12 Global technology M&A update: July–September 2013

Kripa RajshekharTransaction AdvisoryServicesEY+1 312 879 3224

kripa.rajshekhar@ey.com

Barak RavidTransaction AdvisoryServicesEY+1 415 894 8070

barak.ravid@ey.com

Top of mind

As innovation accelerates, portfolio management becomes a “must have”The relentless acceleration of advancing technology constantly makes new things possible, while continually creating newer,

faster, lower-cost ways of doing what is already possible. That’s why there are so many technology start-ups and so much

investment in technology innovation — especially around the five disruptive technology megatrends (mobile, social, cloud, big

data analytics and accelerated technology adaptation). And, as the growing number of corporate divestitures suggests, that’s

also why there is so much need for established technology companies to be proactive in managing their business portfolios.

With few exceptions, however, technologycompanies have not been really proactiveportfolio managers. “The increasing numbersof divestitures in global technology M&A so farthis year underscores the need for proactiveportfolio management,” says Barak Ravid,Transaction Advisory Services, EY.

When companies institutionalize portfoliomanagement with well-defined strategiesand proactive processes, they are betterable to divest business units at the optimaltime, balancing their portfolio smoothly,over time, with fewer bursts of transactionactivity. As the graph on the left side ofFigure 5 indicates, most companies end upinvesting more than is optimal in maturingbusinesses. But as the right side suggests,proactive portfolio management can drivecompetitive advantage.

Aligning your portfolio with rapidlyevolving marketsFurther, one of many possible outcomes of a rigorous portfolio management process is to divest business units that have eithermatured or have a lower profit growthpotential or are no longer in line withstrategic objectives. Because proactiveportfolio management actually starts within-depth analysis of customers and markets,it detects market changes, compares acompany’s portfolio with current marketneeds and identifies any gaps that need tobe filled in order to align the portfolio withthe market. “Effective portfolio managementhelps you see where to invest in organicgrowth, where inorganic options such asM&A may be best and where to lowerinvestment — or divest — in maturebusinesses to help fund those growthactivities,” notes Kripa Rajshekhar,Transaction Advisory Services, EY.

The move toward integrated security portfoliosA current example of portfolio managementis in information security, and was discussedin our Q213 M&A report.1 According to thatreport, corporate customers are reacting tothe greater complexity of modern informationsecurity challenges by seeking single-source, end-to-end solutions providers that can “hide” the complexity and take responsibility for the overall solution. That,in turn, is driving consolidation amongproviders of different types of securitysolutions, as they seek to achieve theproduct breadth and scale that customers want.

Portfolio management starts with the“right” metricsTo maximize the value of a portfoliomanagement process, it’s important to startby defining metrics for portfolio evaluation.Though what’s “right” will vary fromcompany to company, too often companieschoose metrics that are backward-looking,such as historical operating profit. Instead,“business lines should be compared in the context of future market and profitopportunity, asset investment and intensity,tax considerations, manufacturing synergiesor IP use across lines,” says Rajshekhar. Portfolio management processes generallybreak down into some easily defined —though not always easy-to-execute — steps that fall into two broad categories:

• Portfolio strategy (value identification)

• Define the relevant metrics• Assess the portfolio• Identify gaps and opportunities• Prioritize resulting initiatives

“The increasing numbers of divestitures in global technology M&A so far this year are actually a lagging indicator of the need for proactive portfolio management.”

Barak Ravid Transaction Advisory Services

EY

13

• Portfolio operations (value realization)

• Identify and evaluate targets for inorganic growth

• Realign investments in mature businesses, including options for divesture or “ramp down”

Rajshekhar emphasizes that it is importantto include objective external factors (thatmany organizations overlook) at every stepof the process, along with internal factorsand short- and long-term objectives. Andwhen assessing a portfolio, it’s important toevaluate each unit on a stand-alone basis, aswell as its contribution to the whole portfolio.

Harder than it looks Both Ravid and Rajshekhar acknowledgethat several factors make portfoliomanagement hard to execute. For example,the external metrics that are so importantto understanding a business line’s futurepotential are not easy to measure against.“Most companies have very good data onwhich of their products are selling well andwhich are not, but they typically don’tcombine it with robust data on what themarket and their competitors are doing,how that’s going to be changing and whatcustomers are going to be wanting in thefuture,” explains Ravid.

Further, differing internal points of view cancreate hurdles in multiple dimensions. First,most forecasts are made independently, bybusiness line managers with different goals

and perspectives, and therefore, are difficultto compare objectively. Second, to arrive at the correct investment prioritization,subjective perspectives of differentstakeholders must be overcome. “Consistentlyprioritizing investment opportunities maybe the most difficult part of portfoliomanagement,” notes Rajshekhar. Third,even after achieving consensus oninvestment priorities, connecting capitalallocation to strategic planning can be achallenge. “Capital allocation is typically ledby the finance department, and strategicplanning is business-unit-led — this makes ithard,” says Rajshekhar.

“These are difficult conversations that are hard to have objectively within theorganization, because there are alwayscompeting interests, whether at thecorporate level or the business unit level.That’s why so many organizations neverreally achieve effective portfolio managementwithout engaging a trusted third party thatcan bring external data and an independentperspective to help reduce the noise anddrive objective decision-making,”Rajshekhar explains.

Accelerating change demands iterativeportfolio managementAs challenging as it can be to do portfoliomanagement well just once, the constantlyshifting technology landscape demands thatit be done regularly — at least annually. For example, technology companies serving

data centers have been evolving for severalyears from individual providers of servers,storage, networking and software tointegrated providers of all four. This trendrequires the companies to continuallyreassess their portfolios. As in the informationsecurity example, customers’ need to hidecomplexity via seamlessly integratedsolutions is driving the changes. “Thesetechnology companies are recognizing theyneed to evolve their revenue models fromselling products to providing solutions on asubscription basis — and so they are missinglots of pieces in their portfolio to enablethat, from bits of technology to areas ofgeographic support,” explains Ravid.

What is more, the data center technologylandscape is rapidly evolving, even as thecompanies evolve their portfolios. Flashstorage use is climbing, software-definednetworking is emerging and rising use of big data analytics is demanding newsoftware architectures and approaches.Companies involved in this trend would find continual portfolio management adistinct competitive advantage.

Whether your organization is participatingin the data center trend or is otherwise caught up in the transformative disruptionsbeing driven by the five megatrends,investing in effective portfolio managementis key to maintaining competitiveness — or even getting ahead of the changes.

Global technology M&A update: July–September 2013

Source: EY analysis, 2013.

Figure 5: Aligning investment levels with future profit potential necessitates proactive portfolio management

Profit potential

Investment from company in a product

Actual investment

Embryonic Growth Maturing Declining

Optimized level of investment

Typical business potential life cycle

Do

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valu

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Age of business line

Investment

surfeit

Profit

potential

Common

Strategically aligned but implementation

is challenged

Competitive advantage can be driven by enhancements in value identification and/or value realization

Frequent

Not adequately equippedfor portfolio management

Rare

Streamlined sustainableprocesses but insufficient

strategic intelligence

HighLow

Hig

hLo

w

Por

tfol

io s

trat

egy

(Va

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Best-in-classportfolio managers

Process management(Value realization)