As the post-crisis thoughts of executives turn to mergers, acquisitions, and disposals, the familiar idea of “best owner” takes on renewed urgency. Discerning readers will be well aware that best owners are those companies whose distinctive characteristics enable them to create more value in a given business than other potential owners could. But the pace of rapid recovery in equity market valuations may be causing some executives to worry too much about being preempted by better-prepared competitors and too little about acquiring businesses where they themselves would hold a distinct advantage.
The risk is considerable. Reactivating deals that were put on hold may be unwise in some industries where fundamental changes during the crisis have weakened the competitive position of deal targets or hurt the structural attractiveness of their markets. Companies may also discover that they have lost competitive advantage in businesses they already own. Moreover, boards and management teams that assess the fundamental attractiveness of their potential acquisitions and disposals solely by growth and returns increase the likelihood that they will enrich only the sellers of the businesses they buy.
The Best-Owner Life Cycle
Typically, a business’s founder is its first best owner. Their entrepreneurial drive, passion, and commitment to the business are necessary to get the company off the ground. As it grows and requires larger investments, a better owner may be a venture capital firm that specializes in helping new companies, grow by providing capital, improving governance, and enlisting professional managers to handle the complexities and risks of scaling up an organization. Eventually, the venture capital firm may need to take the company public, selling shares to a range of investors to finance further growth. As the public company grows, it might find that it can no longer compete with larger corporations because, say, it needs global distribution capabilities far beyond what it can build in a reasonable amount of time. It may thus sell itself to a larger company that’s the better owner because of an existing global distribution network, thereby becoming a product line within a division of the larger company.
As the division’s market matures, the larger company may decide to focus on faster-growing businesses. In this case, it might sell its division to a private-equity firm—a better owner if the firm can eliminate corporate overhead that’s inconsistent with the business’s slower growth and thereby leave the division with a leaner cost structure. Once the restructuring is done, the private-equity firm can sell the division to yet another better owner: a large company that specializes in running slow-growth brands.
We support owners planning mega projects by developing business cases aligned with their long-term strategic objectives, by ensuring rapid and effective decision making through our proprietary tools, and by performing key analyses to monitor the progress, economics, and risk associated with projects. more