What is corporate development?
Corporate development is the group at a corporation responsible for strategic decisions to grow and restructure its business, establish strategic partnerships and/or achieve organizational excellence. It is a function which aims to create opportunities for the company by carrying out mergers, acquisitions, divestitures and deals which leverage the value of the company’s business platform.
Why is corporate development needed?
Corporate development is needed by a company to create and execute innovative strategies which will help the company harness its competitive advantage and thereby:
- Improve the financial and operating performance of the company; and,
- Enable the company to out-perform its competitors
Internal vs external focus
On one hand, 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 considered to be 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
Centralized model of corporate development: Generally, corporate development is a centralized function because this gives the corporate development team a birds-eye view of the organization which helps them to spot opportunities and threats. This allows the company to take the 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 fill will into the company’s portfolio. However, it should be noted that a centralized corporate development department does not imply that the department works in complete isolation. After acquiring a business, the corporate development department helps integrate the same into the company by collaborating with support functions and business lines within the company and with vendors outside the company.
Hybrid model of corporate development: Under such an organizational model, the corporate development department is lean i.e. it has few core corporate development professionals. This lean team of corporate development professionals depends on a network of external and internal resources for providing subject matter expertise.
Decentralized model of corporate development: Under such an organizational model, there exists no core corporate development department. The function of corporate development is rendered by individuals belonging to different internal departments, who are called upon on a case-by-case model, depending on the subject matter expertise required.
The centralized model is the most popular model of corporate development while the decentralized model is the least popular model of corporate development.
Work profile of a corporate development team
Corporate development groups are responsible for a wide range functions, which can vary significantly from company to company. Many people think of Corp Dev as solely focused on mergers and acquisitons (M&A), however, there can be much more to the group than that. Some of the most common responsibilities of Corp Dev include :
- Achieving operational excellence
- Analyzing and investing in new strategic initiatives (like mergers, acquisitions and divestitures)
- Creating forecast models and budgets to determine asset allocations and monitor the performance of the company
- Dealing with regulators
- Ensuring capital adequacy
- Identifying and handling non-core assets
- Improving client experience
- Optimizing firm productivity
- Participating in financial conferences, shareholder meetings, Investor Days and earnings releases to communicate the company’s strategy to the shareholders.
- Product development and penetration
- Portfolio management
- Understanding key drivers of revenues and expenses
Strategies for corporate development
The following strategies are commonly used while carrying out corporate development:
- Mergers and Acquisitions: Large companies often acquire/buyout smaller firms which have the skills, knowledge, customers, revenue, earnings, and/or cash flow to improve the state of the company. In other cases, a company may acquire a firm which it thinks has potential and then revamp its business model entirely. To carry out such acquisitions, corporate development professionals need to be excellent at corporate valuation, financial modeling, risk management, negotiation, and integration [please put links to valuation and financial modeling noted above]. 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 intergrations, 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).
- Long-term partnerships: In the market place, being reputed as a “partner” of choice provides the company with a competitive advantage. This is so because stable partnerships, comprising 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) 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 for the firm. However, negotiating a deal agreeable to all parties involved is difficult.
- Divestitures and carve-outs: Companies face 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 function also requires extensive financial modeling, Excel skills, and strong understanding of business valuation techniques.
- Strategic alliances: Strategic alliances allow the companies involved in the alliance to manage their risk better, leverage core capabilities and assets and speed up new market entry. 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 relationship and learn the relevant business practices faster than would have been possible otherwise. Furthermore, strategic alliances also result in more efficient use of capital as the cost of the investment is shared and the risk is dispersed among the partners in accordance to their skill set/asset base.
- Creative transactions for optimizing shareholder value: Activist shareholders and hedge funds often exert external pressure on the 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 with optimize 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:
- Net Present Value (NPV): The higher the NPV, the better the performance of the company’s corporate development department (and vice-versa).
- Return on Investment (ROI): The higher the ROI, the better the performance of the company’s corporate development department (and vice-versa).
- Internal Rate of Return (IRR): The higher the margin by which the IRR exceeds the company’s required rate of return, the better the performance of the company’s corporate development department (and vice-versa).
- Revenue growth: The greater the growth in company revenue, the better the performance of the company’s corporate development department (and vice-versa).
- Strategic Factor Analysis: The higher the score of the company in its strategic factor analysis, the better the performance of the company’s corporate development department (and vice-versa).
- Synergy Capture: If after a merger and acquisition, the performance and value of the two organizations combined is greater than performance and value of the two organizations separately, the corporate development department is said to be efficient. The synergetic effect of a transaction/deal is most easily seen on share prices – if the synergetic effect is positive, share prices increase (and vice versa).
- Dilution/accretion analysis: If a dilution/accretion analysis shows that earnings per share will increase after an M&A, the corporate development department is considered to be good at creating shareholder value (and vice-versa).
- Customer retention: The higher the customer retention, the better the performance of the company’s corporate development department (and vice-versa).
- Employee turnover: The lower the employee turnover, the better the performance of the company’s corporate development department (and vice-versa).
An effective corporate development department has the ability to assess value and risk in an accurate fashion, generate a significant number of deals, acquire targets and drive business strategy.
More helpful resources
Corporate development helps a company define the strategy optimal for its growth. You can learn more about corporate development by clicking on the following links: