More than 500 students participated in the SpringWeekSummit 2022 of the professional journal M&A REVIEW. This shows how much interest there still is in the topic of mergers & acquisitions. Over the past few, M&A has become an indispensable tool for implementing corporate strategy. However, many companies still show great deficiencies with regard to their corporate strategy. This requires a clear understanding of their value drivers, which need to be mastered.
We are once again in particularly uncertain times. To mitigate the associated risks, companies often choose a diversification strategy. They spread their risks, for example, through a presence in many country markets (e.g. Linde), through a portfolio of brands (e.g. VW Group), through different customer segments or user markets (e.g. Schott), and so on. The result of such a strategy are companies that control the portfolio of their various businesses by means of a corporate strategy.
Even though such diversified companies are the norm today, they still meet with skepticism in the capital market. This is by no means unfounded, because, on average, they destroy value. This means that the total value of the company is less than the sum of the values of its businesses. The top management does not seem to be able to lead such a company successfully in the long term. This is often formally expressed in the fact that the corporate strategy is no more than the sum of the business strategies. The craft of corporate management is obviously not sufficiently mastered. But for modern managers, the question of sustainable value creation in harmony with society and the environment must be answered convincingly.
This raises the question of which value drivers are available to a corporate management – also known as a “corporate parent” – to create added value (“corporate surplus”). Based on the state of knowledge in management research, we have been able to identify ten central value drivers. They are reflected in the corporate management model shown in Figure 1. It shows how management teams in diversified companies can create sustainable added value for the company as a whole as well as for the individual businesses.
The first level of value drivers is that of the normative frame to be provided by top management: for the guidance of strategies, the vision and strategic goals; for the “channeling” of strategies, corporate values and mission (or “purpose”). This framework provides orientation and shows the degrees of freedom for the business strategies.
The second level is about “corporate strategizing”: this involves defining the strategic concept in alignment with the mission. For example, the Swiss chemical company Clariant changed its concept for the group from “ mass chemicals” to “fine chemicals” because it no longer saw a chance for itself in mass chemicals in competition with the big players: “Clariant aspires to be the globally leading company for specialty chemicals and achieve above-average value creation for its stakeholders.”
Such a turnaround naturally also has consequences – by means of portfolio restructuring – to the configuration of the businesses, for M&A and divestments. And depending on how similar the businesses are to each other, value-creating synergies can be realized by coordinating them (e.g. economies of scale).
On the third level of “corporate organizing”, the alignment of the management organization must now take place in order to implement the corporate strategy. This relates in particular to the adaptation of the organizational structure and the management systems (e.g. incentive systems), but also to the management style.
All of this is embedded in a dialog-based collaboration between the company and its relevant stakeholders. In the sense of “stakeholder engagement,” these stakeholders make a significant contribution to the company’s value creation, which is why they ultimately have to be fairly considered in the distribution of value creation. To achieve this, top management must be able to strike an appropriate balance between existing conflicts of interest and value between stakeholders, otherwise it jeopardizes their support.