CFO

Growth 2020: EY, Fidelity, Qualcomm Execs Reveal Strategies to Beat Global Uncertainty

By Jeffrey Schwartz, Brainyard Editor-at-Large
Growth Outlook

In short:

  • Executives attending this year’s Corporate Development Conference say diverse approaches to growth are shaping M&A strategy
  • Fears of economic and geopolitical headwinds weigh on C-suite execs despite strong consumer confidence, an unusual dichotomy
  • Strategic factors such as ‘build versus buy’ and willingness to evolve play key roles in portfolio growth

“I think it is clear that deal intentions are high,” said William Casey, vice chairman of Ernst & Young’s Transaction Advisory Services, during a panel discussion at the annual Corporate Development Conference in New York last month.

EY, which advises corporations on M&A and portfolio management and was a lead sponsor of the Conference Board event, used the gathering’s opening session to present findings of its latest Global Capital Confidence report. That set the tone for discussions during the two-day summit, which focused on best practices for fueling business transformation through both organic and inorganic growth.

Some report findings: Despite economic headwinds and growing geopolitical turmoil, 52% of C-level execs report that their companies will actively pursue deals next year. That’s an increase from 46% a year ago, but a retreat from 59% in EY’s April 2019 bi-annual survey.

That rise will come against the backdrop of a cash-rich private equity industry, which has shifted the playbook on deal-making and the IPO market in 2019.

Seventy-nine percent agree (58%) or strongly agree (21%) that there will be an increase in hostile and competitive bidding in the next 12 months; 75% expect more cross-sector M&A driven by technology and digitalization. Corporate development managers in key verticals say they have an eye toward deals that will not only accelerate growth but help them remain competitive.

One fear: being blindsided by new and unlikely rivals.

While execs at the conference were bullish on 2020, the reality is that the aggregate value of closed deals this year is trending the lowest in more than a decade, according to Fidelity. As of Oct. 1, there were nearly 17,000 completed transactions valued at a combined $0.7 trillion compared with 25,000 deals last year worth $2.5 trillion.

TA8 Growth 22%

EY’s Casey warned about 125 corporate development managers in attendance that an unwillingness to consider M&A is a risky choice.

“Companies continue to push to do inorganic growth, but I think, particularly now, in the uncertainty of this economy, there's a dual cost for inactivity,” he said. “There's a cost in terms of the share price, in terms of the long-term value and in terms of the resiliency of the business.”

It’s clear that the business and technological transformation sweeping across industries over the past several years is putting pressure on companies to find new routes to growth. At the same time, though, corporate development managers must navigate the hype that has contributed to lofty valuations on some firms — and put questionable discounts on others.

Recession Reality Check

Only 24% of companies that went public in 2019 have reported positive net incomes, the lowest since the dotcom crash in 2000, according to a Goldman Sachs report. Much-hyped IPOs this year from popular but in-the-red companies like Lyft, Slack and Uber, along with the very public meltdown of coworking pioneer WeWork, will drive a lot more scrutiny in 2020.

The next generation of would-be unicorns won’t have it as easy.

“There has been so much going on, and new technologies are following up on each other so quickly, that you throw yourself at this and say, ‘Let's see if we can make it work,’” said Bart Van Ark, The Conference Board’s chief economist. “The markets ultimately begin to figure out where it's hype and where is it not.”

TA8 Growth 68%

Members of The Conference Board, a nonprofit think tank representing 1,200 corporations globally, are looking at 2020 with uncertainty, according to Van Ark. Underlying fears include potential economic volatility stemming from ongoing trade disputes between the U.S. and China, Brexit in the U.K., fears of military escalations in the Mideast and the upcoming U.S. elections. More on our 2020 outlook is here.

While those factors and others are weighing on business confidence, Van Ark said consumer confidence is at an all-time high, thanks to a strong labor market and growth in the financial markets.

“I cannot remember over the last 30 years where the gap between consumer confidence and business confidence is so large,” he said.

Noting that consumer spending accounts for 70% of the economy, Van Ark said unless that slips, the risk of a recession remains low. In fact, consumers could haul manufacturing back from the edge.

“Because industrial production has been declining very rapidly over the last year, it may very well begin to bottom out a little bit,” he said. “And frankly, these trade disputes are not going to go away, but they're not likely to hugely accelerate in the light of an upcoming election — China doesn't want the economy to decline even further.”

TA8 Growth 31%

Indeed, the Chinese government’s refusal last year to approve Qualcomm’s $44 billion merger with NXP Semiconductor forced the two companies to walk away from that deal after a two-year delay. Duane Nelles, Qualcomm’s senior VP of corporate development, told attendees that the current trade tensions are a factor, but he doesn’t see the company wavering from M&A strategy.

“China has a distinct appetite to have their own technology and not be as beholden on the U.S. or western technology,” Nelles said. “So, they’re pushing their own internal development.”

Build Vs. Buy

When Tom Jessop was offered the head of corporate business development job at Fidelity Investments two years ago, his boss made clear that the leading asset management and mutual fund company rarely acquired companies. Fidelity, which reported 2018 revenues of $20.4 billion with $6.7 trillion in assets under management, has made only a handful of small deals in its 73-year history.

“We’re much better at doing things organically,” CEO Abigale Johnson told Barron’s last year. At the time, Johnson also noted that it’s much easier for a publicly traded company to make a large deal than a private firm such as Fidelity. Case in point: Fidelity’s largest rival, Charles Schwab, will acquire TD Ameritrade for $26 billion in an all-stock deal.

In a panel discussion about how companies looking for growth weigh whether to acquire or build from within, Jessop explained Fidelity’s approach. Given that technology is a driving factor in the hypercompetitive asset management and financial services business, time to market is a critical factor.

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“One of the things that we’re trying to do with our team is to come up with a framework to say, ‘When is it appropriate in that context to build versus buy something?’” Jessop said. “And we're not binary in that — we obviously look to acquire companies and have looked at several. We’ll also look to partner with startups and get some corporate venture investments with the net effect of getting us further down the field than something we would build ourselves.”

Bottom line, when a company needs to deliver a new capability, the “acquire it or build it” decision comes down to how core the need is to the business.

“We are much more likely to want to own and control that and differentiate around that core,” he said. “If it is a finance technology capability, for example, tools that allow an advisor to build a portfolio, that's where we may say there's a time-to-market benefit in partnering or acquiring a company to build that front-end capability to get to market faster.”

In contrast, earlier this year Fidelity launched a standalone business called Akoya that will aggregate customers’ financial information across different providers without the use of screen scraping, an approach by aggregators that many firms now block due to the security risks associated with the practice. Jessop said that was a capability Fidelity decided to build internally.

“It’s a technology capability that allows us to provide client information via API to a destination of the client’s choice and avoid the risk” of providing user credentials to an aggregator, he said.

Serial Acquirers Sharpen Focus on Success

While Fidelity doesn’t have a history of making major acquisitions, tech giant Cisco does.

“One in five people at Cisco are the result of an acquisition,” said Kimberly Baird, corporate development integration lead at Cisco. “We have been a serial acquirer for almost 30 years now.”

While many of Cisco’s buys have played key roles in its growth, the company has a history of deals — especially earlier on — that were very public flops. Baird, who joined Cisco 19 years ago, said the company has taken a decidedly different approach to M&A over the past five years.

One change: oversight to ensure that all deals will yield the value anticipated. Part of that effort is a major focus on engaging with all the right stakeholders to ensure that the Cisco business sponsor championing a deal is aligned from a strategy perspective with the target company. Likewise, Baird looks to determine whether that target company will fit in with Cisco.

“I help orchestrate that conversation and ensure that strategy alignment from the beginning, where you're talking about striking the deal, to making sure those employees are onboarded in a very human way and they feel welcome and they feel like they're actually making a difference,” she said.

The most recent example of that was Cisco’s September acquisition of Voicea, a small company whose software can transcribe conversations. Cisco has already integrated the tech into its Webex communications and conferencing platform. “They're very quickly integrating value for our customers,” she said.

Aside from its admitted status as a serial acquirer, like many large tech companies, Cisco has a rich ecosystem of industry alliances, investment of R&D funds in emerging technologies and participation in various consortia.

In the pharmaceutical industry, Pfizer is another company with a storied history of making acquisitions. Its most recent agreement to acquire Array Biopharma for $10.64 billion will bolster Pfizer’s cancer treatment pipeline. Pfizer sought Array because it has an approved treatment for skin cancer.

Aside from striking big deals, as one of the largest pharmaceutical giants in the world, Pfizer also has deep ties to academia and is no stranger to partnering with rivals, including a 2017 pact with Merck and Corning to develop a glass packaging solution for injectable drugs.

“About half of our portfolio is enabled or is typically acquired through the partnering process, whether it's acquiring, or co-developing or licensing, it all happens in a very co-mingled way,” said Doug Giordano, Pfizer’s senior VP of business development. “You have to be mindful about what you're good at and what you may not be good at.”

Acquiring companies to diversify for growth also is a core focus at Qualcomm, provider of the chipsets found in mobile phones, tablets and, increasingly, other hardware. Qualcomm’s Nelles said the company will engage in five to 10 acquisitions every year, some joint ventures and an occasional divestiture.

“We are certainly using the M&A process to diversify ourselves a bit here, as well as to fill in key gaps in our portfolio,” he said. While China is a threat, Nelles said that’s just one factor: “Lots and lots of competitors are coming down the road to keep us awake at night.”

TA8 64%

For about three years after a deal closes, Qualcomm conducts annual reviews to assess how well the newly acquired company is adding value. “After that, it often becomes very difficult to segment out because it just becomes part of the work,” he said.

Corporate Development Managers, Focus on Transformation

As industries undergo sometimes radical change fueled by digital technology and shifting work culture, the stakes are high for corporate development managers — not only in finding the best deals but making sure the acquired businesses are successfully integrated in a way to achieve expected long-term value. Bringing together disparate cultures, historically an afterthought in the scope of M&A, is becoming a higher priority, as Cisco’s Baird noted. That’s a sentiment we’ve heard at other private equity conferences.

Addressing corporate culture when making deals isn’t just for high-tech companies, which have a mixed track record of success. Becton Dickinson (BD), a company founded in 1897 that manufactures a broad range of medical supplies ranging from syringes to diagnostic gear, has turned to M&A for growth — most notably two years ago when it acquired C.R. Baird for $24 billion and for its 2015 acquisition of CareFusion for $12 billion.

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“In companies that we acquire, there's going to be aspects of their culture that are essential for them to succeed at the business that they're doing, which is actually part of your business,” said Evelyn Douglas, BD’s senior VP for corporate development and strategy.

One major change for a 122-year-old company: moving away from traditional hierarchical management. Now, leaders need to ask employees how they can enable them to do what they do best.

“We spend a lot of time with our senior leaders saying, think of yourself as a servant of those who report to you,” she said. “It’s a cultural shift from back in the day when you were the boss and your job was to tell people what to do rather than listen to them.”

Marie Quintero-Johnson, VP and director of M&A at Coca-Cola agreed, noting that when the beverage giant’s newest CEO, James Quincey, took over in 2017, he joined the transformation wave, which included changing the company’s employee culture, not a simple endeavor.

TA8 84%

So what other lessons can CFOs of smaller firms take away?

The EY report reinforces advice from these big-company corporate development managers:

  • Don’t drift where geopolitical, competitive and tariff forces push you. Proactivity was a main theme of the conference.
  • While recession is a possibility, 54% don’t expect a slowdown in the near term. So that should not deter companies from being open to M&A. Make sure you’re prepared with data on your company’s valuation and executive expectations.
  • Don’t bank on automation to fix your hiring problem. EY says that more automation of routine tasks is increasing the challenge of attracting and retaining talent, especially those with technical skills. Manufacturing is a canary in that coal mine. Digital natives are accustomed to visual and fast-paced learning. As we’ve discussed, they want an environment where they can be empowered, part of a collaborative team and supplied with ongoing training. That’s a major shift for many firms.

“Cultural change is not easy; it is a journey,” Quintero-Johnson said. “It means transparency and communication, making everybody feel valued. Being consumer-centric, bringing the outside in so that you are not an insular company.”

Jeff Schwartz is Brainyard editor-at-large, covering technology and trends across different industry sectors. He has covered all aspects of technology and its impact on business for three decades as an editor and writer for a wide range of publications. Currently he’s a freelance writer. In addition to Brainyard, he contributes to Channel Futures and SD Times, among others.

  

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