What is Corporate Development?
Corporate Development (Corp Dev), is the department of a corporation that makes strategic decisions about how to grow and restructure their business, create strategic partnerships, and/or achieve organizational excellence. Corp Dev exists to provide opportunities for companies through its actions such as Mergers and Acquisitions (M&A), Diversification, as well as deals That maximize the company’s business platform’s value.
Why is Corporate Development Important?
A company needs corporate development to develop and implement innovative strategies that will increase its competitive edge and help it:
- Steadily improve the financial and operational performance of the company
- Allow the company to surpass its competitors
Internal vs. External Focus
Corporate development is an inward-looking function that is essential for any organization. It fills gaps in the company’s product and geographical reach.
On the other hand, corporate development is an important outward-looking function of an organization. Because organizations are dynamic businesses with valuable assets that can be monetized or grown through various combinations of partnerships and deals, this is important. The corporate development department must be innovative and open to new business partners and other transaction options.
Structure for Corporate Development
1. Centralized model
Corporate development is typically a central function. This gives the Corp Dev team an inside view of the company, which allows them to spot potential threats and opportunities. This allows companies to benefit from being a member of the broader community. Pre-emptive actions against threats and first-mover when there is an opportunity. This structure allows corporate development to make deals with businesses that are well-suited for the business portfolio.
It is important to note that a central Corp Dev department does NOT imply The department is completely isolated from all other operations groups in the company. After acquiring a company, The corporate development team assists in integrating the acquisition into the company through collaboration Assist with the business and support functions within the company as well as with external vendors.
2. Hybrid model
This organizational model makes the corporate development department lean, i.e. it has very few Corp Dev professionals. The lean team relies on an extensive network of internal and external resources to provide subject matter expertise in evaluating strategic partnerships and transactions.
3. Decentralized model
The decentralized Corp Dev organizational structure means that there is no central corporate development department. Instead, a corporate team for development is created on a case-by-case basis and is comprised of people from different internal departments.
The expertise required to complete the corporate development project determines the exact composition of the team. If the project was a divestiture then the Corp Dev team would include many people from corporate finance and legal.
The most popular model for corporate development is the centralized one, while the less popular decentralized model is more popular.
Work Profile of a Corporate Development Team
The corporate development group is responsible for many functions. However, the scope of these functions can vary from one company to another. While many people view Corp Dev solely as being involved in mergers & acquisitions (M&A),), especially large corporations, Corp Dev is often involved in multiple other projects besides just M&A.
These are some of the most important responsibilities for a Corp Dev:
- Achieving Operational Excellence
- Analyzing and investing in new strategic initiatives (this includes mergers, acquisitions, and strategic divestitures).
- To create forecast models and budgets in order to allocate assets and monitor company performance
- Dealing with regulators from the government or industry
- Assuring adequate capital
- Identification and management of non-core business assets
- Improved customer/client experience
- Optimizing firm productivity
- Participating in shareholder meetings, financial conferences, Investor Days, and earnings releases, in order to communicate company strategy to shareholders
- Market penetration and product development
- Portfolio management
- Understanding the key drivers of revenue and expense; The most important Key Performance Indicators(KPIs), to measure and evaluate company performance
Implementing strategies for corporate development
These strategies are often used to reach corporate development goals:
1. Acquisitions and Mergers
Larger companies frequently acquire or buy out smaller businesses You have the skills, knowledge, customers, and revenue to support your cash flow, earnings, and/or customer service. This can be a significant benefit to the acquiring company. Another possibility is for a company to acquire a potential acquisition and then restructure it. Its business model moves it in a new and hopefully profitable direction. Corporate development professionals must be proficient in corporate valuation, risk assessment, financial modeling, and negotiation to make such acquisitions.
Corporate development teams are required when conducting mergers and acquisitions:
- create a target list,
- Value the companies using a financial model.
- Negotiate terms for the deal.
- Integrate the acquisition into your company.
For successful integrations, Corp Dev teams often establish a Transition Services Agreement between the buyer or seller.TSAs are used to specify the duration and nature of the services that the seller will continue to offer to the business after it has been bought. This adds value to the buyer because it allows them to take the necessary time to integrate the new business. It is also beneficial for the seller, as it allows them to reduce stranded expenses and restructure their system (especially if they have only acquired a portion of their business).
2. Long-term Partnerships
Reputation in the market A company can gain a competitive advantage by being a “partner” of preference. Because stable partnerships are made up of multiple organizations and provide all the partners with economies of scale to avoid a price war race for the bottom, Companies often prefer to form partnerships with potential competitors than with them.
Partnering is also (usually) possible It is much more cost-effective than buying a company. Given the need to form partnerships in new ways, It is a competitive advantage to know how to form sustainable partnerships with other organizations.
3. Divestitures & Carve-outs
To be successful, companies must meet both internal and externe pressures so the company’s portfolios are efficiently using capital. Diversification and Carve-outs are becoming more important strategies for companies.
A planned offloading of assets can lead to a high return on investment. This is based on a regular review of the company portfolio. Another Corp Dev function requires financial modeling. Excel skills and an understanding of business valuation techniques are essential.
4. Strategic Alliances
Strategic alliances allow companies to better manage risk, leverage their core capabilities, and increase entry into new markets. For emerging markets such as Brazil, China, India, and China, strategic alliances can be a prudent vehicle. Because they allow companies to establish business relationships in new countries and learn business practices quicker than otherwise.
Strategic alliances can also result in more efficient capital use since the investment cost is shared and risk is dispersed among partners according to their skills/assets.
5. Creative Transactions to Optimize Shareholder Value
Activist shareholders and Hedge funds can often put pressure on companies by expressing their opinions and preferences regarding the company’s performance as well as its strategic direction. These investors’ demands are an incentive for corporate developers to create new types of deals that maximize shareholder value.
Metrics to Evaluate the Effectiveness Of Corporate Development In An Organization
These are the most common metrics used to measure the performance of a company’s corporate development department.
- Net Present Value (NPV). The NPV is a measure of how well the Corp Dev team performs.
- Return On Investment (ROI): Similar to NPV, a higher ROI signifies a solid Corp Dev Department.
- Internal Rate of Return (IRR): The higher the Corp Dev’s performance, the greater the margin at which the IRR exceeds the company’s required return rate.
- Revenue growth: Another metric used to assess the performance of a Corp Dev team is revenue growth.
- Strategic Factor Analysis. A company with a higher score in its strategic factors analysis indicates that the corporate development department is operating efficiently.
- Synergy Capture is when the combined performance and value are greater than those of the individual organizations. Stock share prices are often the best indicator of the synergetic effects of a transaction or deal. Share prices will rise if there is a positive effect.
- Dilution/accretion analysis If earnings per share increase after an M&A, then the Corp Dev team can be considered to be a good source of shareholder value.
- Customer retention: Because Corp Dev is responsible for improving the client/customer experience, higher customer retention rates are a reflection of the Corporate Development team’s success in this area.
- Employee turnover: By helping to build a business and operating efficiency, corporate development can help to achieve and maintain a low rate of employee turnover.
An effective Corp Dev department is efficient and can accurately assess risk and value can generate significant deals, acquire targets and drive a successful business strategy.