The importance of portfolio rebalancing

Let's start with what portfolio rebalancing is at its heart. Whether we're talking about private equity clients, Fortune 500 companies, or G2000 companies, they're always reconsidering the businesses they're in, where they play, and how to win.

The market continues to change. There's an interesting quote circulating that the world will never move as slowly as it is right now. If you consider that, the concept of portfolio rebalancing becomes crucial. 

It's about deciding where you will service your clients and customers and where you choose not to. It's about determining where you have an advantage in certain markets and product areas and where you don't.

This has never been more relevant from a board perspective. Today, we see several macroeconomic headwinds: the impact of COVID, rising interest rates, geopolitical tensions, the regulatory environment, and even the role of democracy around the world. 

In 2024, 4 billion people are engaged in the democratic process, fundamentally changing government policies. This, in turn, affects boards of directors, forcing them to make difficult decisions about their global footprint and where to play from a business perspective.

That's the essence of what we consider portfolio rebalancing. We've done a lot of research on companies that outperform from a public market perspective. If you look at the S&P 500 over the last 10 years, companies that have done no transactional work or portfolio rebalancing underperform the S&P 500. 

Companies that do some portfolio rebalancing, like divestitures, outperform the S&P 500 by about 300 basis points. But companies actively engaged in their portfolio—through acquisitions, divestitures, joint ventures—outperform the S&P 500 by 700 basis points over the last 10 years. This study spans across industries.

We can discuss industry specifics further, but it's clear that portfolio rebalancing is a very relevant topic for boards today, given all the changes happening worldwide.

The broader scope of portfolio rebalancing

To give a simple answer, as I've been working with boards and C-suites for the last 15 years, I've definitely seen a significant shift in their attitudes. 

About 10 to 15 years ago, the assumption was that every business stays unless proven otherwise. Companies didn't exit markets, products, business units, or geographies unless there was a compelling reason, or perhaps an unsolicited offer came in for a business unit.

Today, that thinking has completely flipped. 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.

At Accenture, how we advise our clients is with a "clean sheet" mentality. The idea is to reassess each business unit's value. 

You may have been the advantaged owner of a company five or ten years ago, but the world has changed—markets have changed, customer sentiment has evolved, corporate cultures have shifted, and operating models have dramatically transformed over the past five years. 

If you study this, the pace of change is astonishing. At Accenture, we embrace change and get excited about it. Making the decision to put an asset up for sale can be tough. 

Some people feel sad about these events because the company might be losing employees, heritage, or a brand. However, there's also excitement because the business becomes unburdened by the current organizational structure or regulatory environment. For publicly traded companies, moving to private ownership can offer many advantages. 

The private equity markets are particularly active, with around $1.2 to $1.5 trillion in dry powder ready to be deployed. This capital needs to be invested, and while hold times are growing longer, these situations present significant opportunities for corporations to find an exit or a monetization event.

Evolving perspectives on portfolio rebalancing: activist investors

First, let's talk about the concept of activist investors. They've been around for a long time. The history of activism goes back to the 1960s, and they got a lot of press in the 1980s—Gordon Gekko in "Wall Street" certainly helped with that. 

Activist investors have always been there, and in recent years, a lot of investment funds, particularly alternative investments, have been flowing into activist investor funds.

These funds work to instigate change, not just for their own benefit but for all shareholders. They use market forces and gain consensus at the board level and with other shareholders to drive change. While they are part of the shareholder population, their actions are aimed at improving outcomes for all shareholders. This is a significant macro trend we're seeing now.

These trends manifest in three different ways.

1. Portfolio Rebalancing: Activist investors are pushing for companies to exit businesses where they are no longer the advantaged owner. They advocate for divestitures or getting out of certain markets.
2. Changes in Management: Activists often push for changes in management teams and seek seats on boards of directors to influence company direction. We saw this recently with a well-known coffee company that made changes at the C-suite level.
3. The Decline of the Conglomerate Model: Over the last four to five years, we've seen many 100- to 200-year-old companies shrink in size and scale compared to 10 or 15 years ago. Activists have challenged the old mantra of maintaining a diversified portfolio where one side compensates for the other. 

From a market perspective, investors now reward companies that excel in a few areas rather than being generalists in many. Activists have been pushing for these portfolio rebalancing activities to accelerate this shift.

The difference between an opinionated shareholder and an activist

Usually, an activist has two things that you, as an opinionated shareholder, might not have. Number one, they have a lot of money. They can buy a significant amount of stock.

Well, it's not necessarily a minimum requirement. Even within activism, trends can vary. For example, a super major energy company had an activist investor who didn't even reach the 5% ownership threshold that would require disclosure. 

They openly disclosed their ownership, which was about 0.01%, but they were very vocal and managed to rally other existing investors to support a particular strategic initiative focused on sustainability and portfolio rebalancing.

This effort earned them seats on the board of directors and led to changes, although the full impact will play out over the next 10 to 15 years. So, you don't need a lot of money, but you need enough to buy enough shares to be taken seriously by the board of directors and other shareholders, not to mention the C-suite.

Besides buying power, you need a strong investment thesis. Money is important, but without evidence and deep research to back up your thesis, you won't convince other investors to support your viewpoint. 

Otherwise, you're just a guy with an opinion and a few hundred shares. Activists typically conduct thorough outside-in analysis. Firms like Accenture and investment banks often perform this kind of research for their clients. You might also involve legal teams.

In essence, you need a strong hypothesis that this company isn't performing as well as it should be, and a compelling argument that it needs to reallocate capital or make different strategic choices.

Companies that attract activist investors

Every company should have, and we've been doing a lot of research on this, the mentality to "think like an activist." Whether or not an activist is actually engaged, companies should consider what would attract activists. Based on our research, we've identified three markers:

1. Declining Market Share: A company experiencing a sustained decline in market share over a period of time.
2. Market Saturation: A company that has saturated its existing market where its share won't grow, and the market size itself isn't likely to expand.
3. Systematic Industry Changes: Significant changes in the overall industry.

For example, consider the energy transition from a hydrocarbon-based economy to an electron-based one, particularly in the automotive sector. There's been much discussion about moving away from internal combustion engines to electric vehicles. 

This transition affects not just automotive companies but the entire supply chain, from mining companies to manufacturers. We're seeing trends of consolidation among mining companies, which are essential for sourcing raw materials like CCM, platinum, palladium, cobalt, nickel, copper, and aluminum—key components in the shift from hydrocarbons to electrons.

Moreover, there are disruptive forces, such as the advent of generative AI, which are hard to ignore. These forces will fundamentally change industries that haven't seen much movement in the last hundred years, like the automotive industry. 

However, the transition hasn't been as fast as some forecasts predicted. For instance, electric vehicle adoption rates are still behind earlier projections from seven to eight years ago. 

Additionally, regulatory changes are playing a role. For example, the CHIPS Act has become highly relevant. 

Government intervention, like the $50-60 billion investment through the CHIPS Act, serves not only geopolitical purposes but also aims to boost research and development and retrain and reskill employees for a new economy.

How to approach portfolio rebalancing

Boards of directors are ultimately accountable to shareholders of publicly traded companies for the return on their investment. The committees within these boards, such as the audit committee, have seen their focus on risk evolve from primarily financial risk to include systemic, geopolitical, macroeconomic, and labor-constrained issues.

Boards now face a broader range of considerations, including black swan events, where they must think about probability and likelihood. These expanded responsibilities are leading to more complex conversations at the board level, which then translate down to management teams about how to remain agile and resilient in an ever-changing world.

It's easy to talk about resilience in theory, but it's much harder to create an organization that is truly resilient—able to adapt and respond to market trends and customer shifts quickly. Social media, for example, can move markets almost instantly. 

Building a resilient organization takes more than just words from a consultant on a podcast. It can take years to shape an organization capable of adapting to a rapidly changing world in ways never seen before.

Boards and shareholders typically focus on data. Building a strong, hypothesis-driven business case is essential, leveraging the scientific method to prove your point. This approach is critical when you're in a boardroom making a pitch for a transaction.

Once everyone votes yes, there's a brief moment of excitement, but then reality sets in: "What did we just agree to do?" The activities involved in transactional work—whether buy-side, sell-side, pre-deal, or post-deal—are extraordinarily intense and leave little room for mistakes or errors, which can be costly.

In other high-pressure fields—like military operations, sports, aviation, or surgery—where the margin for error is near zero, there's a focus on preparation. They practice extensively, with a practice-to-performance ratio where 99% of the time is spent practicing, and only 1% performing.

Why don't we apply this approach to M&A more often? We work with our clients to build out their M&A capabilities before an actual transaction is even considered. This involves developing playbooks and running through practice sessions to handle various scenarios before a transaction takes place.

As the saying goes, "When did Noah build the ark? Before the rain." We prepare companies for major transactions before they need to execute them. There are many ways to do this, with valuable lessons learned that we can discuss, which greatly benefit our clients.

Key stages in M&A transactions

If you think about the three stages of a transaction—pre-sign, post-sign, and post-close—they all feel and look very different to the individuals and companies involved.

In the pre-deal stage, you typically have a small group of people who are "in the know," involved in the transaction, and going through the diligence and valuation processes. For example, at Accenture, we're investing $2 billion in research to support our clients across the Gen AI agenda. A significant focus within Gen AI is M&A. 

We've developed a unique capability for conducting diligence by leveraging Gen AI. Think about the data room and all the historical data it contains. By using large language models, we can analyze this data to identify red flags among the sea of green, enabling quicker insights.

Gen AI allows us to "get to no" faster. While everyone is eager to close deals and often think they're being logical, emotions still play a significant role in decision-making—even in the boardroom. 

Once a deal is announced, and it hits the street, you enter the planning phase. You can't execute or implement anything yet because you're waiting for the transaction to close.

We've seen the close window—the time between signing and closing—expand dramatically over the past four to five years due to various factors: regulatory, anti-competitive concerns, government regulations, and changes in go-shop provisions in purchase sale agreements. 

The key is leveraging that time during the planning phase to ensure that, post-close, you're confident in your ability to execute.

All the charters should be aligned, and everyone should understand the "jazz ensemble" so that, when the time comes, you're playing your instruments, not just looking at the sheet music. From a transaction perspective, execution is where the rubber truly meets the road.

Addressing integration bottlenecks

It's essential to have a resilient organization with some experience in handling transactions before they take place. Using the planning window to your advantage is critical. It involves detailed planning, down to specific contingencies. 

For instance, what does "Day One" look like? A straightforward question might be: What changes on Day One? If you're a publicly traded company buying another, apart from legal requirements, nothing needs to change immediately. 

However, you can choose to accelerate certain synergies, like general and administrative (G&A) synergies—order to cash, procure to pay, record to report, HR, finance, IT. These are areas where value can be created with minimal risk, offering higher confidence in achieving goals.

One reason I work at Accenture is that we can handle everything from strategy to execution and implementation. We not only meet synergy targets but often exceed them, achieving results faster and with greater confidence. Beyond G&A synergies, there’s also vertical and horizontal integration.

Recently, we’ve seen more deal theses focused on cross-selling to existing customers rather than just cutting G&A costs. This approach requires more planning and lead time—it’s about measuring twice, cutting once. You’re dealing with your core business reason: your customers. Preparing them for a merger can be thrilling yet daunting.

A little-known challenge is that competitors might take advantage of any uncertainty or anxiety among your customers during this period. They may try to poach your customers during the close window. So, how do you stay close to your customers and ensure you don’t experience attrition or revenue loss before Day One?

The challenges of divestitures in portfolio rebalancing

I wish it were as simple as snapping your fingers and moving from decision to execution, but it's not. First, there's a learning curve. If a company has never gone through a carve-out or divestiture, it's not like an acquisition in reverse. 

I've had many conversations with clients where, after deciding to divest a business, the C-suite might say, "We've done tons of acquisitions, so we're all set; this is just an acquisition in reverse." But that's a false assumption.

The only way to truly learn is by doing it repeatedly, much like acquisitions, where you build muscle memory and capability. When we work with clients, we often say, "You might do a divestiture once every 10 years. 

We handle 10 to 15 divestitures with our clients every year." So, we bring a "been there, done that" mindset and playbooks. However, no two deals are the same, and no two businesses are alike.

For example, we helped a consumer products company divest a business operating in 118 different countries—a very different activity than divesting a business with just one office and 50 employees. It's about right-sizing the strategy, governance process, and how you're organizing from a separation management perspective.

When it comes to selling, almost everything is negotiable at the right price. But defining the deal's perimeter—what's up for negotiation—is crucial. Is intellectual property included? Are there opportunities based on geographic footprint or rights to use? Each consideration is highly relevant to the particular transaction.

The human element is also significant. Divestitures directly affect individuals and can be frightening. Imagine finding out your business unit is being sold—that news hits home. Effective communication, change management, and empathy are vital. Preparing for this in advance is critical to the success of the divestiture process.

Portfolio rebalancing example

I'll give you an example of a high-tech client in the semiconductor space. We've worked with them on several transactions, including buy-side, sell-side, joint ventures, and strategic alliances. Over the last eight to nine years, their entire business portfolio—where they play, who they serve, and how they serve—has evolved significantly.

Nine years ago, this publicly traded company primarily focused on two end markets: automotive and aerospace defense. Those were their main areas. 

Today, they still have a strong presence in automotive, but the auto industry has completely transformed with the shift to electric vehicles (EVs). 

If you think about all the different technologies involved in EVs, it's not just about minerals but also about battery technology and the underlying material science, which is an evolving field facing fundamental scientific challenges.

Moreover, the shift from internal combustion engines to electric vehicles requires new technologies, such as the zonal architecture that connects sensors in a smart vehicle. The internal combustion engine components, like carburetors, are no longer necessary.

This company has moved from focusing on two markets to serving multiple sectors, including 5G and the evolving communications industry. They've expanded not only within aerospace and defense but also into the space sector, adapting to the changing landscape influenced by players like SpaceX and various global competitors. 

They've also increased their involvement in government work, which they had strategically maintained a presence in, and have now deepened this engagement.

Today, about 50% of their revenue comes from areas that were not part of their portfolio seven years ago. This shows the rapid pace of change within the organization.

They executed three different divestitures during this period, each varying in scale. One major divestiture involved 25 countries and about 4,000 employees. 

The other two were smaller, one covering four or five countries and the other two countries, mostly focusing on intellectual property.

Aside from divestitures, they also pursued acquisitions, joint ventures, and strategic alliances. In discussing portfolio rebalancing, networks and strategic partnerships are becoming increasingly critical. 

Over the next decade, strategic alliances will likely play a more vital role as industries continue to converge and boundaries blur.

Looking ahead, what will today's industry giants look like in 10 years? My guess is that they will look and feel very different due to various factors, including stock market catalysts, activist investors, geopolitical shifts, and regulatory changes. The landscape will evolve, and so will these companies.

Working with the board and CEO in the semiconductor business was very interesting. In this particular case, the board of directors was highly diverse, which is crucial when considering activism and portfolio rebalancing. 

The composition of a board is critical. If you have a group of people with the same backgrounds and experiences, you won't get a wide range of opinions, ideas, and insights needed for effective decision-making. This board, however, was extraordinarily diverse.

When speaking to this board, there was a mix of backgrounds, from academics to investment bankers, lawyers, and even ex-military. They had someone from a consumer packaged goods background and even a rocket scientist. The diversity of the board made the conversations unpredictable, almost like a "dog's breakfast" going into the meeting.

But it was interesting because the discussions became more dynamic. Initially, there was a wide range of divergent opinions—like an accordion expanding. However, as we continued to walk through the case over multiple board sessions, the opinions began to converge, leading to a unified direction and consensus.

How influence works in the boardroom

It's all about using the force to your advantage—just like in the movies. But seriously, it goes beyond just building a strong business case or showing up with a 50-slide PowerPoint deck. 

Yes, data is essential—income statements, balance sheets, cash flow, and a solid business case are all fundamental. You also need scenario planning and stress testing to explore different outcomes of a transaction. That's the baseline.

But the real challenge is the pitch itself. It's not just about presenting data; there's a bit of a game involved. You have to understand how influence works, which can vary widely from company to company and culture to culture.

For example, cultures within companies and even within their boards can differ significantly. Working with a hardcore engineering company where everyone has an engineering background is very different from working with a company full of creatives.

Let me give you an example of a "Clash of Civilizations." We worked with a marquee brand in the media space—very creative, world-famous, especially in the gaming space. This company was full of creatives—lots of tattoos and piercings, the prototypical creative environment. 

They acquired a very manufacturing-heavy company to become more vertically integrated. This new company was all about block-and-tackle operations and process-focused work.

Bringing these two cultures and ways of working together was challenging. It took years for them to even speak the same language. 

Concepts like cash flow and profit meant entirely different things depending on whether you were in the creative company or the low-margin, high-cash-turn manufacturing business. It was a fascinating case study of where the rubber truly meets the road.

How to be an activist investor

I'm not sure I can teach you how to be an activist, but I can certainly teach you how to prepare to be targeted by an activist. Maybe that will help you understand what it's like to be one.

To think like an activist is a powerful mindset shift for an organization. It's not about creating a sense of fear, but rather about operating from a "clean sheet" perspective. How would an outsider, particularly an activist, view your company? 

I'm not just talking about the general market view, but a true activist who is financially motivated to instigate change. They're playing by the rules in a capitalist society—unlike Gordon Gekko, who went to jail.

Activists work to build consensus among multiple stakeholders and shareholders, often having long standing personal relationships within the organization they aim to change. This process of instigating change is not something that happens with the snap of a finger; it's a consistent, ongoing effort over time.

If you're looking for a playbook on how to be an activist, you're talking to the wrong person. However, if you want to make sure your company is battle-tested and doesn't fit the criteria of an activist target, I can help. If you want to ensure your organization is ready and nimble enough to fend off activist interest, we can discuss that.

But as for the Nobel Prize-worthy ideas on becoming the perfect activist investor, that I can't provide.

Defending against shareholder activism

It's a big topic. As the famous general Eisenhower once said, "Plans are useless, but planning is invaluable." 

The process of strategic planning, thinking through five to ten years ahead, and considering all the different scenarios that could affect your markets, customers, suppliers, and stakeholders, is crucial. This preparation allows a company to react proactively to potential activist attacks.

Most discussions with activists happen behind closed doors, although some do make headlines in outlets like the Wall Street Journal, especially with Fortune 100 companies. 

One example I can share involves a major resources company that an activist approached, pushing for significant divestitures. The activist argued that the company should exit a particular business not aligned with its core competencies.

Ultimately, the CEO negotiated with the activist right before the shareholder proxy vote, reaching an agreement behind closed doors. They shook hands, and the activist remained on the board but withdrew the proxy vote presented to the shareholders.

I'm not a lawyer, but a proxy fight involves bypassing the board of directors and management team and going directly to the shareholders to instigate change at the board or business level. This approach often stems from differing views on corporate strategy and can lead to changes in CEOs or board seats.

Proxy battles can sometimes focus on environmental, social, and governance (ESG) issues. ESG considerations have been a significant challenge for many companies. However, some have turned this into an advantage by focusing on ESG issues, effectively using them to their benefit.

While the headlines about ESG might have diminished, the focus on E, S, and G remains critical. Research shows that companies that prioritize these factors tend to outperform those that don't. The SEC is also discussing requirements for publicly traded companies, at least on the NYSE and NASDAQ, to disclose specific ESG metrics in the future.

Audience Q&A

Characteristics of companies with a strong M&A muscle

First, the experience of having "been there, done that" is invaluable. There's no substitute for the experience of having completed acquisitions of various shapes and sizes and having gone through multiple scenarios. This experience enables quick and effective decision-making.

However, it's not just about experience. We talked earlier about the practice-to-performance ratio. It's not just practice that makes perfect, but perfect practice. Companies that maintain an always-on M&A capability, regardless of whether they're actively doing deals, are better prepared. 

Having a dedicated team that continually refreshes its skills, goes through diligence processes, even on targets unlikely to result in a deal, helps build that muscle. It's about practicing perfectly to achieve exceptional results.

Challenges faced by companies with a weaker M&A muscle

To your point, no two deals are the same. There are differences between acquisitions, divestitures, and joint ventures, each requiring different approaches. Having playbooks and templates in place is useful, but they are just a starting point. 

At Accenture, we leverage digital accelerators to help companies think through everything from planning to execution, including the pros and cons of different operating models. This simulation helps envision what the integration journey looks like post-close.

Integration is not always done in a hundred days or as a simple business-as-usual task. It can take a long time. 

For instance, we use a tool called OrgView, which allows companies to simulate multiple organizational designs to determine which best supports the operating model and aligns with the investment thesis. This approach helps de-risk the overall execution by practicing perfectly early on and then executing effectively later.

The importance of prioritizing capital allocation in M&A

Let's start with the basics: the balance sheet, focusing on assets and liabilities. It's essential to have the right leverage, especially if you're a publicly traded company. Private equity firms might look at this differently, but from an M&A perspective, what's important is that you don't actually have to commit cash until the deal is completed.

On the buy side, you don't pay until the deal is finalized. On the sell side, you might get excited about a potential cash influx, but it only becomes real when the deal closes. That’s why the pre-planning process is so critical. 

You want to avoid delays to "Day One" on either side of the transaction. Delays can trigger various issues, such as provisions in the purchase-sale agreement like a Material Adverse Change (MAC) clause.

Completing the transaction quickly and confidently ensures that your capital allocation is clear, and you know how much cash you need in the bank if you're paying cash.

The other factor to consider is stock. While cash might not immediately impact your bank account, issuing new stock affects your valuation and the number of outstanding shares. If you're not pricing the asset correctly, you risk diluting the organization's value.

The key lies in execution—delivering value that aligns with the investment thesis. As you know, Conrad, clients get excited when we help them pressure-test the investment thesis and value creation strategy. We then help them accelerate and even increase that value post-close.

From a discounted cash flow (DCF) perspective, capital allocation becomes a significant value driver for our clients and a strategic lever for Accenture to provide the best support.

The duration of the close window is critical. Recently, Accenture's global lead of the M&A strategy and transaction advisory practice, Jane Neely, published a paper discussing five key strategies to use during an extended close window. 

As the saying goes, "Time is a terrible thing to waste," so for those listening, there are specific playbooks or lessons learned on how to best utilize that planning period.

Portfolio rebalancing in private equity-owned businesses

First, let's talk about private equity as an investor class. Over the last decade, private equity investors—both general partners (GPs) and limited partners (LPs)—have outperformed the S&P 500 and the Dow. 

This has led to a significant influx of money into private equity, which is currently a $7 to $8 trillion asset class and is expected to grow to about $20 trillion over the next decade.

The reason for this growth is the success private equity has achieved. Unlike publicly traded companies, private equity firms don't have to worry about disclosures, Sarbanes-Oxley compliance, or other regulatory requirements that are costly and time-consuming. This allows them to focus relentlessly on value creation.

Private equity firms are singularly focused on value creation, and it's not just an academic exercise. They have detailed operating manuals that outline their strategies. Many funds are being formed around the thesis that there are fragmented industries that shouldn't be fragmented, creating opportunities for value creation through consolidation.

For example, we've worked with a major private equity fund and one of their portfolio companies, helping them execute eight acquisitions over 15 months in a niche software space. 

Their EBITDA continues to grow, not just from cost-cutting measures like G&A reductions, but also from top-line growth through cross-selling, entering new markets, and leveraging synergies between portfolio companies.

Even mid-market funds, with $10 to $15 billion in assets under management, are becoming more sophisticated. They are taking advantage of extended hold times, a trend that has persisted since the IPO markets have not fully recovered post-COVID. 

Rising interest rates also add challenges for private equity funds, but they've adapted by focusing more on value creation initiatives and consolidating their portfolio companies.

We're seeing a lot of consolidation among portfolio companies, and even if they don't go public, private equity firms prioritize cash flow. This has led to an increase in PE-to-PE transactions, where private equity funds sell companies to other private equity firms.

Carve-outs in private equity portfolios

The concept of portfolio rebalancing applies to both publicly traded companies and private equity funds. Private equity firms do engage in carving out parts of their portfolio companies. 

For example, I have a private equity client whose investment thesis for a particular transaction involved buying a business with the intention of eventually carving out part of it and spinning it off into its own entity.

This strategy is generally easier for private equity firms because they don't have the same quarterly shareholder expectations as publicly traded companies. They have a longer timeline to monetize their investments and can afford to be more risk-seeking rather than risk-averse.

The trend is actually increasing. This is largely due to longer hold times and the demands of limited partners (LPs) who want returns on their investments. One way to provide returns without selling the entire business is to carve out a part of it, monetize that piece, and distribute the proceeds to LPs as a dividend or one-time payment.

Looking ahead, much depends on interest rates. If we enter a declining interest rate environment, as many hope, we could see even more of these transactions. If interest rates have indeed peaked, we may see a rise in carve-outs, similar to what you're describing.

Understanding wargaming in strategic planning

Wargaming, as a concept, is also known as scenario planning or strategic planning. While "wargaming" sounds more intense, it essentially involves thinking through various potential future scenarios in a structured, methodical way.

This practice dates back to companies like Shell, which pioneered the concept in the 1960s and 1970s. Today, wargaming is a tool used by boards to consider various external factors, such as geopolitical tensions, macroeconomic changes, and regulatory shifts, to decide where to play and how to win. 

Generative AI has enhanced our ability to do this more effectively, allowing us to start with a consistent set of facts and run different scenarios faster.

Wargaming is based on probabilistic mathematics, like Monte Carlo simulations, which help companies predict potential outcomes. It starts with agreeing on a set of facts as a foundation and then running various scenarios. 

For example, interest rates are a critical factor because they affect discounted cash flow (DCF) models and the weighted average cost of capital, which are influenced by interest rates.

We saw an example recently with the yen's fluctuations caused by changes in Japan's central bank policies, impacting the dollar-yen carry trade imbalance. A global organization constantly deals with foreign exchange (FX) risks, and interest rates play into these concerns. 

What central banks do—whether in the UK, EU, US, or Asia—affects capital allocation and resource planning.

We run these scenario planning simulations with companies to help them prepare for high-impact, low-likelihood events. This preparation involves creating business continuity plans and strategies to handle unforeseen events.

This kind of planning is fascinating, and executives often engage deeply in these conversations. It can be a bit nerve-wracking when you consider scenarios like, "What happens if there's another pandemic?" 

Initially, it might seem far-fetched, but then people remember the recent COVID-19 pandemic or the great financial crisis. It raises the question: Are businesses built resiliently enough to adapt to rapid market changes?

Choosing the right advisor for your business needs

To give some context, before I got into consulting, I worked in corporate development for a blue-chip Dow Jones company. So, I'll try to be as unbiased as possible here.

One of the most valuable things we offer our clients is our ability to engage upfront in thinking about corporate strategy. Transactions are a means to an end, not an end in themselves, so it all begins with a solid corporate strategy. 

Portfolio rebalancing is part of this process. We help companies reimagine and transform themselves, considering what their roadmap looks like over the next three to five years.

We focus on achieving these goals at pace, with confidence, and in a low-risk manner—what we call "compressed transformation." Our clients appreciate that we can support them from the initial strategy planning and vision setting to designing the operating model and continuing through to implementation and execution.

For example, we're currently working with a Fortune 50 consumer goods company. Over the past decade, we've helped them with various transactions as they reinvent their market footprint and set their direction for the next five years. 

They were looking for a single firm to partner with throughout this journey rather than hiring multiple firms for different stages of the process. They wanted an "all hands on deck" partner to guide them through this transformation.

Additionally, being a publicly affiliated firm, we often put "skin in the game." We structure our fees to be at risk under certain scenarios, fully committing to our clients' success. It's like the difference between the chicken and the pig in a ham and egg sandwich: the chicken is involved, but the pig is committed. 

At Accenture, we are fully committed to our clients' success, sometimes even on a revenue-at-risk basis.

Most of our clients are G2000 companies, and our private equity clients vary widely. However, we're committed to working with companies that aim to change industries and be trendsetters.

For example, Accenture has its own venture capital division called Accenture Ventures. We invest in startups to stay close to emerging trends and innovations that will shape the next three to five years. 

Through these investments, we build relationships with smaller organizations, partnering with and advising them on various aspects from strategy to execution.

Future trends in M&A and portfolio rebalancing

Since we're in New York, I have to quote Yogi Berra: "Predicting is very hard, especially about the future." The future is challenging to predict, but we're noticing that the pace of change in customer end markets will never be slower than it is right now. 

There are several ongoing meta trends with no signs of slowing down, such as energy transition and ESG considerations. We're also seeing the rise of a giant middle class in Asia, which has global implications.

Companies are now thinking strategically about what these changes mean for their growth agendas, both organic and inorganic. We expect this to manifest in significant industry shifts and mega deals, especially in a declining interest rate environment. 

Companies will continue to reinvent themselves over the next five to ten years. This will involve not only portfolio rebalancing but also strategic partnerships and alliances.

For example, large technology companies are partnering with electric vehicle manufacturers, energy companies are teaming up with electrical grids, and consumer packaged goods companies are partnering with mining organizations. These trends are not going to stop; they will only accelerate.

How these changes will ultimately unfold is the big question, and it varies by industry and client. However, in a time when ambiguity is at its highest and the ratio of knowns to unknowns is at its lowest, partnering with firms like Accenture, which has a strong pulse on future trends, is invaluable. The pace of change is continually increasing, making it an exciting yet challenging time.

Advice for companies on portfolio management

The time horizon from the origination of an idea to transaction execution has been artificially inflated. As we work with clients, we perform due diligence on multiple deals across various industries, and we've noticed this trend. You can see it in the news, too—the time from deal origination to pulling the trigger has increased.

However, I believe that over the next 12 to 18 months, as the balance of knowns to unknowns becomes clearer, we'll see a significant decrease in that time frame. 

Strategic clients often take a long time to make decisions due to governance processes, but to compete for an acquisition target, they need to move at the pace of competitors, like private equity, which can act much faster.

I expect confidence levels to rise, reducing the perceived risks in transaction execution and value creation over the next 12 to 18 months. I'm hopeful that the time from idea to decision will also shorten, and we'll see a trend towards quicker, more decisive actions in M&A.

I'm an optimist when it comes to transactional work. Given all the macroeconomic trends we've discussed, I think we'll continue to see industry convergence and significant shifts that will drive companies to reinvent and transform themselves to stay competitive in evolving markets. 

From a consulting and advisory perspective, there's never been a better time to be in this field. And yes, I'm a bit biased!