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Going into a negotiation, the management team of a mid-sized company discussed a potential deal:

Business Development: If we can buy it for $68mm or less, it clears our hurdle rate.
Chief Strategy Officer: What’s our BATNA? [Best Alternative To a Negotiated Agreement]
Senior FP&A Analyst: If we pay $68mm, it reduces our enterprise value. We have to get it below $54mm to be a net positive.
Chief Strategy Officer: Why is that?
Senior FP&A Analyst: Paying any more than $54mm and using other resources on this project keeps us from doing a few other projects that are collectively worth more to us than this one.

This conversation happens all the time at companies that actively use portfolio management to aid their decision making.

Two or more companies could use the exact same forecasts and assumptions about an acquisition, but may still decide it is worth different amounts. That’s because the companies all have different alternatives. If they complete the acquisition, it will likely mean they cannot do other projects under consideration. And that’s because few companies have infinite resources, and doing Project A means you may not be able to move forward with Projects B and C.

The value of the npv10 solution is to very quickly evaluate your alternatives, recalculate all of the pertinent key performance indicators, all while achieving corporate goals within the given constraints.

Beyond the quick analysis, executive discussions can focus on relaxing constraints (perhaps by raising additional capital, or finding other necessary resources) to enable the firm to take on additional valuable projects. The software will show which KPIs are “bumping against the ceiling” and you can decide if they are “hard ceilings” or have some flexibility.

If you are frequently considering acquisitions or divestitures, and want to quickly determine how they impact your company, let us help model your business and its opportunities, and show you how to maximize your company’s value.

“What’s the difference between being strategic versus opportunistic?” a friend recently asked.

After thinking about it, I answered, “Suppose you want to make $1,000. Being strategic means you come up with a strategy or plan that you reasonably expect to make that amount, perhaps investing in a stock or bond, or take a job that pays that much. Being opportunistic means you wander the streets looking for loose change.”

It is usually straightforward to know how a company operates by looking at its portfolio of business lines. Strategic companies have fairly similar-looking opportunities, almost cookie-cutter in their appearance. By knowing what they do well, they develop plans to replicate their successful endeavors. Having this tight focus enables them to have better insights into how these ventures work, and hopefully work together for greater efficiencies.

Opportunistic companies are always on the lookout for “a good deal.” Their portfolio is a collection of seemingly unrelated ventures, with little or no cross-venture benefits. They may still make a good deal of money, but they are dependent upon a sufficient number of acceptable deals to come their way. In essence, they wait for opportunities to come to them, instead of making the opportunities happen.

If we look at the world’s largest companies, we see 14 banks in the top 50, 6 oil companies, 6 automotive companies, 6 insurance companies, 5 utility-like companies, 3 drug companies, 3 tech companies, 2 consumer electronics companies, and 2 consumer packaged goods (CPG) companies. There is only one potentially opportunistic company among the 50, Berkshire Hathaway, although they may actually be an insurance company that also invests opportunistically in a wide variety of industries.

These are the most valuable companies in the world, and they show the value of a focused strategy. They didn’t become that valuable waiting for opportunities to come along. They made the opportunities happen.

Using a disciplined portfolio strategy will enable you to set audacious goals and develop a plan to achieve them. Contact us to start you on the path to becoming one of the LARGEST COMPANIES in your industry.