Insights on Portfolio Rebalancing in M&A

Insights on Portfolio Rebalancing in M&A

In the fast-paced, ever-changing world of business, portfolio rebalancing has emerged as a crucial tool for companies to stay competitive, agile, and resilient. Whether it's private equity firms or Fortune 500 companies, the concept of portfolio rebalancing is becoming a central topic in boardrooms worldwide. In this article, we will discuss portfolio rebalancing thoroughly, featuring Gregg Albert, Managing Partner - Corporate Strategy and Mergers & Acquisitions at Accenture.

“Every business unit now needs to prove its value to the overall organization. For publicly traded companies, this means proving its value to the market. This change starts at the board level and cascades down to the management team and business unit leadership.” - Gregg Albert

What is Portfolio Rebalancing

At its core, portfolio rebalancing is the practice of regularly reassessing a company's business units, markets, and product lines. Portfolio rebalancing involves determining where a company has a competitive advantage and where it doesn’t. This concept is not just theoretical—research shows that companies actively involved in portfolio management, whether through acquisitions, divestitures, or joint ventures, outperform the S&P 500 by up to 700 basis points over ten years.

For boards of directors, rebalancing is no longer optional; it’s essential. Faced with macroeconomic headwinds like rising interest rates, geopolitical tensions, and even global changes in democracy, companies must make difficult decisions about where they invest their resources.

Over the past 10 to 15 years, the corporate mindset has undergone a significant shift. Previously, companies held onto their business units unless a compelling reason arose to sell. Today, that mindset has flipped. Each business unit must now prove its value not only to the company but also to shareholders. Public companies, in particular, need to show that every part of their organization contributes meaningfully to the market.

Companies are adopting a "clean sheet" mentality, reassessing each business unit’s role in the broader portfolio. As corporate cultures and operating models shift, companies must be willing to sell off assets that no longer align with their strategic goals.

Catalysts for Portfolio Rebalancing

Activist investors have always been a part of the corporate landscape, but their influence has grown significantly in recent years. They often advocate for portfolio rebalancing, pushing companies to exit markets where they are no longer the advantaged player. But how do activists gain this influence?

First, activists often acquire a significant amount of stock in a company, giving them a voice at the table. However, they don’t always need to buy large amounts of stock. In one example, an activist investor gained influence with less than 0.01% ownership in a major energy company by rallying other investors to support their sustainability-focused initiative.

More importantly, activists bring a strong investment thesis, backed by deep research and analysis. It’s not enough to just hold an opinion. Activists conduct outside-in analyses, often with the help of firms like Accenture, to present a compelling case to the board and shareholders. Their goal is to create value for all shareholders, not just themselves, by encouraging companies to rethink their portfolios, exit underperforming markets, and refocus on core competencies.

How to Think Like an Activist Investor

One of the most valuable lessons companies can learn from activists is to adopt their mindset. Every company should be asking: What would attract an activist to my company? Common markers include:

• Declining market share: A company steadily losing ground to competitors.
• Market saturation: Limited growth potential in existing markets.
• Industry changes: Fundamental shifts in the industry that require a new approach.

For example, in the automotive sector, the transition from internal combustion engines to electric vehicles has created significant opportunities—and challenges—for companies throughout the supply chain. Activist investors look for companies that are slow to adapt and push them toward necessary changes, like divestitures or strategic pivots.

Improving M&A Practices: Lessons from Portfolio Rebalancing

Portfolio rebalancing offers several insights that can improve M&A practices:

1. Take a “Clean Sheet” Approach: Regularly reassess every part of your portfolio. What made sense for your company five years ago may no longer align with today’s market realities. This kind of self-assessment can help you stay ahead of activists and competitors alike.
2. Prepare for Divestitures: Selling off parts of your business is not as simple as reversing an acquisition. Divestitures require their own set of skills and strategies, and companies need to develop "muscle memory" by practicing these transactions.
3. Build M&A Capabilities Before the Deal: Don’t wait for a deal to start preparing. Companies that outperform in M&A have developed playbooks, practice scenarios, and stress-tested their processes long before an actual transaction takes place. As the saying goes, "When did Noah build the ark? Before the rain."‍
4. Leverage the Close Window: Use the time between signing and closing a deal to ensure detailed planning. This is when the real work begins—preparing for Day One, aligning integration charters, and safeguarding against potential disruptions like customer attrition.