Hypotenuse Enterprises, Inc.

THE CORPORATE DEVELOPMENT COMPANY


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A Game Plan for Development

A Game Plan for Development

Diane C. Harris

Vice President, Corporate Development,

Bausch & Lomb Incorporated,

Rochester, New York

Since the establishment of Bausch & Lomb’s mergers and acquisitions program in the early 1980s, half of the company’s growth has come from acquisitions, licensings, technology agreements, and, to a lesser extent, joint ventures and equity participations. Collectively, these external growth strategies are called “new ventures,” and are distinguished from internal growth strategies such as research and development, market expansion, or new applications for current products. During the 1980s, there were 150 transactions completed, amounting to more than $500 million in market value. In addition, 20 operations were divested, many in the mid1980s as part of a corporate restructuring, for a value of over $150 million. Acquisitions have been at the heart of Bausch & Lomb’s 16 percent annual growth rate. Thirty of these acquisitions ranged in size from less than $1 million in purchase price, to $133 million for Dental Research Corporation in 1988. For 1990 through 1992, based only on acquisitions done during the prior five years, 15 to 20 percent of Bausch & Lomb’s growth in any particular year came from acquisitions. Regardless of how the data are viewed, acquisitions and other new ventures have been, and continue to be, key strategies for Bausch & Lomb’s growth.

As Bausch & Lomb changed, so too did Corporate Development, which supports the CEO in implementing the company’s external growth strategies. Corporate Development at Bausch & Lomb has gone through four definable periods:

bulletEstablishment
bulletRestructuring
bulletCentral execution
bulletDecentralization

Corporate Development now is entering a period of balance between central execution and decentralization, flexibly providing both service and control. Each of these phases will be discussed.

PHASE 1 (1981-83):

ESTABLISHING THE CORPORATE DEVELOPMENT FUNCTION

Although historically Bausch & Lomb had grown from both internal and external strategies, in 1981 we were not actively pursuing an organized new ventures program. In earlier years Bausch & Lomb had purchased a few companies and pursued several licenses, but by 1981 we were seeing very little deal flow and were executing, at most, only one or two small deals a year.

The establishment of Corporate Development followed a four-part strategy:

Strategic Planning. A strategic planning process was developed to identify business strengths and weaknesses and focus on opportunities that could be captured through a new ventures program. A particular success was separation of strategic issues from financial plan development. Freeing strategic thought from the “numbers exercise” put more focus on opportunity and creativity. A management decision was made to capitalize on Bausch & Lomb’s strengths. We used various outside consultants who were helpful in individual businesses, but not in the development of overall strategic vision. In the end, that had to be done internally.

Developing Deal Flow. In 1981, Bausch & Lomb had contact with only a handful of banks and intermediaries for M&A purposes. We began to create a global network, which is still being expanded, to establish contact with more than 1,000 intermediaries worldwide and seek opportunities that meet Bausch & Lomb’s acquisition criteria. The hardest part of developing deal flow was convincing intermediaries that Bausch & Lomb was going to become a true dealmaking company so that they could treat us like the “A team” and trust we would behave that way. Initially, we tried to use a third party to develop intermediary relationships. Although it gave us a model to follow, ultimately we had to develop our own relationships. The most important ingredient in turning around the intermediaries’ mind-set was the way we actively began to do deals. Until then, it was only words and promises.

Some corporate development professionals do not believe in using banks, brokers, or intermediaries to find deals. In evolving a corporate development function, we took the opposite tack, deciding that not to use such help would be like climbing a rope with one hand tied behind our backs. The network we established continues to be helpful even many years later, and there certainly are deals we would not have been able to do without this kind of help. We see about 1000 deals per year, and consistently complete 2 to 3 percent.

Developing a Technical Base. Although we wanted to use outside help, we did not want to be dependent on outsiders. Therefore, we developed our own in-house valuation, deal searching, analysis, and due diligence capabilities. Besides adding those capabilities to Corporate Development, we found it necessary to work with many areas of the corporate staff to raise the corporation’s overall dealmaking capability. Experience proved to be the test as well as the teacher.

Changing Internal Mind-Set. Just as it was necessary to change the attitudes of intermediaries toward Bausch & Lomb’s M&A program, it was necessary to change our own internal mind-sets, to make our organization not just tolerant of but hungry for growth. It is easy for operating managers to be too busy to look at new ventures, for the “plate” to be “too full.” The CEO’s involvement in this process is critical. We had monthly operations committee meetings in which division presidents were expected to bring forth their growth opportunities. Lost opportunity has a real cost to the shareholder, too, and that needs to be recognized.

It is easy for Corporate Development inadvertently to become competitive with Research and Development in scrambling for funds. Often, millions of dollars are spent on a transaction, while R&D works under budgets constrained by current earnings-per-share considerations. We were committed to seeing that such competition did not evolve and were able to achieve harmony by involving R&D deeply in new business evaluation. Eventually, some of our acquisitions brought new R&D opportunities and cross-fertilization to the research and development process. We run corporate development as a 100% effort, as if R&D were never going to develop a new product, and we encourage R&D to run at a 100% effort as if the “new ventures” function would never find another “deal.” Together, these complementary strategies give our management the best choices in “make versus buy” and our shareholders the best opportunity for returns.

Of the four elements of establishing a new ventures process, the most difficult was changing organizational mind-set. Changing mind-set is an effort that should never stop; a changed mind-set soon slips away, like a muscle unexercised. The biggest factor in changing mind-set was the CEO’s involvement, followed by the success of a number of new ventures. Soon the excitement spreads and people, especially in middle management, want to work on deal teams.

During this early phase (1981 to mid-1984) we had some successes—notably the acquisition of Polymer Technology Corp., producer of gas permeable lenses, which grew from $6.8 million in sales in 1983 to the $85 million business it is today; and Charles River Laboratories, which broadened Bausch & Lomb’s health care position in the new sector of biomedical supply.

All of our early deals were not successes, but we learned. From an early failure in the acquisition of a California-based laser company, we learned the importance of an “operating champion,” a person who would personally be committed to the success of each new venture. We found out how necessary it is to be more comprehensive in our due diligence, especially regulatory due diligence which had failed to identify a major change in the regulatory environment of the Food and Drug Administration (FDA). We also learned how vital good management is to acquisition success. We continue to reject opportunities if the management doesn’t plan to continue with the business.

During Phase 1 of Bausch & Lomb’s new ventures program we began to clarify the kinds of companies we wanted—companies in a health care niche that enjoyed worldwide position, market leadership, profitability, good growth potential, and a committed management with whom we could share a common vision. Some people were surprised when we bought Charles River Laboratories, but it met all the requirements we had articulated for an addition to the Bausch & Lomb family, especially successful management that is willing to continue to do what they do best, unencumbered by interference from a new parent.

PHASE 2 (1984-85):

RESTRUCTURING

After a few initial successful acquisitions, licensings, and other external transactions, it became clear that the other side of the strategic vision soon would need to be implemented. That was the divestiture of businesses that no longer strategically fit Bausch & Lomb’s health care vision, diluted management attention and shareholder returns, and offered only low returns and inadequate opportunity for growth. In 1984 we announced a reserve of $9 million to divest the industrial instruments group. Being able to announce the divestitures publicly was of enormous benefit in having open employee communications that made our divestiture efforts even more effective. Managers and key staff people were given incentives for staying and assisting with the sale.

As a result of the openness, potential buyers had more open access to information, and a secretive, counterproductive environment was avoided. The “people” element was the key to divestiture success. The highest offer for one operation was turned down because the buyer would not guarantee to keep the operation where it was located and minimize the risk of terminating long-time employees. Minimum periods of employment and some continuation of Bausch & Lomb’s severance plan were negotiated on behalf of the employees of the divested operations.

A number of industrial instruments businesses were sold off, including military optics, precision optics, spectrometers, analytical instruments, scanning electron microscopes, digital readouts for machine tools, recorders, plotters, digitizers, and CAD/CAM equipment. (The eyeglass frame and lens business, including ophthalmic laboratories, had been sold previously.) As of late 1987 we had also sold off the microscope, photogrammetry, and ophthalmic instrument operations.

Divestitures represent an intensive, all-consuming effort. A year in divestitures is worth about five years in acquisitions as a training ground for new M&A people and aspiring dealmakers. During this period, we met people who were as good as their word and those who weren’t; those who “due diligenced ” a deal to death, and those who were quick and efficient. We learned a lot from being on the selling side of the table, especially what kind of acquirer we wanted to be, how we wanted to be treated as buyers, and how we should treat sellers. On one transaction we contacted 480 prospective buyers; on another we negotiated for 28 hours straight. We learned that there are 100 reasons why any deal can’t be done. The successful dealmaker finds the 101st reason to do it. When completed, the divestitures realized more than $100 million for redeployment, and the proceeds were within the reserves and time frame established.

PHASE 3 (1986-89):

CENTRALIZED M&A

Following the completion of Bausch & Lomb’s divestiture program, our deal skills were sufficiently honed to pursue further growth through acquisition. Management attention turned to implementing major growth strategies. In 1986, Bausch & Lomb acquired Berlin-based Dr. Mann Pharma, an ophthalmic pharmaceutical and over-the-counter health care products company, for nearly $100 million. Adding to this entry into a new sector was the 1987 acquisition of Pharmafair, a U.S. generic ophthalmic drug company. Then, in 1988, another new sector was entered with the $133 million acquisition of Dental Research Corp., implementing a long-targeted entry into the oral care business. Another worldwide sector, hearing aids, was entered on a small entrepreneurial basis in 1989.

The approach to new ventures at Bausch & Lomb has been flexible, utilizing whatever deal structure seemed most appropriate for the business needs of both buyer and seller. For that reason, licensing never has been separated from acquisition, as it has in some companies. Deal structure should not be driven by organizational structure. In some cases, a licensing agreement was a better alternative than full acquisition. In other cases, a technology agreement, minority investment, or joint venture was the most effective way to proceed.

By the end of the centralized period, Bausch & Lomb had completed 105 M&A transactions, accounting for more than $625 million in market value. Of these transactions, 26 were acquisitions, 13 were divestitures, and 47 were licensings. Of the remainder, 12 were technology agreements, five were joint ventures, and two were equity participations. Both the good news and bad news was that during this very active deal period, we bid in auctions but never won. This may be due in part to having control of our own valuation process and refusing to overpay.

A corporate strategic goal had been to reach $1 billion in sales by 1990 without significantly diluting our financial ratios. In 1989, a year ahead of schedule, the target was reached, and more than 50 percent of our growth came from the new ventures program. By the end of 1989, the four new sectors of biomedical research, ophthalmic pharmaceuticals, oral care, and hearing aids had been entered. New opportunities were being added in most sectors of Bausch & Lomb’s business, creating synergies after the initial transactions. A new target was set—to reach $2.5 billion in sales by 1995, particularly by growing the oral care, over-the-counter health care, and international businesses.

The major acquisitions of 1986 to 1989 were accomplished mostly on a decentralized basis. Just two of us in Corporate Development negotiated most of the transactions, and centralized activity assured full coordination and control. But a reevaluation of the new ventures program was necessary if growth to the $2.5 billion level was to be reached without letting centralized control become a bottleneck. As a result of benchmarking the dealmaking process at some 20 other companies, we developed data that pointed to a correlation between centralization and lower deal intensity, so we systematically began to decentralize the new ventures process.

PHASE 4 (1990-92):

DECENTRALIZATION OF NEW VENTURES

Although divided into four phases for the purpose of this discussion, no phase was completely isolated from the others. In truth, a few aspects of new ventures were being decentralized to some degree as early as 1987, as operating units became capable of taking on various responsibilities.

We defined six aspects of dealmaking for decentralization purposes:

bulletThe presentation/approval process
bulletAnalysis and valuation
bulletSourcing
bulletDue diligence
bullet“Running the deal”
bulletNegotiating and deal structuring

Approvals. The first element to decentralize was presentation of deals for approval. The early advent of the operating champion concept, and the need for strong advocacy signaled the move of Corporate Development into more objective reviews of proposed operating unit transactions. Simultaneous with the increase in operating unit responsibility, a formal new ventures policy was put in place. One of the keys to effective decentralization is an adequate, but not over-controlled approval policy. Still continuing today is a three-step approval policy:

bulletApproval to enter into final negotiation
bulletApproval of the proposed transaction
bulletFinal contract approval, just prior to signing

It is also a corporate policy that letters of intent are subject to approval prior to being sent out and before vital resources are expended by both parties.

Analysis and Valuation. The analysis of an opportunity, especially the valuation (usually based on deal-market multiples and discounted cash flow analysis) has been progressively decentralized to the operating units. It is a vital skill to have in place prior to beginning negotiations and deal structuring, and it gives an operating unit the opportunity to experiment with its own scenarios, sensitivities, strategies, and synergies. A corporate model and its attendant software were developed and made available to each operating unit. Any variation or exception in the use of the model is brought to our attention. It gives Corporate Development the opportunity to be more objective in the review process.

One element of valuation retained by Corporate Development involves the collection of multiples, especially deal multiples. To be sure the data base is up to date and that resources are not duplicated, we provide this service company-wide.

Sourcing. At one time, during centralized new ventures, if an opportunity were missed (i.e., a competing buyer bought a company or technology that would have been of interest to Bausch & Lomb without our having had an opportunity to bid), Corporate Development would have been almost entirely responsible. As decentralization proceeded, this responsibility began to be shared with the operating units. Their charters or missions are developed during the strategic planning process, and any opportunity that lies within a business unit’s charter should now be pursued directly by the unit. This is in contrast to procedures at some companies where only Corporate Development makes these contacts. The control element that balances this degree of decentralization is that the units must keep Corporate Development posted on contacts being made and the progress of their deals. If a deal were missed today, the operating unit would have primary responsibility, because it should be pursuing opportunities of interest within its charter. Corporate Development, however, would also be responsible if the opportunity came through a banking, broker, or intermediary network.

Still reserved for Corporate Development, and likely to continue to be so in the foreseeable future, are the worldwide intermediary contacts. The global nature of banking today and the liability of fees or even double fees make this control reasonable. But the operating units make their needs known and Corporate Development maintains a regular program of updating intermediaries on what Bausch & Lomb wants. Operating units use all other methods for deal sourcing: consultants (on a fee-for-service rather than transaction basis), personal contacts, meetings, trade shows, and so on.

Due Diligence. In order to truly have accountability for a transaction, it was obvious that an operating unit also would need due diligence responsibility. Bausch & Lomb divides due diligence into three areas: financial, legal, and business. Financial due diligence often requires the help of corporate finance, tax, treasury, and accounting as well as the outside auditors. Legal due diligence requires corporate counsel and sometimes outside counsel, especially in unfamiliar geographic areas. Outside counsel also may be involved in specialty matters such as patent, regulatory, and environmental issues. Although corporate resources may be used in both these instances, it is still an operating unit’s responsibility to accept and endorse the due diligence done at its request and on its behalf. The business due diligence is even more clearly an operating unit responsibility. The further away the due diligence is from the current experience and expertise of the operating unit, the more likely that outside consultants will be used.

Running the Deal. This element of dealmaking is as much a mind-set as an activity. It involves internal coordination of division resources as well as corporate resources needed for deal completion. It involves overseeing the contractualization effort, arranging timely meetings, assuring that all commitments are kept, elevating important issues, and, in short, doing whatever it takes to get the deal done. One characteristic of a successful new ventures person, whether at the corporate or operating unit level, is the ability to “multiplex,” to juggle many different projects of varying priorities and yet move them all ahead. This is one of the more difficult skills to assess in potential M&A staff, and the inability of people to handle multiple projects is one of the most frequent reasons for failure.

Deal Structuring and Negotiation. This has been the last of the six deal steps to decentralize. The risk is higher. It is important to have all of the other five steps in place before attempting to decentralize deal structuring and negotiating. We connect deal structuring and negotiating in the belief that dealmaking is an iterative process, as one moves from deal structuring to negotiating, then back again to deal structuring.

Corporate Development participates in the process of hiring divisional New Ventures personnel, and in their training. One of the more difficult aspects of training and teaching deal structuring and negotiating is how to give the potential deal-maker a sufficient repertoire of deal structuring skills to substitute for many years’ experience at the negotiating table. Outside courses are used, as are co-negotiating, and a “buddy system” of contract review. New Ventures staff from the operating units are invited to gather once a month for deal-structure brainstorming, deal autopsies, and reviews of unusual structures for completed deals. Operating unit New Ventures staffs draw on each other, as well as on Corporate Development, as information resources. Equally important as basic skills training, is giving each negotiator a sufficient understanding of Bausch & Lomb’s values and culture to enable him or her to represent the company credibly and fairly. A fundamental belief of our New Ventures training is that there is no substitute for individual and corporate credibility.

When a New Ventures person is ready, Corporate Development and the operating unit head jointly recommend to the CEO that he or she be named a “qualified negotiator.” In 1992 we had four qualified negotiators at operating units, along with two in Corporate Development and three more in training.

Some operating units, usually because of insufficient deal flow or lack of dedicated New Ventures staff, do not have qualified negotiators and may not be decentralized in certain other aspects either. In these cases, Corporate Development provides needed services to the operating unit. If the transaction is large, the deal is outside of operating unit charters, or the project involves multiple divisions (such as Bausch & Lomb’s worldwide sponsorship of the Olympic Games), all of the foregoing six steps are the responsibility of Corporate Development. Except for these cases, decentralization has cast Corporate Development as more of a coach and counselor, as well as wearer of the corporate governance hat of review and control. More importantly, decentralization has been effective in removing many barriers to further growth. In 1989, Corporate Development executed or played a major role in 16 of 21 deals. In 1992, 19 of 24 transactions were completed by operating units. Even more significantly, not being burdened with the execution of smaller transactions has enabled Corporate Development to play more of a coaching role, especially eliminating problems in deal structuring early in the process. We are expecting further benefits from being able to concentrate more on corporate strategic growth and do larger deals as decentralization solidifies.

PHASE 5 (1993-  ):

FUTURE PLANS

We don’t expect the current organizational structure to be static. There already are indications that in some years New Ventures personnel may transfer back to Corporate Development to serve multiple operating units, as a particular unit’s deal needs change. Flexible resources, available when needed on a decentralized basis or provided when appropriate as a corporate service, will probably be the direction over the next few years. The emphasis on external strategies is being broadened to include new technology search beyond the normal planning horizon of the operating units. Bausch & Lomb also is moving to implement operating organization changes and to vest resources in fully regionalized headquarters in Tokyo for the Far East, Rochester for the Western Hemisphere, and London for Europe, Africa, and the Middle East. For the first time, a New Ventures person has been added outside the United States.

We believe that staying open and flexible is the key to making these structures work. Having been through the full centralization/decentralization cycle, we probably are better equipped than ever to deal with the appropriate future Corporate Development/Operating Unit New Ventures organizational structure and balance.

To better articulate such diverse roles, we’ve put forth a Corporate Development values statement, developed through consensus of the operating units’ New Ventures staff (Table 8.1). Understanding “where we are coming from” contributes to the fine balance of teamwork and corporate governance and has gone a long way toward developing a positive working environment.

                      

Table 8.1. Corporate Development Values

Maintain personal and departmental integrity and credibility, both inside and outside the company.

Inspire attitudes and activities that recognize and nurture new ventures as key to Bausch & Lomb’s growth.

Capture the opportunity to look at any new ventures situation that fits corporate or operating unit charters.

Be responsive to and perceived as responsive to new ventures needs wherever they arise in the company, adding value without diminishing any operating unit’s ownership of its own transactions.

Provide leadership to the new ventures process and quality monitoring and review of new ventures, advising as needed and being proactive in minimizing the risk of each transaction.

Provide quality mentoring and coaching to the new ventures team throughout the company.

Complete transactions that enhance shareholders’ value and in which we all can be proud to have been involved, long after the transaction is completed.

                      

We’ve also clarified for the operating unit officers what it takes to effectively manage and evaluate New Ventures staff. A list of 17 elements of effectiveness for a New Ventures manager is in Table 8.2. Corporate Development encourages dialogue between a division president and New Ventures people to clarify expectations and focus on problems. The coaching role of Corporate Development continues to be important.

Finally, we’re focusing more on the role of quality in Corporate Development and New Ventures departments. In 1991 we surveyed the internal customers to whom we provide service through both blind questionnaires and independent consultant interviews. The aspects of Corporate Development quality judged most important by internal customers were competence and creativity, with timeliness, relevance, and credibility also regarded as important. Overall ratings were excellent, but certain ideas that emerged are being implemented to create even more value, such as the formation of an internal venture program. Currently, we have an entrepreneurial task force addressing methods and processes for more effectively managing start-up and internal ventures.

Also on a blind basis, we surveyed banks and intermediaries with whom we’ve dealt for at least three years. Response to the mailing was 30 percent. We presented nine areas for the intermediaries to rate, and found that access to the CEO and responsiveness were most important to them in working with a corporate development department. Surprisingly, intermediary policy and regular communication were down on the list. We used a survey that rated Bausch & Lomb for each of the nine factors against each intermediary’s perception of the very best company in that category, excluding Bausch & Lomb. Overall, our score was 8.2 percent compared to 8.4 percent for the “best companies.”

                      

Table 8.2. Division New Ventures Person (DNVP) Performance Appraisal

1.   Has the DNVP understood and been responsive to the new ventures strategy set by the operating unit president, yet still evidenced independent thinking regarding potential deals, even to the point of internal advocacy?

2.   Has the DNVP been responsive to all deal flow, whatever the source, and handled it in a timely manner, making sure none ‘falls in the cracks,’ that necessary decisions are requested and relationships maintained?

3.   Has the DNVP been proactive in identifying companies which fit within the division’s charter, in catalyzing appropriate contact with the companies of expected future importance, and in maintaining those relationships with a good sense of timing and follow-through?

4.   Has the DNVP been proactive and aggressive in contacting the division president on a real-time basis regarding new ventures developments, and requesting decisions regarding projects for which the DNVP is not empowered to decide?

5.   Does the DNVP request resource when needed, and effectively manage that resource during the dealmaking process (analysis, valuation, due diligence), involving that process neither too early (wasting resource) nor too late (putting the deal at risk)?

6.   Does the DNVP efficiently and effectively bring in the appropriate people to each new ventures team, coordinate the due diligence effort to minimize disruption to the organ­ization, and communicate important deal activity on a timely basis within the division?

7.   Does the DNVP understand the corporate new ventures policy and act in accordance with that policy, providing guidance to the division as needed, and maintaining the right balance between division and corporate needs?

8.   Does the DNVP provide coaching, counseling and guidance to those other division personnel who participate in the new ventures process, and in general raise the level of functioning of new ventures within the operating unit?

9.   Is the feedback received from outside the company with respect to the DNVP’s representing Bausch & Lomb favorable to the company, credible, and consistent with the image and values the division president and Bausch & Lomb want to convey?

10. Does the DNVP effectively utilize corporate staff resources with respect to the new ventures process, stimulating a spirit of open communication and challenging others to reach a high quality of dealmaking?

11. Does the DNVP drive for ‘truth’ in the due diligence effort, elevating issues to division management on a timely and thorough basis, with recommendations for minimizing risk?

12. Does the DNVP identify and surface deal-killer issues early to protect resource utilization?

13. Is the DNVP technically competent in valuation, deal sourcing, initiation of contacts, confidentiality agreements,  negotiating, deal structuring, due diligence and contractualization, and does the DNVP stay current in the field? 

14. Does the DNVP pull together and make an appropriate presentation to the Management Executive Committee and/or the Board of Directors, assuring that all the relevant issues are addressed in a timely manner?

15. Is the DNVP creative in finding solutions to problems encountered in individual deals and in applying the strategic charter of the division to real-world opportunities?

16. Is the DNVP able to balance the larger aspect of strategic dealmaking with the detailed focus of negotiating and contractualization? 

17. Does the DNVP’s efforts result in meaningful transactions for the operating unit?

The third element of our quality program was to continue benchmarking “peer companies,” a process begun in 1990 to validate our decentralization decision. Benchmarking is an ongoing process to stay on the leading edge.

Overall, the trend for the next three years should be a balance between centralization and decentralization, with flexibility in changing the degree of each, as needed. We see a finer balance between the collegial coaching/ training/ service aspects and corporate governance issues. Weve matured enough to institutionalize the dealmaking mind-set and growth orientation, with values clarification, performance criteria, and a quality program. And we are working to attract new ventures staff who do well in both corporate and operating unit environments.

PHASE 6 (1996- ): OUTSOURCING AND BEYOND

The preceding article was written in 1994 while the author was VP Corporate Development at Bausch & Lomb, a position she held for 14 years. Phase 5, which had not been named at the time the article was written, has come to be regarded as a “Flexible Services” approach.

The experience in decentralization and in a flexible services approach to Corporate Development led naturally to the observation that if such activities can effectively be provided on a “service basis” within a company, such services can also be provided on an outsourcing basis.

In one sense, outsourcing is not a new concept to Corporate Development. Through consultants, investment bankers and intermediaries, one or more parts of dealmaking have often been outsourced: finding deals, valuation, deal structuring, due diligence and financing. Further, contractualization and financial analysis have often been provided by outside attorneys and accountants, respectively.

Outsourcing is relatively new as a service function to the Corporate Development department or process itself. There are myriad activities, which a Corporate Development Officer must perform effectively in order to create a successful function, yet few contribute directly to the success of an individual deal. Nevertheless, a Corporate Development Officer is expected to do all or most of the following:

                      

TABLE 8.3. Corporate Development Responsibilities

·        Strategic Plan / Growth Linkages

o       Decision to Establish Function / Recruitment

·        Establish Technical Capabilities and Resources

o       Information Resources

o       Valuation

o       Negotiation Training

·        Develop Internal Deal Team

·        Balance of Line and Staff/ Service and Oversight

·        Develop and Cultivate Deal Network

·        Develop / Disseminate Criteria and Policy

o       Setup Administrative System

·        Secure Deal Flow

o       Develop Confidentiality Agreements

·        Establish Fee Agreements Policy

·        Organize Deal Resolution Process

·        Enact Approval Procedures, Internal Policies

·        Meet other Corporate Requirements

o       Rewards / Incentives / Succession Planning

o       TQM and Benchmarking

                      

In spite of all that a Corporate Development Officer (CDO) must do internally to assure the success of the function, there is little reward or incentive based on those activities per se.

Usually, bonuses are paid on doing deals, not on writing policy. So the role of outsourcing, not only for deal activities, but also for the internal activities of Corporate Development, is useful to consider. For example, the fiduciary responsibility of most Boards of Directors requires that a solid M&A policy be in place, with strong controls. Writing such a policy can be a nightmare for the Corporate Development Officer. Not only does such activity take away from running deals, but developing policy is fraught with the pitfalls of politicizing internal relationships. Most operating unit heads don’t welcome restrictions on contacting intermediaries, on agreeing to deal terms or on their unilaterally deciding on valuation. A strong policy may require such restrictions, but the Corporate Development Officer who decides to author such policy may be stepping on powerful toes. A third party outsourcer who can provide such policy, benchmarked against wider practice, not only frees the Corporate Development Officer to do what is most rewarding, but can be a neutral factor in achieving even-handed M&A policy.

Policy is just one area in which outsourcing can be useful; however, managing the outsourcing professional or consultant can also be very important. The following guidelines will help the Corporate Development Officer to determine what activities can be most effectively outsourced, and what kind of controls should he placed on using an outsourcing professional or consultant:

Guidelines in using outsourcers or consultants.

·    Outsourcing should not come between the Corporate Development Officers (CDO’s) and their key relationships such as the CEO, COO or operating unit heads, the Board of Directors, other peer corporate staff or the deal champion (the person driving a deal to happen). In other words, dealing with key relationships should not be left to the outsource providers, but rather to the CDO.

·    Outsourcing should not be used to manage one’s own people, or to exert influence up or down the organization.

·    Outsource professionals can’t create a corporate culture or make a growth mindset happen (but can conduct seminars and help with training, and stimulate deal activity).

·    Outsourcing should not be used to make a decision to hire or fire, but it can provide interview feedback and benchmarking.

·    A third party shouldn’t be in the way of the CDO’s visibility to top management or the Board of Directors.

·    Outsourcing is not a substitute for staying leading edge, keeping up one’s own individual skills.

·    Outsource providers and consultants shouldn’t be the face of the company to the outside world, or act like a company’s decision makers.

Guidelines for the Corporate Development Officer in working with outsourcers and consultants include:

·    Articulate what you want to learn and what you want to accomplish.

·    Build up the relationship as you would one inside your own company.

·    Learn to express concern early, give feedback. Review results openly.

·    Work with people with training and coaching mindsets who will show you how and not keep their skills in a black box.

·    Don’t give the plum assignments to the outsourcers, and lose the opportunity for personal growth and visibility.

·    If you feel like you’re losing control, you are. Outsourcing should give you more control, not less.

The CDO’s challenge is not only to maximize the value of each deal to his or her company, but also to maximize the Corporate Development department’s value to the corporation and the CDO’s own value to the function. Outsourcing of deal activities and also of internal Corporate Development process offers the Corporate Development professional the best opportunity to leverage scarce resources and to concentrate where the rewards are highest.

EPILOGUE 1998

In 1996, the author perceived outsourcing as such a viable approach for the Corporate Development department, and the need for this activity as so widespread, that she retired from Bausch and Lomb in order to launch Hypotenuse Enterprises, Inc., a mergers and acquisitions advisory company, which also provides consulting and outsourcing services to the Corporate Development professional. Diane Harris has leveraged her 14 years of Corporate Development experience, having managed the function in and through virtually every phase of evolution, and now offers those services to other Corporate Development Officers and their staffs, as well as to CEO’s committed to creating growth programs.


 

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Contact Information: Phone: 585-473-7799,   Fax: 585-473-7465, 
E-mail: info@hypot.com

Hypotenuse Enterprises, Inc. is a New York State domiciled corporation and operates under the laws of New York State.  Hypotenuse is not a broker/dealer and does not offer broker or broker/dealer services.  No information on this web site is intended to provide broker, broker/dealer, consulting or advisory services, and Hypotenuse Enterprises, Inc. is not responsible for and accepts no liability for any use or misuse of such information by viewers of this web site.  Notwithstanding the foregoing, Hypotenuse Enterprises, Inc. is a registered business broker in the State of Illinois.