I'm afraid I have a much more jaundiced view of the role the private equity
plays in innovation. Most leveraged buyout (whether by management or outside
PE investors) look for undervalued companies in mature markets. These
companies are typically undervalued due to operatinoal inefficiencies -
either due to poor manageemtn or a corporate parent that has neglegted the
business. The investors usually look to process improvements for increasing
the value of the business. This typically involves one of three areas:
1) If the problem lies in the cost structure, then the focus is on
eliminating waste and reduing overhead.
2) If the company has a high CoQ and/or is loosing market share due to poor
quality, the focus is on improving quality.
3) If the company has a poor customer service performance, then the focus is
on improving reducing leadtimes, improving on-time delivery and increasing
customer support.
In a very few cases, the invwestors will buy a company because of synergies
that might exist between different businesses. Private equity investors are
value investors, and as value investors they know that acquisitions made on
the basis of some synergies that make the whole worth more than the sum of
the part rarely materialize. They know that in the long run, they will make
more money focusing on improving the bottom line, rather than identifying
new markets or products that create completely new top line revenue. That is
a real crap shoot, and they are no better at getting it right than anyone
else in the industry. Why trow good money at risky innovation when they can
stick to their proverbial knitting, take their newly realized gain, and
invest in other undervalued companies.
Peter Flentov
20/20 Innovation LLC
We help you create the future!
-----Original Message-----
From: MCT [mailto:mark_turr
...@imaginatik.com]
Sent: Thursday, February 03, 2005 6:47 PM
To: CorporateInnovation@googlegroups.com
Subject: Corporate Innovation - Latest Updates Re: Hot Topic #1 from Feb.
Corporate Innovation Newsletter
Private Equity Investment - from Mark Turrell (contributor to Corporate
Innovation)
It is interesting following private capital and innovation. At the most
basic level I see a pattern emerging:
- BigCo wants to divest slow moving parts of the business, low growth areas,
areas that require too much capital, sometimes too much 'innovation', or
divest less interesting brands after a merger or strategic review
- BigCo sells off the group to a private equity firm
- the private equity firm needs acquisitions like this as they have a lot of
money to spend (interest rates are too low, so banks and insurance companies
need some boost to their returns) and they need a 2X - 5X return in 3 - 5
years
- the divested company starts off with new management - or invigorated
managers who now own a stake in their business
- the divested company starts by reducing costs and making themselves more
efficient... but this does not provide the growth path that is needed to
justify an ultimate 2X - 5X return
- the divested company needs to 'innovate' to come up with new things, new
growth areas, new markets, etc and starts to invest in innovation capacity
- eventually the focus on innovation starts to yield dividends for the
divested company...
- ... and demonstrates to a potential acquirer or the stock market that this
company is really a growth firm
- and while this is going on, the divested firm's actions in the industry
start to force their competitors to start innovating as well... and thus the
Innovation Arms Race goes on
So, who is impacted by this. Right now the chemicals industry has
experienced a surge of private equity investment. The next wave will be
larger manufacturers and consumer product companies, in my opinion.
What is clear for me is that the wall of private money - which needs its
huge return - is going to drive innovation wherever it hits.
Yours,
Mark Turrell
mark_turr...@imaginatik.com
www.imaginatik.com
