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Corporate Development

The group responsible for the company's strategic decisions and initiatives

What is Corporate Development?

Corporate Development (Corp Dev) is the group at a corporation responsible for strategic decisions to grow and restructure its business, establish strategic partnerships, and/or achieve organizational excellence. The purpose of Corp Dev is to create opportunities for the company through actions such as mergers and acquisitions (M&A), divestitures, and deals that leverage the value of the company’s business platform.

 

corporate development

 

Why is Corporate Development Needed?

Corporate development is needed by a company to create and execute innovative strategies that will help the company harness its competitive advantage and thereby:

  1. Improve the financial and operating performance of the company
  2. Enable the company to outperform its competitors

 

Internal vs External Focus

In one sense, corporate development is an essential inward-looking function for an organization. It is required to fill gaps in the organization’s geographical outreach and product portfolio.

On the other hand, corporate development is also an essential outward-looking function for an organization. This is so because organizations are dynamic enterprises, with valuable assets, that can be monetized and grown through different combinations of deals and partnerships. Thus, the corporate development department is required to innovate and create a range of business partners and transaction alternatives.

 

Structure of Corporate Development

 

#1 Centralized model

Typically, corporate development is a centralized function because this gives the Corp Dev team a birds-eye view of the organization which helps them to spot opportunities and threats. This allows the company to take advantage of being a first mover in case of an opportunity and take pre-emptive action against threats. Such a structure also allows the corporate development team to structure deals with other businesses that fit well into the company’s portfolio.

However, it should be noted that a centralized Corp Dev department does not imply that the department works in complete isolation from other operational groups within the company. For example, after acquiring a business, the corporate development team helps integrate the acquisition into the company by collaborating with support functions and business lines within the company and with vendors outside the company.

 

#2 Hybrid model

Under this an organizational model, the corporate development department is lean – i.e., it consists of very few Corp Dev professionals. This lean team depends on a network of external and internal resources for providing subject matter expertise when evaluating potential partnerships and strategic transactions.

 

#3 Decentralized model

A decentralized Corp Dev organizational model actually means there is no core corporate development department. Instead, a corporate development team is put together on a case-by-case, or ad hoc, basis, and is made up of individuals from various internal departments. The exact composition of the team is determined by the expertise required for the specific corporate development project. For example, if the project were a divestiture, then the Corp Dev team would be heavily populated with individuals from the corporate finance and legal departments.

The centralized model is the most popular model of corporate development, while the decentralized model is the least popular model.

 

Work Profile of a Corporate Development Team 

Corporate development groups are responsible for a wide range of functions, and the range of functions may vary significantly from company to company. Many people think of Corp Dev as solely involved in mergers and acquisitions (M&A), but – especially at large corporations – Corp Dev is typically engaged in a number of other projects besides just M&A.

Some of the most common responsibilities of Corp Dev include the following:

  • Achieving operational excellence
  • Analyzing and investing in new strategic initiatives (this encompasses mergers, acquisitions, and also strategic divestitures)
  • Creating forecast models and budgets to determine asset allocations and monitor the performance of the company
  • Dealing with government and/or industry regulators
  • Ensuring capital adequacy
  • Identifying and handling non-core business assets
  • Improving client/customer experience
  • Optimizing firm productivity
  • Participating in financial conferences, shareholder meetings, Investor Days, and earnings releases, in order to communicate the company’s strategy to shareholders
  • Product development and market penetration
  • Portfolio management
  • Understanding key drivers of revenues and expenses; identifying the most important Key Performance Indicators (KPIs) to measure and evaluate company performance

 

Implementing Strategies for Corporate Development

The following strategies are commonly used to achieve the goals of corporate development:

 

#1 Mergers and Acquisitions

Large companies often acquire/buyout smaller firms that have skills, knowledge, customers, revenue, earnings, and/or cash flow that can significantly benefit the acquiring company. In other cases, a company may acquire a firm that it thinks has potential and then revamp its business model to take it in a new, and hopefully, profitable direction. To carry out such acquisitions, corporate development professionals need to be skilled at corporate valuation, financial modeling, risk management, negotiation, and integration.

When carrying out mergers and acquisitions, corporate development teams: (1) create a target list, (2) value the companies in a financial model, (3) negotiate terms of the deal, and (4) integrate the acquisition into the company.  For more on this, please see our guide on the M&A Process.  For successful integrations, Corp Dev teams often create a Transition Services Agreement (TSA) between the buyer and the seller. A TSA specifies the nature of and duration for which the seller will continue to provide services to the business which has been purchased. This creates value for the buyer as it provides them with time to integrate the newly purchased business.  It also helps the seller as it allows them to mitigate stranded costs and restructure their systems (especially if only a part of their business has been acquired by the buyer).

 

#2 Long-term Partnerships

Having a reputation in the marketplace as a “partner” of choice provides a company with a competitive advantage. This is so because stable partnerships, comprised of a number of organizations, provide all the partners with economies of scale. Furthermore, in order to avoid a price war/a race to the bottom with a potential competitor, companies often prefer establishing partnerships with them. Also, forming partnerships is (usually) much less capital intensive than acquiring a firm. Thus, given the demand for establishing partnerships in innovative ways, knowing how to establish sustainable partnerships with other organizations creates a competitive advantage.

 

#3 Divestitures and Carve-outs

Companies face both internal and external pressure to make sure that the portfolios of the company are using capital in an efficient manner. As a result, divestitures and carve-outs have become an increasingly important strategy for companies. Offloading assets in a planned fashion, based on regular reviewing of the company portfolio, can result in high return for the company. This is another Corp Dev function that requires extensive financial modeling, Excel skills, and a strong understanding of business valuation techniques.

 

#5 Strategic Alliances

Strategic alliances enable the companies involved in the alliance to manage their risk better, leverage core capabilities and assets, and speed up entry into new markets. Strategic alliances are especially prudent vehicles for entering emerging markets like India, China, and Brazil because they help the company entering the new country form the required business relationships and learn the relevant business practices faster than would have been possible otherwise. Furthermore, strategic alliances often result in a more efficient use of capital, as the cost of the investment is shared and the risk dispersed among the partners in accordance with their skill set/asset contribution.

 

#6 Creative Transactions for Optimizing Shareholder Value

Activist shareholders and hedge funds often exert external pressure on a company by stating their preferences and views regarding the company’s performance and strategic direction. The demands put forth by such investors act as incentives for the corporate development team to engineer new kinds of deals for optimizing shareholder value.

 

Metrics for Evaluating the Effectiveness of Corporate Development in an Organization

The most commonly used metrics for measuring the performance of a company’s corporate development department are:

  1. Net Present Value (NPV): The higher the NPV, the better the performance of the company’s Corp Dev team is perceived to be.
  2. Return on Investment (ROI): Like NPV, an increasingly higher ROI indicates a solid Corp Dev department.
  3. Internal Rate of Return (IRR): The better that Corp Dev performs, then the higher the margin by which the IRR will exceed the company’s required rate of return.
  4. Revenue growth: Revenue growth is another metric that is used to evaluate the performance of a Corp Dev department.
  5. Strategic Factor Analysis: A higher score for the company in its strategic factor analysis indicates operational efficiency of the corporate development department.
  6. Synergy Capture: If after a merger and acquisition, the performance and value of the two organizations combined is greater than the performance and value of the two organizations separately, the company is said to have captured synergy. The synergetic effect of a transaction/deal is often most easily seen in stock share prices – if the synergetic effect is positive, share prices increase.
  7. Dilution/accretion analysis: If a dilution/accretion analysis shows that earnings per share will increase after an M&A, the Corp Dev team is considered to be good at creating shareholder value.
  8. Customer retention: Since part of Corp Dev’s responsibility is working to improve the customer/client experience, higher customer retention rates reflect the Corporate Development team’s success in that area of endeavor.
  9. Employee turnover: Corporate development, by helping to create business success and operational efficiency, can also contribute to achieving, and then maintaining, a low employee turnover rate.

An effective Corp Dev department has the ability to assess value and risk accurately, generate a significant number of deals, acquire targets, and drive an optimal and successful business strategy.

 

corporate development financial modeling

Source: M&A financial modeling course from CFI.

 

Additional Corporate Development Resources

Corp Dev helps a company define the strategy optimal for its growth. You can learn more by exploring these additional resources, freely provided by CFI:

  • Financial Modeling Guide
  • M&A Process Overview
  • Term Sheet template
  • LOI template

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