological change, but  it’s clear that new regulations and new patterns of consumer behaviour have also created new markets and opportunities for new entrants. It’s this broad spectrum of disruption that formed the basis of our discussion.

Of course, all CDOs will have different disruptive experiences, but amongst the vast array of sectors represented  common themes emerged.

Disruption is having a profound impact on business models

  • Long standing stable business models are being disrupted by technological, behavioural or regulatory change –  often acting in concert.

  • Disruption adds an additional layer of geographical complexity. Countries are evolving at different speeds – or are on different paths – which can require a bespoke response.

  • Technology has also raised expectations and – operational complexity – with companies facing greater pressure to deliver products and services in the seamless end-to-end way customers now expect and demand.

  • Companies increasingly have feet in both old and new camps. This can create tension within the business and with shareholders of traditional companies, who hold the shares for ‘consistent returns’.

Deal strategy is rapidly evolving to meet the challenge

  • Which part of the supply chain to hold is still an absolutely fundamental choice.  What has changed is speed at which value can shift along the chain and where the value lies. Control of intellectual property used to be vital, but now the value could be in reputation, distribution or networks.

  • To avoid missing the boat on new ideas, deal criteria have come more flexible. This includes taking a greater risks in areas like cultural fit.

  • CDOs are looking beyond markets they know very well, with sizeable and familiar competitors, to a larger potential acquisition pool containing a multitude of small operators.

  •  Companies have responded to the increased risk of choosing from a vast pool of potential disruptors and uncertainty over the winners by making more bets using smaller equity bites.

  •  As supply chains become more complex, companies are also looking increasingly at alternatives to M&A, such as alliances and joint venture. Control is becoming less important than access to the ‘right’ technologies and expertise.


There are new challenges in deal execution

  • Corporate Venture Funds are back in vogue – but companies have learnt lessons from the early 2000s. There is less of a scattergun approach, with a greater focus on ensuring an operational connection with the core business – whilst still encouraging entrepreneurial spirit.

  • Exit strategies are changing where companies are taking greater risks on acquisitions. The focus is moving away from setting a target price towards putting in place “steps and processes”.

  •  Constantly changing assumptions mean deal rationales quickly move out of date. CDOs are using a venture capital approach, ensuring they have 5-6 key assumptions recorded and tracked to avoid the: “Why did we buy this?” conversation.

  •  Companies are still doing transformational deals; but these are still tough to make work. It might be that rather than merging the cultures, one is chosen to become dominant – something to discuss!

The CDO role is becoming more operational

  • CDOs are carrying out more research, with a greater focus on origination and strategy to ensure that their companies stay at the forefront of new developments.

  • CDOs increasingly need to be able to speak a variety of deal languages as they bring together parties from across divides, e.g. ‘technical’ and ‘creative’.

  • CDOs recognise that they need to do more to “sell” their company to entrepreneurial target, who can be hostile to large corporations and don’t need to sell to access capital. CDOs can offer to take away administration, a greater network, a larger R&D facility etc.

  • The increasingly personal touch with smaller acquisitions means CDOs are often acting as the “buffer” during the deal making process and working more closely with the target through integration to ensure the company isn’t “drowned”. 

And through all of this, CDOs need to educate management and shareholders about the changes in the markets and the need for a new strategy – both in terms of the type of acquisition and the way deals are being executed. These are interesting, exciting and perhaps a little scary times – but companies cannot afford to standby, as many salutatory examples illustrate.

 


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