A number of recent headline-grabbing announcements of divestments and split-ups by companies such as HP (spinning off its PC and printer businesses), GE (the sale of its appliances business to Electrolux) and Royal Philips (its separation into two autonomous companies, Lighting and HealthTech) are putting the spotlight again on the phenomenon of “core shifting”: how a company, through a sustained process of acquiring and divesting assets, changes the mix of its business portfolio and thus purposefully shifts the core of its activities.
What makes such a transformation successful? From our analysis of a number of core shifts and conversations with the CEOs who have undertaken them, we have drawn five keys to success:
1. Allow time and persevere. Pulling off a core shift takes many years, if not a decade. First, such transformations consume resources, both financial and human. A company needs the financial firepower to make the required acquisitions on top of the capital investments in its ongoing business. It also takes management time to align all the teams, including those of the acquired businesses, to the transformation initiative. Second, finding value-creating acquisition and divestment opportunities requires patience. Third, some stakeholder groups may want to see confirmation of the positive impact of a given move before consenting to continue on the chosen path.
2. Be clear about the destination yet flexible about the path. The company’s executive team should be clear and unrelenting about the vision for the company’s future and the rationale thereof. But the actual path to get there is unpredictable. What is important is to create options and exercise them as the right opportunities arise.
3. Go for the occasional mega-acquisition. Acquisitions are part of a transformation. What really gives traction to a core shift is the occasional mega-acquisition that is emblematic of the vision and that catapults the company forward. For example, Umicore’s 2003 acquisition of PMG increased its revenues by 50%. Of course, it takes time to digest such acquisitions and restore the company’s financial firepower, which often results in a transformation pattern in which a period of consolidation follows a period of acceleration.
4. Communicate consistently and transparently. Clearly communicating the vision and its rationale is crucial to keeping everyone committed, whether they’re employees or external analysts. Particularly important are the managers and staff of businesses earmarked for divestment. Up-front communication about the company’s intention is essential to keep them motivated and prevent value destruction. The message is that the divestment should be beneficial to the business concerned.
5. Safeguard the short-term performance of the ongoing business. While mergers and acquisitions transactions absorb much of senior management’s attention and attract great interest from financial analysts and the business press, the company’s operational performance will ultimately make or break the transformation. If short-term performance slips, pressure will mount and stakeholders will question the transformation’s long-term pertinence and/or viability.
When it comes to shifting your business’s core, it usually pays to be tenacious, visionary, bold, transparent and results-oriented.
(Herman Vantrappen is the managing director of Akordeon, a strategic advisory firm based in Brussels. Daniel Deneffe is a strategy consultant and professor of strategy and managerial economics at Hult International Business School.)
