When selling your business, you might have to deal with the Corporate Development department of a large company. To help navigate and manage this process, I interviewed a senior Corporate Development professional to get some inside information on how they work.
Hope it helps.
How does Corporate Development work?
Corporate Development can sometimes have a wider mandate to work on corporate strategy and partnerships, but my department focuses exclusively on the efforts of our company to acquire other companies. You can think of it as internal mergers and acquisitions (M&A).
In this sense, we are meant to:
- Work with executives to set our M&A and inorganic growth strategy and find companies we can buy (also called targets) that align to the strategy. We will also often be approached by investment bankers who are trying to sell a company in our industry so the job involves building these relationships too.
- Build the investment case for acquiring potential targets including the strategic rationale and financial model, and then work with target company management, investors, boards, investment banks, advisors, legal, tax, etc. to complete transactions.
- Oversee the post-merger integration. Essentially embedding the acquired company into ours and making sure everything goes smoothly. Post-merger integration is a super important activity that is typically done really poorly and warrants an entire other interview to do it justice, so I won’t focus on it here.
That’s it. It’s those three parts really. I must add, there is another entire responsibility but it’s much rarer. If our company wants to divest a business or division we’ll manage that process too. It’s a lot of the same activities, we’re just on the other side.
It’s a lot of stakeholder and project management. You could really call the whole job transaction based project management.
What does a Corporate Development team do?
So we’re meant to be strategic but in reality, we spend most of our time:
- Completing any transaction so we can to show activity/results, and
- Completing transactions an executive has already decided they want to do based on their incentives, intuition and relationships, but not really aligned to the overall strategy.
This means it becomes even more like project management very quickly. We don’t do much scanning of the market, sourcing new potential transactions and thoroughly debating the strategic benefits. We just execute on the deals we can get or the deals that come in.
What’s the most surprising thing people don’t know about Corporate Development?
Because transactions aren’t a core competency for our company and we don’t do them for a living like investment banks do, there are a lot of misconceptions and knowledge gaps in our executive team and board. They know our industry really well, but not deals. This means they make bad investment decisions. It’s hard to find a way to communicate this to them because they have to appear like they know what they’re doing. I wish they could be a bit more humble and be responsive and open to our advice, without it looking like weakness.
What do you know that few others know about Corporate Development?
The prices we pay are far too high! We’re also not that price sensitive on a lot of deals as there are very few that make up more than just a few percentage points of our entire business (our market cap is over $10 billion and we mostly do $50 million transactions). Then there is almost no downward pressure on the price during a deal. Once we’ve decided we want it, we lose all leverage and the price that already started high, just goes up! Sellers should really use this to their advantage, and they often do, especially when they have experienced advisors representing them who know the levers to pull when dealing with a large corporation.
What’s the last thing you would want outsiders to know about Corporate Development?
Same again. The prices we’ll pay are high, targets should ask for more money especially once we have sunk costs into the deal, which we don’t treat as sunk costs like we should.
What would shock most people about Corporate Development if they knew about it?
People on the outside always think corporations and their processes are far more sophisticated than they really are. They would be shocked at just how ad-hoc the process really is. We have systematized our processes in the past, but then new people come in and either forget about them or have a different way of doing things. Well “same same, but different” as they say on the beaches of Thailand. I’ve seen our processes and the processes of a number of other companies I’ve either worked at or been involved with and they make it up each time as they go. Fly by the seat of their pants, if you will.
People in the industry don’t prioritize getting it done pretty, just getting it done. This means there are tools, methodologies and other valuable exercises that we should perform (like an acquisition pre-mortem) but that get left on the shelf.
What’s the dirty little secret in Corporate Development?
It’s not our money so there really is a principal-agent problem. By that I mean the team overseeing the process has no skin in the game, the dirty truth would be that we don’t care if the deals create value or not. It’s not our money. We’re just trying to construct our career narrative and avoid fights with the executive and other deal sponsors with their own motivations.
This is not the way anyone wants it, myself included. A tailor made incentive system for Corporate Development teams would be a game changer here that no one has really looked at in my experience. After all, we’re often talking big numbers on our deals.
What tips would you have for people so that they get the best outcome when dealing with Corporate Development teams?
On the target side, wait until the deal is in train, then ask for a higher price. If it’s a capability they want, they need to buy growth or they are politically invested in the deal, they’ll pay for it.
On our side, executives should place 0% weight on revenue synergies for most deals (not all deals). It’s hard to get two teams with different cultures, relationships, methods, products and incentives to work together. They almost never come to fruition and should be treated like an option that we get for free.
What do you wish your stakeholders would do to make your life easier?
On the target side, provide your data in a structured and easy-to-understand format and save my analysts a lot of time and effort. It’s amazing how quickly new companies let their finance systems become messy.
On our side, listen. We live and breathe the markets we operate in, and are experienced deal-makers. Executives should pause, stop and ask our team for their honest opinion on every deal. The important part, do this as early as possible in the process as this is when we can save a lot of time, resources, money and even suggest some more value creating alternatives.
What corners are people who work in Corporate Development most likely to cut?
Actually, lots. Just like any profession or industry. There are two areas that stand out:
- Due diligence: You can hide a lot of gaps in the due diligence process. This is partially because time is always limited to close a deal, and there is always more diligence you can do. Most people take the approach of “close enough is good enough” but I believe there is significant improvement to be gained by simply asking more questions and pursuing them to their resolution.
- Financial modeling: Similar to due diligence. The main reason here is that the data you receive can be patchy and it comes in over time. It’s mentally hard to keep reengineering a model every time new information arrives, so people often stop at a point. Having the data complete and reliable from the beginning would largely solve this problem.
There are others, but these point to where executives should be asking more questions during their deals.
What information do you often keep from your stakeholders?
The assumptions in the model. It always amazes me how experienced executives don’t know what to ask for. It reminds me of an example from the cruise liner industry. One of the majors once commissioned and launched a billion dollar cruise liner. The biggest and most expensive ever. It was the biggest decision of the CEOs career and held significant career risk if it didn’t work out. There was a model underlying the entire business case built by an analyst, four reporting lines removed from the CEO. The analyst knew where all the skeletons were. That the economics didn’t work if the average passenger didn’t spend $500 on extras, as we had assumed. The sensitivity to certain costs, where at a point we’d have to find a way to increase prices even more just to break even. Yet the CEO never spoke to the analyst. These details were known and shown in the model, but not reported in any presentations.
Is Corporate Development a good industry to work in?
Yeah, I can’t complain. I get paid well and while there are sometimes late nights when a deal is completed the work-life balance is much better than some alternatives.
What would the haters say about Corporate Development?
“You destroy shareholder value.” Yes, most deals are bad deals. The truth is that the problem only sits partially in Corporate Development teams. It’s a widespread problem right across a company from the executives to their advisors.
What is the outlook for your industry?
It’s pretty good. Our team is impacted by economic downturns so there are redundancies at times but that’s a part of the experience. In the long-run I think internal Corporate Development departments will grow over time. This is because our incentives are more aligned to the company than external advisors (but like I said, still not well enough) and so these activities will be completed more and more by an in-house team.
Do you have any advice for people who want to work in Corporate Development?
Choose the company you work for wisely. It will determine the markets you get to work in and the volume of interesting work you get to do (some are more active than others).
Well there you have it. A look inside the mind of a senior Corporate Development professional. I hope this has helped you to understand how they tick, and how they make decisions.