CORPORATE ADVANTAGE

IIM Calcutta

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 Corporate Strategy

 Strategy used by multi-business corporations

 Business versus Corporate Strategy

 Each business can be uniquely defined by a

business model; does your business model
differ on at least one of the three dimensions
(who / what / how)?

 Many businesses in same industry is possible

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 Corporate Advantage

 Competitive advantage is usually explained in

terms of price and cost

 Corporate advantage occurs when two

businesses ‘owned together’ are more valuable
than the sum of the parts

 V(ABC) > V(A) + V(B) + V(C), where

notations denote NPVs of standalone and
jointly owned businesses (corporate advantage
test relates to the ‘portfolio’)
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 Corporate Advantage

 Businesses may give up own advantage for the

greater advantage the firm as a whole may get

 Various academic studies (e.g., Bowman and

Helfat, SMJ, 2001) opine that there is a
substantial corporate effect on profitability
(behind business-level effect but ahead of
industry-level effect)

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 Competition

 Investors (can only do ‘portfolio assembly’

while multi-business firms can do ‘business
modification’)

 Other multi-business corporations

 Activist shareholders (stake gives decision

rights – can pressure CEO on M&As) and
private equity investors (though they usually do
not exploit linkages)

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 ‘Selection’ Approach

 Passive investors cannot change cash flow

(and ‘spot bargains’ may be hard to get in
mature markets)

 However, they can reduce discount rates (at

which they raise money) via portfolio
diversification (other ways to change discount
rate include changing timing and / or riskiness
of cash flows, which a passive investor cannot
do); so simply select a good portfolio

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 ‘Synergy’ Approach

 Risk diversification via portfolio assembly will

not suffice in mature markets as investors can
do that themselves (i.e., owning but not
operating)

 So corporate strategist needs to change cash

flows and discount rates through joint
‘operation’ that entails joint decision-making
(i.e. operating with or without owning); from
corporate to parenting advantage

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 Corporate Strategies & Contexts

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 Application

 SOTP valuation (see example)

-EBITDA for (private) businesses within group

-EV (market cap + debt – cash) / EBITDA for
focused peers
-Projected EV of businesses – add them
together
-Deduct cost of HQ & deduct ‘debt’ to arrive at
market cap (assuming no cash)
-Divide by number of shares to get SOTP
valuation, and compare with (own) current MP
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 Application

 SOTP valuation (example)

Business A Business B Business C
EBITDA (focal) 50 30 40
EV/EBITDA (peers) 4 5 4
Projected EV (focal) 200 150 160
Debt (subtract) 100 70 80
Cash (add) 50 40 60
Projected MV 150 120 140
Focal firm projected MV 410
Outstanding shares 40
MV per share 10.25
Current market price (say) 9
Corporate Discount 1.25

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 SOTP: Criticisms

 Comparability of divisions with focused peers

 Assumption that divisions will maintain same

levels of EBITDA if de-linked from the firm

 Still, a benchmark

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 Points of Discussion

 Even diversified shareholders may be able to

reduce systematic risk using a corporate
strategist

 Divisional, holding and conglomerate

structures

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 Points of Discussion

 Conglomerates are still common

 Corporate strategy may be relevant for single

business considering new entry

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 Managing Linkages

 Common corporate services (treasury, risk

management, financial control, shareholder
relations, taxation, auditing etc.)

 Shared services organization: core operational

functions (IT, research, HR etc.) (P&G’s
‘global hubs’); often operating as profit centres

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 Business Unit Management

 Direct involvement

 Strategic Planning (joint decision-making,

long-term, tech sector, HQ as coordinator) vs.
Financial Control (high business unit autonomy
within annual performance targets, short-term,
little sharing among businesses, conglomerates)

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