Trading the corporate portfolio

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Corporate strategy planners have never had it tougher. Companies are bracing for the worst economic year in more than a decade. Disruptive technologies and new competitors continue to proliferate. Capital markets are a storm of discontinuity, allocating capital among winners and losers, encouraging the creation of corporations, and removing them when they no longer perform.

In this environment large companies are particularly vulnerable.1 Even as some corporate icons have relied on their sheer size and momentum to survive, they have not created superior shareholder value. One approach to countering such turbulence, our research shows, is to emulate the dynamism of capital markets within individual companies. Companies that “trade” their corporate portfolio—developing a balanced M&A program that actively allocates capital to acquire new businesses, encourages their growth, and then sloughs them off in a timely fashion—can create superior shareholder returns.

Active, balanced M&A programs outperform

We identified 200 of the largest companies in 1990 that were still trading independently in 2000 and examined all their acquisitions and divestitures during that period that were more than $100 million.2 We ranked and then compared the performance of the most active one-third of the group, based on total number of completed acquisitions and divestitures, to the least active, or passive, one-third. We further differentiated among active companies that primarily acquired,3 primarily divested,4 or acquired and divested assets in relative balance.5

Our findings indicate that companies with active, balanced programs of acquisitions and divestitures create more shareholder value than those that transact few deals. Over the ten-year period we examined, these companies had 30 percent higher total return to shareholders (TRS) than did companies with passive M&A strategies. Furthermore, among active companies, those that pursued a balanced strategy had 17 percent higher TRS than did those that primarily acquired and a 32 percent higher TRS than those that primarily divested (Exhibit 1).

Among active strategies, a balanced approach creates the most value.

Consider Texas Instruments. From 1990 to 1994, TI made only two significant acquisitions—one in information engineering and another in travel products—and divested an industrial controls company. In 1995, however, the company began aggressively managing its portfolio, completing nine significant acquisitions over the next five years and becoming a segment-leading player in core analog, DSP (Digital Signal Processing), and wireless components businesses. It also shed three successful but noncore businesses in custom manufacturing and defense electronics. Suddenly, TI’s profile changed. Its market cap increased from $7 billion in the fourth quarter of 1994 to $60 billion in the second quarter of 2001. Between 1995 and 2000, its average annual TRS was 48 percent, compared to approximately 22 percent for the S&P 500 in the same period.

Or consider the experiences of J. P. Morgan and Primerica, now Citigroup. In 1990, J. P. Morgan was one of the most valuable and well-respected financial institutions in the United States. Its $8 billion market cap ranked it second among U.S. financial institutions and it boasted long-standing relationships with some of the world’s most respected companies. By contrast, Primerica, with revenues of $5.2 billion and a market cap of $2.5 billion, was smaller and focused on lower-middle-class consumer finance. By 2000, however, Primerica had made 11 significant acquisitions, including major brokerage and investment banking businesses like Salomon Brothers and the brokerage unit of Shearson Lehman. Its ten major divestitures included both less profitable businesses and noncore assets like health insurance, mortgage banking, and long-term care. For its part, J. P. Morgan spent the decade attempting to grow organically, making no significant acquisitions or divestitures.

Where are they now? Citigroup increased its revenues to more than $82 billion by the end of the decade, with a market cap of nearly $265 billion. J. P. Morgan, on the other hand, was unable to turn its strength in commercial lending into a top-tier spot in lucrative investment banking. Morgan underperformed its peers and the S&P 500, and its market cap ranking tumbled. In 2000, Chase Manhattan Bank took it over.

Managing a balanced portfolio

These anecdotes illustrate a modern-day fact of corporate life: nearly every large corporation is actually a portfolio containing multiple, potentially independent business units. In a world of increasingly efficient capital markets, multibusiness companies no longer add value simply by providing access to capital. They must add value by applying their unique set of corporate skills or competencies to each business unit in their portfolio.

These core competencies include those that drive the performance of existing businesses, such as financial performance management, operations planning and management, or marketing. They also include those that identify new sources of growth, such as mergers, acquisitions, alliances, product/customer strategy, or new product development.

Naturally, the skills needed to create value in any single business unit change as the unit evolves. A new, growing business unit needs help in marketing, product development, and fund-raising, while a mature business unit in a highly competitive industry needs help cutting costs, slimming capital, and restructuring operations. Our research points to value-creation levers and critical skills required at four key stages of a business’s life cycle: building a business, expanding it, operating it, and reshaping it (Exhibit 2).

Four-phase business life cycle

Because a company’s core competencies are relatively static and the skills it needs at each stage of the life cycle unique and dynamic, few companies excel at managing business units across all stages. Therefore, as a business unit’s value-creation needs evolve, its parent company typically faces three strategic choices. First, it can allow the needs of the business unit to drift away from the company’s competencies, obviously leaving value on the table. Or it can try to transform its competencies to suit the future needs of the business—an option that is difficult and, our research suggests, justified only when the majority of business units in the portfolio simultaneously require the same skills to be changed. Finally, it can sell the business, which is often the right option.

Winning M&A strategies

Just as each phase of the business life cycle has a winning operating strategy, each phase also has a winning M&A strategy (Exhibit 3). The challenge for executives is to adopt an M&A strategy consistent with the life cycle focus of business units in each of the four phases.

Winning M&A strategies across life cycle phases


In the build phase, companies need to be able to quickly assemble the business model, laying down frequent, small bets. Often, alliances and joint ventures are of equal importance to acquisitions. Proprietary deal flow is critical, as is high-volume deal screening and creative deal structuring. The imperative of market forces means that the many small bets that have been made must be reviewed frequently and divested quickly.

This is what Cisco achieved via its “M&A as R&D” approach. Cisco acquired gap-filling technology to assemble a broad line of network-solution products, investing $24 billion to acquire 71 companies from 1993 to 2001. During this period, Cisco’s sales increased from $650 million to $22 billion, and its market cap increased from $6 billion to $120 billion. Nearly 40 percent of Cisco’s current annual revenue comes directly from companies it acquired since 1993. Even with the recent market downturn, Cisco’s annualized TRS from 1991 to the first quarter of 2001 was 57 percent, contrasted with 16 percent for the S&P 500 for the same period.


In the expand phase, the name of the game is to rapidly replicate the successful business model across as many markets, geographies, and products as possible. Often, this means “bolting on” midsize firms to cross-fertilize, especially when deal structuring and integration can capture revenue synergies. As soon as the business reaches the point of inflection where cost and capital efficiency trump top-line growth, the expander should be looking to divest. For example, Johnson & Johnson created value for shareholders through the 1990s by developing many small acquisitions into significant product lines, even as it weeded out businesses that no longer fit. Its annualized TRS from 1991 to the first quarter of 2001 was a strong 19 percent.


In the operate phase, companies must remain focused on their cost/efficiency ratio, scouring the deal flow for opportunities to acquire poorly operated businesses with solid market presence. Successfully integrating operations is often critical to driving cost and capital reductions. The operator should divest when its cost advantage is not sustainable or the industry requires restructuring.

Industrial products and hand tool manufacturer Danaher, for example, has aligned its M&A strategy with its skill at operations. The company acquires niche industrial brands with undermanaged operations and applies its operating know-how to make substantial improvements. Since 1985, Danaher has made more than 30 acquisitions in the process and environmental controls segment and seven acquisitions in the hand tools segment. These segments now account for 58 percent and 42 percent of sales, respectively. Danaher’s annualized TRS from 1991 to the first quarter of 2001 was 28 percent.


Reshaping a mature industry suffering from overcapacity typically calls for a roll-up consolidation strategy, acquiring a major competitor, or reinventing the business by disintegrating and reintegrating the value chain. If growth and profitability can be improved (i.e., returned to the operate phase of the business life cycle), the company may once again emerge as the natural owner of the business. Otherwise, the restructured business may be suitable for “harvest” in a leveraged buyout. Superior insight into industry trends and distinctive deal-structuring skills are a must to thrive in this game.

In 1994, for example, San Antonio-based Clear Channel had 35 radio stations, nine TV stations, and no billboard or concert venue assets. When the Federal Communications Commission in 1996 lifted restrictions on radio ownership, however, the company began an acquisition spree. With 1,200 stations Clear Channel is today the largest owner of radio stations in the United States, as well as the largest billboard owner with 770,000 outdoor ad displays, and is both concert promoter and venue operator. By consolidating the moribund radio industry, Clear Channel improved scale and focus. It achieves cost savings by delivering common content (e.g., national radio shows) across geographic boundaries and spreading advertising across radio and billboards nationwide. Clear Channel’s annualized TRS from 1991 to the first quarter of 2001 was 54 percent.

The right mix of acquiring and divesting also varies across the four stages. Our analysis suggests that successful builders and expanders pursue M&A strategies that are weighted toward acquisitions. By contrast, the best strategy for operators and reshapers is a relatively balanced program of acquisitions and divestitures. In fact, in the build and expand phases, companies with acquisition-focused strategies had shareholder returns almost five times greater than companies following a balanced M&A approach. However, in the operate and reshape phases, companies following a balanced strategy had shareholder returns almost six times greater than companies following an acquisition-based strategy. This stands to reason, since builders and expanders are assembling small businesses into larger businesses. Once a business unit has reached a relatively stable size, the successful operator and reshaper are more likely to pursue a “balanced diet” in terms of deal quantity.

Matching the dynamism of markets in a corporate setting is not easy. But companies that pursue active, balanced M&A strategies matched to their core skills and the life cycle stage of their business units have the best chance to thrive in an ever more tempestuous market.

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