Mckinsey On M&a

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Number 75,
November 2020
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Number 75,
November 2020
Table of contents
4 Why you’ve got to put your portfolio

on the move 24 Divesting with agility
Research shows that active, efficient
We analyzed hundreds of companies reallocation of resources creates better
around the world across a decade-long returns for companies than simply standing
business cycle. The conclusion? pat does. Here’s how to make portfolio
Winners change their business mix decisions faster.
year after year. Laggards sit still.
12 Three degrees of separation: How to

successfully execute divestitures 29 Deciding to divest? Make your
preparation time count
The seller’s focus on three key interrelated LiveRamp president and CFO Warren
activities—defining, marketing, and Jenson explains how the up-front work
disentangling—can help expedite the companies do on communications,
transfer of divested assets and planning, and analysis can boost the odds
increase total deal value. of success in separations.
18 What’s keeping you from divesting?

Active portfolio management can
34 The one task the CFO should not
delegate: Integrations
create significant competitive advantages. The numbers show that when the finance
Still, executives routinely shy away chief is directly involved in identifying
from separations. Here are six common potential synergies, transformation and
roadblocks and some tips for value-creation opportunities, and
breaking through. cultural pitfalls, companies see greater
deal success.
40 Checking the health of your
business partnerships 49 Warren Buffett: An appreciation
As Warren Buffett turns 90, the story of
Frequent, systematic assessments one of America’s most influential and
of joint ventures and alliances can reveal wealthy business leaders is a study in the
hidden problems and opportunities logic and discipline of understanding
to create more value. future value.
45 Wall Street versus Main Street:

Why the disconnect? 53 Bias Busters: War games? Here’s what
they’re good for
Despite turmoil in the real economy, the Strategy decisions are interdependent
US stock market remains resilient because decisions. Don’t forget to anticipate
of three critical factors: the basis of competitors’ moves when making your own.
valuations, the market’s composition, and
investors’ expectations.
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Why you’ve got to put your
portfolio on the move
We analyzed hundreds of companies around the world across a decade-
long business cycle. The conclusion? Winners change their business mix
year after year. Laggards sit still.
by Sandra Andersen, Chris Bradley, Sri Swaminathan, and Andy West
© Ray Massey/Getty Images
4 McKinsey on Finance Number 75, November 2020

Every CEO will ask, at least once, “Which business shifting, and they deploy resources aggressively
should this company be in?” But the best know it to seize potential value-creation opportunities.
can’t be a one-time question; they know the answer
will keep changing over time. These executives 3. Use transactions to speed your way.
consistently put their companies’ portfolios of The outperformers in our research account
businesses on the move—and outperformance for an outsize share of M&A-transaction
tends to follow. The reverse holds true as well: value during the period studied, and they favor
CEOs who rarely ask the question end up with a programmatic approach to M&A.1
static portfolios. The market moves on, and
their company doesn’t. 4. Focus on acquisitions at the perimeter of your
portfolio. The outperformers use M&A to
For many companies, sitting still can be a bad option. seize new opportunities in existing but secondary
We know because we have measured. We analyzed businesses—that is, outside, but not too far
the detailed financial results of more than 1,000 outside, of their core sectors.
global public companies between 2007 and 2017,
through a long cycle of downturn, recovery, and 5. When the going gets tough, go harder. Our
growth. Our research makes the case for dynamic research reveals that context matters: how you
portfolio management and reveals five critical stack up against your competitors affects
principles (based on the outperformers’ best prac how hard you need to pull on all the levers we
tices) for actively reallocating assets: have outlined. We found that companies in
the lowest quintile of performance did better
1. Be consistent. The outperformers rotate their when they pulled even harder.
portfolios steadily, not wildly, and avoid keeping
them fixed in place. Interestingly, these lessons proved sound in both
good times and bad. They are also harder to apply
2. Move with the market. The outperformers than it seems: challenging economic conditions
identify how headwinds and tailwinds are and cognitive biases that get in the way of good
The outperformers in our research use

M&A to seize new opportunities in
existing but secondary businesses—that
is, outside, but not too far outside, of
their core sectors.
1
A company that takes a programmatic approach to M&A makes roughly two or more small or midsize deals in a year, with a meaningful target
market capitalization acquired over a ten-year period (the median of the total market capitalization acquired across all deals is 15 percent). See
Jeff Rudnicki, Kate Siegel, and Andy West, “How lots of small M&A deals add up to big value,” McKinsey Quarterly, July 12, 2019, McKinsey.com.
Why you’ve got to put your portfolio on the move 5

QWeb 2020
Portfolio transformation
Exhibit 1 of 3
Exhibit 1
An optimal refresh rate keeps a portfolio moving at a steady clip.
An optimal refresh rate keeps a portfolio moving at a steady clip.
Total returns to shareholders, average excess performance, in 2007–17 (n = 209), %
Refresh rate1
<10% 1.5
10–30% 5.2
>30% –0.5
1
Refresh rate calculated as sum of absolute differences in company’s share of revenues by industry divided by 2.
decision making can conspire to keep executives similar to what they had been at the start. This group
(and their portfolios) in a state of inertia. The reality barely moved the needle in average annual excess
is, however, that far more CEOs and investors will total returns to shareholders (TRS). Another group,
complain that companies shifted portfolios too little comprising about a quarter of the companies,
or too late than will gripe about the opposite. The refreshed their portfolios by more than 30 percent
data are with you if you decide to put your portfolio age points over the decade; they actually produced
on the move. slightly negative annual excess TRS (Exhibit 1).
The remaining 23 percent of the companies we

The business case for portfolio change studied registered a refresh rate between 10 and
There’s a lot of literature available on corporate 30 percent. This last group delivered results
portfolio management, but it almost never addresses that were just right—outperforming the others in
the business case for why portfolio changes improve excess TRS by, on average, 5.2 percent per annum.
performance or how to go through the difficult For a hypothetical company with $10 billion in
task of actually shifting the business mix. With such revenues, a just-right rate of portfolio rotation would
business realities in mind, we analyzed reams mean moving between $1 billion and $3 billion
of reported data. We sought out the links between over ten years.
changes in companies’ portfolios and actual
performance results. More important, we sought Of course, even within the range we identified, the
conclusions that held true across market cycles. right refresh rate will be different for companies,
Five core lessons emerged from this study. depending on industry and other factors. One high
performer we studied, today a global logistics
1. Be consistent company, had operated substantial depository-
Our research revealed a Goldilocks rate of portfolio credit and retail-banking businesses through
rotation that is neither too low nor too high but just the first decade of the 2000s. Those business units
right to produce outperformance. When we drilled accounted for more than 15 percent of total
down on a controlled subset of our studied com company revenue in 2007. But between 2007 and
panies, we found that about half kept their portfolios 2017, the company exited banking and expanded
mostly static, refreshing them by fewer than ten its presence in supply-chain logistics and parcel and
percentage points over our studied ten-year period. e-commerce delivery instead—areas that each
Their portfolio mixes at the end of the period were grew to represent about 50 percent of its sales by

2017. This added up to a refresh rate of 16 percent, and remained there. The companies that had started
which put the company in the sweet spot that marks in the slow lane and moved into the fast lane—for
TRS high performers. example, a life-sciences conglomerate that shifted
capital to testing and treatment—reached the end
2. Move with the market of the ten years in reasonable shape, with excess TRS
We created a baseline of industry momentum to growth of 1.7 percent per year. But the companies
consider how a company’s portfolio would have that began in a slow-growing industry and stayed
evolved had each of its business units performed in there delivered a negative average excess TRS over
line with its pure-play peers. This allowed us to the measured period.
measure whether changes within a portfolio either
sped up or slowed down performance. The sum The best companies plumb market insights to fore
of a company’s moves for each of its business units cast which industries and markets are likely to
represents total portfolio momentum (Exhibit 2). thrive, and they actively configure their portfolios to
take advantage of those projected tailwinds.
When we examined the impact of portfolio Consider the journey of one company, now a leading
momentum on a portion of our broader data set, global provider of financial research and analytics.
we found that the one-third of companies that In 2007, 40 percent of its revenues came, collectively,
had begun the ten-year study period with positive from its publishing and education businesses; its
industry momentum did well, with annual excess financial-research arm contributed about one-third
TRS of 4.4 percent; they had started in the fast lane of the company’s top line, and its data and analytics
MoF75 2020
Exhibit 2 of 3
Exhibit 2
Move with the market, and change lanes if you have to.
Move with the market, and change lanes if you have to.
Illustrated example of portfolio momentum
Industry momentum, 2007–17 Company’s portfolio exposure Company’s portfolio momentum

Average change in economic Proportion of revenue, % Expected change in economic
profit, $ million profit, $ million
2007 2017
Business-
unit A
1,000 +25 250
27 52
Business-
unit B
100 +15 15
33 48
Business-
unit C
–80 –40 32
40 0
Total
297

Pursuing a steady stream of deals
can give a company access to
the latest market intelligence and
improve its transaction and
integration capabilities.
businesses accounted for the rest. Seeing the meaningful proportion of a company’s market
challenges ahead for the publishing industry as a capitalization at the end of a ten-year period. And in
whole, the company sold its publishing and the organic approach, a company makes one deal
education businesses to private-equity investors or fewer every three years, and the cumulative value
and doubled down on financial research and of the deals is less than 2 percent of the acquirer’s
analytics. By 2017, slightly more than half of the com market capitalization.
pany’s revenues were derived from financial
research, and its financial-data-solutions business When we looked at the companies that were
reached about 50 percent of the top line. These operating at the Goldilocks refresh rate of between
moves were ahead of the tide: between 2007 and 10 and 30 percent over ten years, programmatic
2017, the average economic profit of companies M&A appeared to be the optimal path. Indeed, the
involved in information provision increased companies in our sample that used programmatic
by $1.4 billion, while that of companies involved in M&A delivered average excess TRS of 6.2 percent
publishing declined by $73 million. Veering out per year. We found similar outperformance when
of the slow lane of publishing and into the fast lane it came to changing industry lanes: of the companies
of financial data helped contribute $400 million that used transactions to move into high-growth
of the $850 million in economic-profit lift that the industries, those that relied on a programmatic
company realized over that period. approach averaged 3.7 percent in annual excess TRS,
compared with –0.5 percent for companies that
3. Use transactions to speed your way attempted this using selective M&A and 1.2 percent
M&A and divestitures are essential for positioning for companies using the large-deal approach.
companies for value creation. But it’s critical to
understand that different approaches to M&A will A global industrial company, for example, divested
produce different outcomes over a ten-year numerous businesses in which it lacked a competitive
period. A company that takes the programmatic advantage and made more than 50 transactions
approach to M&A makes roughly two or more between 2008 and 2017, posting a refresh rate of
small or midsize deals in a year, acquiring a mean 29 percent. Its discipline paid off. The company’s
ingful total market capitalization over a ten-year excess TRS versus that of its peers over the same
period (the median is 15 percent of total market period was 9 percent.
capitalization acquired across all deals). In the
large-deal approach, regardless of how many deals Programmatic M&A may not be right for every
a company does, if an individual deal is larger company in every industry, but pursuing a steady
than 30 percent of the acquiring company’s market stream of deals can give a company access to
capitalization, most of its portfolio story is told the latest market intelligence and improve its trans
by this one large bet. Selective M&A involves doing action and integration capabilities. Deals won’t
deals, but their value often doesn’t add up to a succeed all of the time, but doing them as part of

a regular business cadence can enforce portfolio- the best results, returning an average of 1.6 percent
management discipline, help teams get smarter in annual excess TRS (Exhibit 3). That said, a
about industry levers and trends, and engender company’s existing industry context turned out to
confidence from investors. be critical. Those that started in well-performing
industries did the best in pursuing M&A within their
4. Focus acquisitions at the perimeter core industries—not surprising, since they had
of your portfolio little reason to shift out of their fast lanes. Conversely,
We categorized the acquisitions of the companies those that needed to change lanes got the
in our 2007–17 data set in one of four ways: adding biggest boost when they aimed further from their
to its primary industry segment; adding to an core businesses.
existing, secondary industry segment; buying into
a segment adjacent to an existing business; or Value creation can be a multistep process, of course.
stepping out into an unrelated industry. We found Consider one multinational chemical company. At
that companies that made acquisitions to shore the start of our study period, it was primarily a basic-
up existing but secondary businesses registered chemicals company, operating in a sector in which
QWeb 2020
Exhibit 3 of 3
Top performers tend to aim their M&A outside the

Exhibit 3
core—but not too far outside.
Top performers tend to aim their M&A outside the core—but not too far outside.
M&A radius
Growing core Growing beyond core
Company’s primary Industry adjacent

business unit (BU) to existing BU
Existing M&A not in adjacent

secondary BU industry or existing BU
M&A activity
Total returns to shareholders,
average excess performance,
in 2007–17 (n = 209), %
No M&A 0.1
Company’s primary BU 0.7
Existing, noncore BU 1.6
Industry adjacent to
0.8
existing, noncore BU
No existing or
0.3
adjacent BUs

larger US- and Middle East–based competitors had A story of from–to
far greater scale. The company recognized that The metrics on portfolio change speak volumes.
specialty chemicals—particularly nutritional ones, Yet too many organizations still incline toward inertia.
in which it already had a small footprint—could As our research shows, around half of sampled
provide faster growth. Over a decade, it made companies continue to change their business port
multiple acquisitions to extend its presence in the folios barely, if at all.2 There are several proven
nutrition business. In parallel, it exited businesses practices for getting portfolios moving:
such as rubber, fertilizers, and energy, raising some
$1.6 billion from its divestments. Those moves — Shift the default. Whether we admit it or not,
enabled the company to deliver more than 6 percent we fall in love with what we have. To break the
annual excess TRS. spell, approach portfolio management as
private-equity firms do, with the knowledge that
5. When the going gets tough, go harder most businesses must be sold or put on the
According to our analysis, the worse your starting block eventually. Having the conversation about
point is, the more urgent it becomes to shift to “Why are we entitled to own this asset?”
a faster track. Our research showed that bottom- instead of “Should we sell it?” can help shift
quintile companies (by economic-profit perspective in a way that generates a healthy
performance) benefited the most from aggressive and balanced debate.
reallocation and higher-intensity M&A. The numbers
revealed that step-out M&A, which is usually — Drive conviction. When there’s a difference of
considered higher risk than acquisitions closer to opinion about which strategic actions are
the core, is often a better option than modest required, leaders typically agree to wait a bit
portfolio shifts are for companies that are at the longer—surely a turnaround is right around
back of the pack. the bend. Better to be clear about your strategy
and pursue it with conviction: if a growth
Going harder paid off in spades for a large global opportunity is emerging at the perimeter, your
packaging company. In 2009, after several years of company should be programmed to go out
sluggish performance, the company, then much and capture it. Recognize when one of your exist
smaller, surprised industry observers by pulling off ing businesses is sputtering; admit that your
an ambitious acquisition of a multinational company can’t be a leader in every sector it’s in.
conglomerate’s packaging unit. The conglomerate Follow the lead of one energy company, which
wanted to divest the noncore business unit after established the rule that its corporate-planning
it had determined it was no longer the best owner. team must identify 3 to 5 percent of the com
Through the deal, the packaging company boosted pany’s assets for potential divestiture every year.
its growth and margin trajectory and realized
a decade of outstanding shareholder returns. It was — Build a blueprint. When companies make deals,
also a “bet the company” moment. Indeed, without they tend to be reactive. A better approach
the conviction to go hard on portfolio changes, is to start with a quantified vision of how many
the smaller company may well have become a take deals you want to make and then hew to a
over target itself. program to make that happen. Companies that
2
See Chris Bradley, Martin Hirt, and Sven Smit, “Have you tested your strategy lately?,” McKinsey Quarterly, January 1, 2011, McKinsey.com; Dan
Lovallo and Olivier Sibony, “The case for behavioral strategy,” McKinsey Quarterly, March 1, 2010, McKinsey.com; and Chris Bradley, Martin Hirt,
and Sven Smit, “Strategy to beat the odds,” McKinsey Quarterly, February 13, 2018, McKinsey.com.

succeed in making portfolio change a part of deal value and reimagine the opportunities that
of their DNA spell out a vision for their optimal the acquired company could unleash once the
portfolios, and they create detailed M&A deal is closed. They also have an integration plan,
blueprints to establish baselines of their market head count, and budget in place before the
positions, ambitions, and gaps, as well as acquisition is closed, and they strive to fill in gaps
boundary conditions (such as types or sizes of in personnel or tools so that integration can
deals) that will focus the scope of their deal begin immediately at closing.
searches. Progress toward the target portfolio is
reviewed by the planning committee regularly,
ideally quarterly, to ensure that transactions are
purposeful and not opportunistic. Distinctive companies manage their business port
folios relentlessly, continually pursuing new
— Develop a machine. Sophisticated deal makers opportunities to create value and systematically
manage their M&A programs as core parts of divesting business units that underperform.
business operations. They consider corporate While not every moment is one for disruption, nor
planning in a comprehensive way, and they every sector or company ripe for M&A, the dearth of
view M&A as an enduring capability, not as an portfolio activity highlighted by our research
occasional event. For example, they conduct suggests that too many companies and leaders are
due diligence and integration planning at the keeping their heads too far down. Business
same time—holding discussions early in the leaders must regularly reappraise portfolios—and
deal process about how to get “under the hood” then commit to move.
Sandra Andersen (Sandra_Andersen@McKinsey.com) is an associate partner in McKinsey’s New York office, Chris Bradley
(Chris_Bradley@McKinsey.com) is a senior partner in the Sydney office, Sri Swaminathan (Sri_Swaminathan@McKinsey.com)
is a partner in the Melbourne office, and Andy West (Andy_West@McKinsey.com) is a senior partner in the Boston office.
Copyright © 2020 McKinsey & Company. All rights reserved.

Three degrees of separation:
How to successfully execute
divestitures
The seller’s focus on three key interrelated activities—defining, marketing,
and disentangling—can help expedite the transfer of divested assets and
increase total deal value.
by Jamie Koenig, Anthony Luu, and Steve Miller
© Jorg Greuel/Getty Images

The decision to divest a business unit or other deeds: Critical separation activities”). For instance, a
asset can be painstaking and protracted. Leaders company that wants to sell a business unit must
ruminate about sunk costs, the size and scope identify key characteristics of the asset in question
of their portfolios, and the status of their strategic so it can consider how to disentangle it from
objectives. But once all sides have been heard others in the company’s portfolio while simulta
and the choice is finally made, leaders face an even neously deciding on the valuation story to tell
more daunting challenge: executing the divestiture. potential buyers.
To part with an asset successfully, management Segmenting the separation process in this way can
teams must choreograph a range of critical tasks and help business leaders better understand where
consider the perspectives of dozens of internal and to begin and where to focus their efforts—thereby
external resources and advisers—potential buyers, increasing the odds of divestiture success.
current employees, boards of directors, and so on.
And they need to do these things quickly: McKinsey
research reveals that, on average, separations Where to begin
completed within 12 months of announcement deliver Once business leaders get permission from the
higher excess total returns to shareholders (TRS) board to pursue a divestiture, they tend to go right
than do those that take longer.1 to the marketing activity. They engage a deal team,
retain an investment bank to support the sale
In most cases, however, business leaders allocate process and evaluate the potential universe of
more time to the question of whether to divest rather buyers, and develop a ten- to 20-page document
than how to divest. So when they get the green outlining investment highlights. Of course, this
light from the board, many find themselves stuck in approach will work if the asset in question is a stand-
neutral—unsure about where to put their energy, alone entity with a strong track record—for instance,
which decisions to make first, and which tasks to pri if it’s a distinct business unit within a larger
oritize. Meanwhile, delays can diminish an asset’s conglomerate that overlaps minimally with other
value or scuttle deals altogether. Our research and businesses in the portfolio.
experience in the field suggest that, to get unstuck,
business leaders need to break the divestiture For most divestitures, though, there’s a better way:
process into three interdependent but distinct activ start by fully defining the asset in question—
ities: defining, marketing, and disentangling the particularly the financials involved—and considering
asset in question (see sidebar, “Parting words and potential disentanglement issues before launching
Separations completed within 12 months

of announcement deliver higher excess
TRS than do those that take longer.
1
See Obi Ezekoye and Jannick Thomsen, “Going, going, gone: A quicker way to divest assets,” August 6, 2018, McKinsey.com.
Three degrees of separation: How to successfully execute divestitures 13

Parting words and deeds: Critical separation activities
Business leaders must manage the sepa- — Marketing the asset. The team needs — Disentangling the asset. The team
ration of assets through three interrelated to build a narrative that takes the buyer’s needs to assess the risk from the
but distinct activities: point of view of the potential value it separation for the various stakeholders,
may gain from the asset being divested. processes, and functions. It must
— Defining the asset. The company must McKinsey research shows that risk consider the scope and timing of the
convene a cross-functional working premiums decrease and valuations transition while incorporating different
group to define what is actually being increase when sellers take this approach. financial and buyer scenarios.
divested—for instance, confirming The team should define the universe of
deal boundaries, carve-out financials, potential buyers and prepare marketing
and legal structures. materials that tell a consistent story.
any marketing efforts. In doing so, sellers are By contrast, the executives at one software
less likely to leave money on the table or to introduce company developed an ambitious yet attainable
skepticism among buyers about the information value-creation plan for a business unit that the
being provided about the asset, which could company intended to carve out. The plan included
kill a deal. shedding lower-margin, slower-growth products
associated with the carve-out, particularly those
The leaders of a complicated aerospace divestiture linked to other business units at the software
went straight to the marketing task before fully company, and shifting sales and marketing resources
evaluating the upside potential and sources of value toward newer products and services. Executives
for an asset on the block. In the marketing materials, subsequently were able to focus their marketing
the seller provided an estimate for the cost of efforts on the potential financial upside of the deal—
transitioning the asset to potential buyers. Days an expected EBITDA2 expansion of more than
after the offering memorandum was released, 25 percent—and on aggressive growth targets. This
a round of deeper financial analyses revealed that led to a substantially higher valuation of the asset
the corporate allocations used to generate that at sale.
estimate were deeply understated. By then, it was
too late. Sophisticated bidders quickly discov-
ered the error, and the seller was left at a What to focus on
disadvantage during negotiations on the transition Even the most experienced business leaders and
service agreement. The seller learned from divestiture teams can have trouble determining
this mistake, however. This was the first in a string when and how to deploy limited resources in high-
of planned divestitures, so the corporate- pressure deal situations. Here, again, a focus
development team made sure to validate and on the three core activities—with recognition of how
adjust historical allocations before bringing they inform one another—can help cut through
other assets to market. much of the noise and external pressures. It will be
2
Earnings before interest, taxes, depreciation, and amortization.

most critical to establish the deal perimeter property will be managed (transferred entirely or
(defining the asset), build upside into the valuation licensed); and which systems will remain with the
(as part of marketing the asset), and draw a divested asset (Exhibit 1).
“separation road map” (disentangling the asset).
Of course, the divestiture team should ensure that
Establish the deal perimeter it’s using complete and up-to-date information
A common mistake among sellers is launching into during this asset review. The deal team at one global
due-diligence processes and negotiations with pharmaceutical company realized too late that SKU
buyers without fully understanding what they are records in the company’s enterprise-resource-
selling. Sellers should instead take the time to planning system were dated. The team had failed to
assess both the buyer landscape and the value- validate the data with local market leads before
creating aspects of the asset in question. In sharing the information and agreeing to a
this way, they can gain a better sense of the market transaction with a buyer. This led to some difficult
ing messages that will attract potential buyers, as conversations with the buyer during the sign-to-
well as the effort that may be required to transition close phase, as some of the SKUs included in the
an asset. deal were no longer being manufactured or
marketed. The two sides entered into protracted
The divestiture team must set a perimeter around negotiations that could have been easily avoided.
the deal—drawing clear lines around the operations
(such as manufacturing sites and equipment), Build upside into the valuation
products (such as SKU lists), intellectual properties Corporate-development teams must ensure that all
(such as patent rights), and commercial capabilities the technical requirements associated with the
(such as sales forces) associated with the asset sale of the asset can be met. Just as important, they
in question. The team should explore critical ques must ensure that the company is getting the best
tions, such as which products, geographies, and price for the asset. To do so, deal teams must take
MoF75 2020 groups of personnel are in scope for the deal; which a fresh look at the performance of the business
Three degrees of separation: How
contracts will beto
reassigned; how shared intellectual unit or asset to be divested. They must prepare a
successfully execute divestitures thorough assessment of the upside opportunities
Exhibit 1 of 2 embedded in the valuation model and, ideally,
push buyers toward a deal price that is based on a
multiple of management’s adjusted EBITDA.
Exhibit 1 In the case of the software company mentioned

previously, for instance, the team identified
Divestiture teams must clarify the key
and shared with all potential buyers the full range of
requirements for any potential deal. value-creation opportunities from the deal, with
typical levers such as growth and cost improvements.
Critical Necessary Nice to have
It went a step further, however, in highlighting
• Products (eg, SKU list) • Facilities • Non-key for specific buyers how the deal could expand their
assets
• Core operating assets • Key contracts profitability through, say, different market
(eg, manufacturing • G&A2
site, equipment)
• Key systems
personnel positioning, improved technological capabilities,
and the compatibility of the asset in question
• Commercial • Non-key
capabilities (eg, sales systems with other businesses in their portfolios. The team
force) also prepared detailed plans for how each buyer
• IP 1 (eg, patent right) could seize those opportunities. With such a
compelling valuation story, the team was able to
1
2
Intellectual property.
General and administrative.
help buyers understand how they could tap
into new profit pools as a result of the deal—for

instance, gaining access to new innovations that disentanglement issues. The road map should
could lead to new revenue streams or bringing capture all activities, as well as the sequencing of
on an experienced management team with a proven functional and cross-functional work streams
track record of execution. associated with the divestiture. It should clearly
link the intended goals and milestones for the
Draw a separation road map separation with the related deal-process steps. For
One of the biggest roadblocks to successful sepa instance, the separation tasks of building a census
rations is executives’ failure to anticipate all the of transferring employees and developing day-one
MoF75 2020 and interdependencies associated
dependencies planning assumptions should correspond with
Three degrees of separation: How to
with the assets in question. A comprehensive successfully execute divestitures
the deal-process step of preparing a confidential-
Exhibit 2 of
separation 2 map can help them address such
road information memo (Exhibit 2).
Exhibit 2
To disentangle divested assets properly, companies need to draw road maps.
Typical sale road map and stage gates
Gate 1 Gate 2 Gate 3 Gate 4 Gate 5 Gate 6
Board Valuation Positive Round 1: Round 2: Signed Day 1/

approval check with interest Nonbinding Binding bid deal postclose
banker input supporting bids in meeting
valuation valuation target
assumptions range valuation
Prepare Prepare
Develop Finalize
Sale Prepare confidential- management Finalize TSA,1
valuation purchase
process teaser information presentations MSA,2 etc
model agreement
memo for data room
Define
Assess
program Develop TSAs Develop Separate Transition
Operational entanglements
road map and day-1 planning separation and set up and exit
separation and validate
and working assumptions plans TSAs TSA
perimeter
group
Develop Solicit Execute

Demerger Prepare Prepare SpinCo
valuation investor demerger
process equity story stand-alone financials
model interest process
Board Development Planning for independent High market Floating of Postspin

approval of independent SpinCo—strategy, interest in SpinCo’s own
equity story for financials, etc demerger stock—IPO,
SpinCo spin, split
Gate 1 Gate 2 Gate 3 Gate 4 Gate 5 Gate 6
Typical demerger road map and stage gates

1
Transition service agreement.
2
Master service agreement.

Divestiture teams will, of course, need to be aware of of a potential sale. The divestiture team addressed
the time frames required to execute all the steps in these concerns by building into its separation
their road maps. Some business entanglements, such road map a series of stage gates, one at each phase
as shared manufacturing, IT systems, and facilities, of the sale process. In this way, senior manage-
are more complicated than others and can take more ment and the board could conduct frequent cost–
time to resolve. To pace their investments better benefit analyses and formally consider whether
and minimize business disruption, deal teams may to proceed with or halt any disentanglement
want to build stage gates—triggers that allow activities. In fact, the separation was put on hold
for companies to discontinue separation activities after the initial bids for the business failed
if designated thresholds aren’t met—into their to meet predefined valuation thresholds at a certain
road maps. stage gate.
An agricultural company was uncertain about

whether it could attract enough interest in an asset
it was putting up for sale. Senior management Divestitures can be challenging for the teams tasked
believed there would be a dearth of buyers able to with executing them. But by defining the assets in
support an acceptable valuation, given high question, marketing them effectively, and anticipat
consolidation in the market. Investment banks and ing the complexity of disentangling them from
some board members felt otherwise, however. the existing businesses, executives can keep the
There were also lingering questions about whether focus on creating the most value for buyers and
the costs and investments required to separate sellers alike.
the asset’s operations would outweigh the benefits
Jamie Koenig (Jamie_Koenig@McKinsey.com) is an associate partner in McKinsey’s New York office, Anthony Luu
(Anthony_Luu@McKinsey.com) is an associate partner in the Dallas office, and Steve Miller (Steve_Miller@McKinsey.com)
is a partner in the Houston office.
The authors wish to thank Gerd Finck, John Henry Ronan, and Joe Waring for their contributions to this article.

What’s keeping you
from divesting?
Active portfolio management can create significant competitive
advantages. Still, executives routinely shy away from separations. Here are
six common roadblocks and some tips for breaking through.
by Gerd Finck, Jamie Koenig, Jan Krause, and Marc Silberstein
© twomeows/Getty Images

You’ve taken a close look at your portfolio and redeploy their capital toward areas of the business
identified the assets that are no longer strategic where industry dynamics and their competitive
priorities. Now what? Logic would dictate that you advantages maximize ROIC. A recent McKinsey
kick off a divestiture process—that is, you convene study shows that among companies in the sample,
a deal team to define key process steps in the the 23 percent that regularly refresh 10 to
separation and then market the assets in question 30 percent of their portfolios through acquisitions
to potential buyers. and divestitures outperform the others in total
returns to shareholders (TRS) by an average of
A recent survey of business leaders, however, 5.2 percent a year.1
confirms that this process gets abandoned more
often than not, for a variety of reasons—among A recent survey of 128 senior business leaders
them, senior management’s perception that disen helped us pinpoint the most common obstacles to
tangling the assets will be too complicated or that divestitures. Respondents say one or more of
there will be few interested buyers. Executives and the following six concerns had prevented them from
boards often fear that divestitures will reduce the pursuing a divestiture in the past ten years:
size of a company in ways that will make it difficult to misperception of asset value, underestimation of
replace earnings. buyer interest, concerns about damage to the
rest of the business, concerns about timing, fear
Such fears are often unfounded. In fact, research of sunk costs, and stakeholders’ emotional
continues to mount in favor of active portfolio attachment to the asset (Exhibit 1). With 52 percent
management, in which companies constantly of the respondents also indicating that they
Web 2020
What’s keeping you from divesting?
Exhibit 1 of 2
Exhibit 1
Executives cite six common obstacles to divestiture.
Executives cite six common obstacles to divestiture.
Roadblocks cited as 1st- or 2nd-most frequent divestiture inhibitor, % of respondents1
Misperception of asset value 56
Concern about timing 33
Concern about damage to rest of company 29
Stakeholders’ emotional attachment to asset 29
Fear of sunk costs 29
Underestimation of buyer interest 23
Multiple answers allowed; n = 128.

1
Source: McKinsey survey of executives, board members, and corporate-development and -strategy leaders in June 2020
1
This McKinsey analysis of 209 major international companies from a cross-section of industries measured average excess total returns to
shareholders from 2007 to 2017. The refresh rate was defined by how much of a company’s revenues came from business areas or service lines
different from those ten years earlier.
What’s keeping you from divesting? 19

Web 2020
What’s keeping you from divesting?
Exhibit 2 of 2
Exhibit 2
A majority
A majorityofof surveyed
surveyedexecutives
executives expect their companies
expect their companies to
toshift
shift their
portfolios in the next 18 months.
their portfolios in the next 18 months.
Expect company to make acquisitions or divestitures in next 18 months,
% of respondents1
Both acquisition and divestiture 37

~50% Acquisition only 37
plan to divest Divestiture only 15
portfolios
Neither acquisition nor divestiture 12
Figures may not sum to 100%, because of rounding; n = 128.

1
Source: McKinsey survey of executives, board members, and corporate-development and -strategy leaders in June 2020
expect to conduct divestitures in the next 18 months ship. The executive team of a diversified utility
(Exhibit 2), now is the time to confront these chal company did just that. It established an outside-in
lenges. In this article, we take a close look at each perspective on the value of a business unit it had
obstacle and suggest possible moves business considered parting with, looking at the unit from the
leaders can take to overcome them. perspectives of different potential buyer groups
(competitors, private-equity firms, infrastructure
funds, and so on). In parallel, the team com
Asset value prehensively reviewed the business unit’s internal
Business leaders often decline to part with an asset business plan and challenged the viability of its
because they believe that its value is far greater strategic initiatives.
than what anyone would be willing to pay for it. That
belief is frequently rooted in unrealistic growth Through this review, the executive team learned two
expectations for the asset—the traditional hockey- things. First, there was a potentially strong market for
stick projection2—which fail to come to fruition the business unit among private-equity buyers
year after year. So even when executives perform and infrastructure funds, which could bring greater
high-level valuation analyses and flank them with agility, focus, and flexibility to the asset. Second,
trading multiples, that fact base might not be suffi the existing plan of the business unit didn’t reflect
cient to address biases in management’s business the significant capital investments and other
plan or to consider realistically how valuable the asset resources that would be necessary for its strategic
might be to different types of buyers. initiatives to succeed. Once the executive team
factored in the significant near-term cash needs, the
A better approach is to build a detailed, outside-in picture looked very different. The team decided
valuation model that factors in different business and to divest now rather than await cash flows that would
market scenarios under current and other owner be unlikely to materialize—and it prepared its
2
See Chris Bradley, Martin Hirt, and Sven Smit, “Eight shifts that will take your strategy into high gear,” McKinsey Quarterly,
April 19, 2018, McKinsey.com.

marketing materials in a way that would point out the Damage to the rest of the company
value-creation opportunities for financial buyers, Business leaders commonly believe that divestitures
among others. create too much upheaval for the rest of their
companies—that it’s too complicated to disentangle
divested assets from the rest of a business and
Buyer interest will take too much time, diminish economies of scale,
In our experience, executives tend to limit the and result in stranded costs. In our experience,
universe of potential buyers for an asset to the usual however, the operations of a company can actually
suspects or those already active in the industry. become more efficient as its portfolio is stream-
This, of course, leaves out a wide swath of potential lined. As former Oppenheimer executive Laton
suitors. One European utility sold its majority Spahr put it, “Split the worm in half, and it grows two
position in the operator of a electricity-transmission new heads. Now we’ve got two great companies.”3
system to a consortium of more than a dozen
infrastructure funds and life, pension, and health- Rather than assume that the divestiture process may
insurance companies. The buyers had no previous negatively affect the rest of the company, its leaders
exposure in the electricity sector but were attracted should review the possible effects systematically.
by the system operator’s stable cash flows. First, they should formally document and assess the
links or entanglements between the asset being
Business leaders seeking to divest should consider divested and the rest of the business. Second, they
potential buyers within adjacent industries and should quantify the benefit of any links and
geographies, new market entrants and disrupters, entanglements and the value that could be lost by
and financial sponsors, among others. These breaking them. Executives can use hard data
groups may be looking for new integration, cross- on procurement, revenues, and margins to assess
selling, or expansion opportunities. Executives whether any losses in value could be offset or
may even want to consider alternative transaction mitigated. Finally, they should evaluate the true effort
structures—joint ventures and asset swaps, required to disentangle the asset in question.
for instance—to entice parties that may not be in A seemingly complicated divestiture process may
a position to acquire an asset outright. actually be simplified by, for instance, redefining
the scope of the separation or hammering
An agricultural-equipment company seeking to exit out long-term commercial or manufacturing
production sites in several locations believed that supply agreements.
antitrust authorities would block any sale of those
sites to competitors. It abandoned its hopes of It can also be helpful to draw a “separation road map”
divestiture and began to assess shutdown costs. A that captures all the activities associated with
further assessment of the situation, however, divesting an asset, the teams and functions affected,
showed the executive team that the production sites and the intended goals and milestones (see “Three
held significant value for companies (even some degrees of separation: How to successfully execute
financial sponsors) that didn’t have operations in the divestitures” on page 12). One manufacturing
region. Given the expanded range of potential company, for instance, wanted to sell off three assets.
buyers, the agricultural-equipment company By conducting a detailed assessment of the potential
decided to divest and took initial steps to determine effects on the company, its leadership discovered
how best to tailor its marketing messages to that some production lines associated with two of the
different types of buyers. assets would need to be shared 50-50 with any
3
Jen Wieczner, “Activist investors love spin-offs. Here’s why you should, too,” Fortune, June 29, 2015, fortune.com.

buyer. Under these conditions, the manufacturing arrangements—for instance, purchase-price
company would need to restructure its production earn-outs, staple-on financing, staggered payments,
footprint significantly, which could take years. and two-step acquisitions. Executives should
The company decided not to divest these two assets. remember that divestitures typically take 12 to
However, the process revealed that the third asset 18 months from concept to deal close; today’s
was operating on a stand-alone basis, with its own challenges will look different by the time a deal
logistics network, procurement contracts, and IT is completed.
systems. This made it a prime candidate for sale to a
financial sponsor as a new platform company.
Sunk costs
After investing millions of dollars into a business or
Timing asset, executives often don’t want to admit that they
The reality is that the right time to begin the process aren’t the right owner to turn it around once
of divesting an asset is the moment you recognize performance declines. Rather than pull back when
that it no longer supports your strategic objectives.4 signs of significant financial or operational
Business leaders who wait expectantly for market weakness appear, individuals and teams are inclined
conditions to change often risk a continued decline to escalate their commitment to losing courses of
in the asset’s performance, accompanied by action.5 By holding on, though, they are just delaying
an increased need to divest, but now at potentially the inevitable.
lower purchase prices.
To counteract this emotional bias, executives should
In our experience, even significant changes in market change the way they evaluate their portfolios.
conditions (for instance, the collapse of credit For instance, during regular portfolio reviews, it can
markets and COVID-19-related humanitarian and be helpful to have teams present conflicting
economic crises) rarely warrant abandoning opinions—the cases for and against divestiture—as
divestiture plans. At worst, the sale process is put on a counterweight to arguments about sunk costs.
hold for a few months until conditions stabilize. The head of one industrial company convened red
Under these conditions, sellers can make it easier to and blue teams to explore whether it was still
complete deals by looking at alternative structuring the best owner of two lagging business units. One
The right time to begin the process

of divesting an asset is the moment you
recognize that it no longer supports
your strategic objectives.
4
Richard Dobbs, Bill Huyett, and Tim Koller, “Are you still the best owner of your assets?,” November 1, 2009, McKinsey.com.
5
Tim Koller, Dan Lovallo, and Zane Williams, “Bias busters: Pruning projects proactively,” McKinsey Quarterly, February 6, 2019, McKinsey.com.

team explored the argument for divestiture, and the discussions should focus on the creation of long-
other explored options for retention. Both consulted term value rather than possible reactions of
with internal and external experts. Both made short-term investors during the quarters immedi
presentations to the executive-leadership team and ately after divestiture.
the board. Through this process, executives
discovered that it made good sense to divest one Since the decision to divest will have outsize
of the business units and to spin off the other effects on employees, business leaders should be
as a joint venture. The latter deal ended up creating transparent about what it means for employees
significant value for the company—value it would personally and what it means for the company’s
have foregone if it had continued to hold on to the future. Let them know, for instance, about
unit because of sunk costs. the additional growth opportunities each stand-
alone business will be able to pursue if it
doesn’t have to compete for resources with other,
Attachment to asset disconnected businesses.
A range of stakeholders—boards, employees,
shareholders, business partners, regulators, In addition, ensure that shareholders understand
and policy makers—are affected by and can have the value-creation opportunities from divestiture,
adverse reactions to divesting assets. In our the intended outcomes of the process, the potential
experience, business leaders seeking a divestiture resources required, and the planned timing.
will need to have a consistent message about it— Ultimately, divestitures are intended to create incre
for instance, “We are doing this because this mental value for shareholders, so make sure you
business unit is exposed to different cycles, markets, bring them along on the journey.
and customers and would therefore fare better
as a stand-alone company.” Once this rationale is
established, business leaders can tailor the
message for each stakeholder group. Most business leaders understand the need—now
more than ever—for active portfolio management.
For example, business leaders can remind the Yet delivering on the promise of divestitures remains
executive team and the board that, rather than a challenge for many. By taking a pragmatic and
damage the entire company, a divestiture will free structured approach to evaluating divestiture candi
up limited capital to reinvest in critical or new dates and opportunities, executives can greatly
strategic priorities. The forms of analysis described improve their odds of success and shift their
previously can be used to gather the important portfolios into a higher gear.
data required to make this case. Any board
Gerd Finck (Gerd_Finck@McKinsey.com) is a senior expert in McKinsey’s Düsseldorf office, Jamie Koenig
(Jamie_Koenig@McKinsey.com) is an associate partner in the New York office, Jan Krause (Jan_Krause@McKinsey.com)
is a partner in the Cologne office, and Marc Silberstein (Marc_Silberstein@McKinsey.com) is an associate partner
in the Berlin office.
The authors wish to thank Anthony Luu and Steve Miller for their contributions to this article.

Divesting with agility
Research shows that active, efficient reallocation of resources creates
better returns for companies than simply standing pat does. Here’s how to
make portfolio decisions faster.
by Obi Ezekoye and Anthony Luu
© Akinbostanci/Getty Images

Recent McKinsey research revealed that, over a act are both at a premium. Our research shows that,
ten-year period, companies that regularly refreshed on average, separations completed within 12 months
between 10 and 30 percent of their portfolios of their announcements delivered higher excess
through acquisitions and divestitures outperformed total returns to shareholders than did those that
the market by about 5 percent1 (see “Why you’ve got took longer.3
to put your portfolio on the move” on page 4).
Given this backdrop, companies will need to adopt
There’s value in a proactive approach to asset an agile model for managing their portfolios and
reallocation. Too often, however, companies hesitate making allocation decisions. Such a model should
to move critical resources to the more attractive emphasize a tried-and-true approach to frequent
business prospects, refusing to part with even under portfolio reviews that gives corporate-development
performing assets. Why? Corporate-development leaders the detailed insights they need to make
executives tell us there are number of reasons, divestiture decisions more quickly and confidently.
including fear of missing out on a business unit’s
resurgent performance, perceived inability to
replace lost earnings, and concerns about shrinking Agile portfolio reviews
the company too much.2 Companies facing resource-allocation decisions
must prioritize those business units or assets that
Companies’ traditional portfolio-review processes— can create the most value for the company and
which, in most businesses, tend to happen only those for which the company is the best owner—that
every few years—can further encourage companies is, best able to extract more value than any other
to drag their feet when it comes to making dives potential owner. To that end, regular portfolio reviews
titure decisions. Meanwhile, with markets moving can reveal how each business fits within the
faster than ever, speed and the commitment to company’s overall strategy. Companies can use the
Companies’ traditional portfolio-review

processes—which, in most businesses,
tend to happen only every few years—
can further encourage companies to
drag their feet when it comes to making
divestiture decisions.
1
See Obi Ezekoye and Jannick Thomsen, “Going, going, gone: A quicker way to divest assets,” August 6, 2018, McKinsey.com.
2
See Gerd Finck, Jamie Koenig, Jan Krause, and Marc Silberstein, “What’s keeping you from divesting,” September 18, 2020, McKinsey.com.
3
See “Going, going gone,” August 6, 2018.
Divesting with agility 25

Exhibit 1
A
A standardized
standardized framework
framework for
for portfolio
portfolio reviews
reviews can
can help
help companies determine
companies determine
which assets to divest and how quickly to do
which assets to divest and how quickly to do so.so.
Illustrative framework for asset assessment
Natural Size of bubble indicates

Keep
owner asset’s share of invested
capital for business
B
Feasibility of divestiture
A More
Somewhat
Less
Company’s Watch list

unique ability One of
to create value/ pack C
best owner
D
F
Unnatural owner
(value destroying) Divest or fix
Low Asset attractiveness High

as stand-alone entity1
1
Regardless of relationship with parent company.
market-activated corporate-strategy framework,4 To review portfolios more frequently, business

which maps the company’s unique ability to own or leaders must adopt a reliable, repeatable process
create value from an asset against the asset’s for doing so—one in which business leaders
attractiveness as a stand-alone entity (Exhibit 1). define the company’s portfolio aspirations at the
outset and then regularly monitor the company’s
But the typical three- to five-year time frame for performance toward those goals. They should
portfolio reviews is no longer sufficient or practical assess the speed and frequency with which sources
to keep up with markets that are continually of revenue can be shifted and how resilient
churning. Our research and experience in the field a portfolio is to market change. They should rely
reveals the importance of revisiting portfolios heavily on standardized metrics—for instance,
and reconsidering ownership status much more assigning performance rankings and scores to
frequently. The pace of reviews should match elements of the portfolio and continually adjusting
the pace of change in the industry—for instance, those metrics based on the latest information.
semiannually, or even more frequently, if new market Business leaders should routinely consider the port
entrants, disruptive technologies, or other com folio’s overall performance against peers, for
petitive factors emerge. instance, and against investors’ expectations.
4
Frederick W. Gluck, Stephen P. Kaufman, Ken McLeod, John Stuckey, and A. Steven Walleck, “Thinking strategically,” McKinsey Quarterly,
June 1, 2000, McKinsey.com.

The information generated by this analysis can reveal additional buy-in from the board or other key leaders.
to business leaders whether they are truly still the The good news is that taking an iterative, or agile,
best owner of an asset, as well as how feasible it is approach to portfolio reviews can increase transpar
to disentangle an asset from the rest of the com ency among these business leaders, mitigate
pany. A global manufacturer of industrial goods, for organizational inertia and internal biases, and make
instance, conducted a portfolio review as part of conversations more inclusive—all of which can
its annual strategic-planning process and identified help business leaders coalesce around value-
opportunities to divest a business unit for which creating divestiture decisions as opportunities arise,
the company no longer seemed to be a natural owner. not after they have come and gone (Exhibit 2).
The review also showed that sales operations would
be difficult to disentangle: in some countries, the A global consumer conglomerate examined its
business unit’s sales operations would need to sell portfolio during its strategic review of the business.
products that the manufacturer would be divesting The company wanted to shift its portfolio toward
along with products that the manufacturer would be more profitable segments and to identify the
keeping. Given this twist, senior management optimal mix of assets, opportunities for divestiture,
decided to keep the business unit but initiated a plan and potential investment themes. When senior
to stand up the business unit formally so that its management reviewed the company’s goals and
performance could be tracked and reported sepa performance in prior M&A activity, it found that
rately. In this way, the manufacturer created clear the company had generally delivered below-average
lines of accountability and preserved the option to returns compared with internal benchmarks. With
divest the business unit in the future. these data in hand, and through a series of regular
portfolio reviews that followed, senior managers
were able to clarify the company’s M&A strategy as
Agile decision making well as its overarching strategy and how the
Even after a thorough portfolio review, executives two could complement one another. This analysis
need time—to consider short-term performance empowered the company to define several M&A
against long-term prospects, for instance, or to get themes and pursue investments that were more in
Exhibit 2
An agile
An agile approach
approach to
to portfolio
portfolio decision making can
decision making can help
help companies address
companies address
increasingly dynamic markets.
increasingly dynamic markets.
Static decision making Agile decision making
Assessment Inconsistent approach; situation specific Consistent framework; applied to all assets
approach Addresses question, “Should we sell this?” Addresses question, “Are we the best owner
Subjectivity and organizational politics at play of this?”
Objective, transparent process and clear metrics
help mitigate biases
Emphasizes feasibility and opportunity to divest
rather than infeasible recommendations or
“excuses” to defer decisions
Frequency Reviews done in response to crisis Reviews conducted annually, at least; health
or infrequently checks conducted alongside industry or market
events; continual refresh of analyses with
relevant data (eg, M&A trends, new technologies,
emerging markets)
Prevailing Fear of making big moves to shed Open to taking action and using creativity to
mindset underperforming assets; decisions and navigate roadblocks before market sentiment
execution stalled moves; incentives aligned both to grow
revenues and to create value
Divesting with agility 27

line with its overarching strategic goals, thereby investor. Through the review, the CEO discovered
increasing the odds of delivering higher returns from several near- and long-term options to divest assets
its moves. and improve the portfolio. The CEO and senior-
management team used the information from the
Having the infrastructure in place to monitor portfolio review to set a bold strategy for the company,
performance and speed up decisions about as well as a road map for making it happen—which
divestiture is particularly critical in industries prone they shared with the activist investor on their own
to disruption from new technologies, activist terms. The executive team won over the investor
investors, or geopolitical shocks. At one technology and gained broad support for transforming
company, for instance, business-unit heads are the company.
asked to bring both suggested acquisition targets
and suggested products to divest at every
strategic review. They must make a case for keeping
certain products and, at times, are asked to trade Agile portfolio management continues to be one of
a current product in the portfolio for a target they the biggest levers to improve company performance.
think is worth acquiring. These sessions have It’s vital to have a clear, unbiased view of how
forced business leaders to break from the status assets are performing and which ones are still creat
quo, and they have pushed the management ing value for the company. Agile portfolio managers
team’s thinking on portfolio moves. can use the mechanisms described in this article
and others to avoid emotional attachments to legacy
Meanwhile, the incoming CEO at a software company assets. And once a decision is made to divest,
initiated a portfolio review within their first weeks managers must act—finding ways to navigate poten
on the job. Growth had been stagnant, and the new tial roadblocks creatively and maximizing value
CEO was anticipating action from an activist before the market shifts again.
Obi Ezekoye (Obi_Ezekoye@McKinsey.com) is a partner in McKinsey’s Minneapolis office, and Anthony Luu
(Anthony_Luu@McKinsey.com) is an associate partner in the Dallas office.
The authors wish to thank Ajay Dhankhar, Jannick Thomsen, and Andy West for their contributions to this article.

Deciding to divest?
Make your preparation
time count
LiveRamp president and CFO Warren Jenson explains how the up-front
work companies do on communications, planning, and analysis can boost
the odds of success in separations.
by Anthony Luu and Paul Roche
© Matdesign24/Getty Images
Deciding to divest? Make your preparation time count 29

All too often, business leaders lament the one that our high-growth SaaS platform, and while it had
got away—the deal they didn’t pursue or targeted significantly fewer employees and lower capital
too late. They back away from carve-outs and dives requirements, it was also still very much in investment
titures for any number of reasons, including mode—in other words, losing money.
concerns about timing, sunk costs, damage to the
rest of the business, and misperceptions about Each business had very different valuation charac
asset value (see “What’s keeping you from divesting?” teristics and attracted opposite investor types.
on page 18). Senior leaders at LiveRamp (formerly Through our portfolio analysis, we realized that a
a division of Acxiom) held some of those same fears. divestiture could unlock more value from both
But they acted anyway, driven by the desire to entities but only if we structured the deal in a way
transform a business and bolstered by a compre that resulted in two healthy businesses, each
hensive divestiture-preparation process. with the capability to flourish on its own, and each
with the right investor set—value-oriented
In 2014, Acxiom bought the technology start-up investors for AMS and software and growth-
LiveRamp for $310 million in cash. Four years oriented investors for LiveRamp.
later, leadership sold most of Acxiom to a corporate
buyer for $2.3 billion. The remaining company, McKinsey: What obstacles did you face at the
LiveRamp, now provides customer-relationship- outset of the process?
management software that companies use to
build better end-user experiences. Having the Warren Jenson: There were all kinds of challenges.
courage to say “yes” paid off: the transformed The biggest one was the fact that we were
LiveRamp was able to retire about $230 million in considering strategic options for a business that
debt, return more than $750 million of capital to represented 75 percent of our revenue and
shareholders, pursue other strategic acquisitions, employees, 100 percent of our cash flow, and approx
and fund further growth and innovation. imately 90 percent of our assets. LiveRamp was a
good young company but with a lot yet to prove.
In a conversation with McKinsey’s Anthony Luu and Ultimately, we were betting on our ability to reach a
Paul Roche, LiveRamp president and CFO Warren good outcome for AMS on our ability to run LiveRamp
Jenson shared some lessons for others struggling as a successful independent company, and
with divestiture decisions. Hint: it’s all about that investors would support our strategy and
courage and preparation. The following is an edited react positively.
version of their conversation.
Defining the carve-outs was also a big deal, both
McKinsey: How did you decide to divest? strategically and operationally. We had to get the
right assets and people in the right places to ensure
Warren Jenson: When our current leadership team ongoing support for our customers and the health
joined Acxiom about nine years ago, we did so with a of each business. We also had to get our manage
vision that the company could be the bridge ment team to buy into the divestiture and convince
between the on- and offline worlds of marketing and our board that it was the right strategic decision and
advertising. Three years into our tenure, we made that it made financial sense. We had to consider
a big strategic bet and bought LiveRamp. We paid a the structure of the deal and evaluate the relative
high price for this relatively small but fast-growing benefits of a sale, a tax-free spin, a nontaxable
SaaS [software-as-a-service] business, and over the merger, and other financial alternatives. Finally, we
next several years, two strong but very different needed to make a decision on timing and how
businesses emerged. Acxiom Marketing Solutions to communicate our transformation story to key
[AMS] was our slow-growth, high-touch service stakeholders, including employees, customers,
business that generated a lot of cash. LiveRamp was and investors.

McKinsey: How did you address those obstacles? To build investors’ confidence in our valuation
assumptions, we worked with financial advisers to
Warren Jenson: Let me start with how we defined come up with a carefully defined valuation range.
the carve-out. We actually started the process of We did a lot of complex modeling, running a scenario
separating our businesses into stand-alone struc analysis to account for a variety of strategic,
tures more than two years ahead of announcing operational, and financial variables. Things like asset
that we were exploring strategic options for AMS. As allocation and mix were often the subject of
part of the separation, we knew each entity would debate, so we went through a lot of iterations. We
need to have complete, independent, and auditable considered scenarios in which LiveRamp would
financial statements. We knew that having all emerge as only a moderate-growth company pro
these elements in place would give us true option ducing higher cash flow, for instance, as well as
ality. We also knew this would allow us to move scenarios in which various parts of AMS went with
quickly and be transparent with all constituents, LiveRamp. In the end, we chose to look at strategic
including our investors. alternatives for AMS and keep the high-growth
Silver Spring Networks

2008–11
COO
Electronic Arts
2002–08
CFO
Amazon.com
1999–2002
CFO
Warren Jenson Delta Air Lines

1998–99
Education CFO
Holds a bachelor’s degree in accounting
and a master of accountancy degree, NBC
both from Brigham Young University 1992–98
CFO
Career highlights
LiveRamp Fast facts
2018–present Warren Jenson has been named twice to
President and CFO Institutional Investor’s Best CFOs in America list.
He was honored as Bay Area Venture CFO of the
Acxiom Year in 2010. He serves on the boards of Cardtronics,
2012–18 Tapjoy (a privately held company), the Brigham
CFO, executive vice president, head Young University Marriott School of Business, and
of technical operations, and president the University of Southern California Marshall
of international School of Business.

“When you’re defining a carve-out,
remember that everyone has to win; both
companies need to come out of the
process strong and healthy.”
software business. By the end of 2017, we had a the right partner. At least 100 of our customers
pretty powerful valuation story to tell, and our board were customers of both LiveRamp and Acxiom, so it
was ready to move. was critical to identify good strategic partners.
Our end-to-end communications about the dives Initially, we considered a wide range of potential
titure were completely transparent. In February of partners, but we took care to qualify all the partici
2018, we publicly announced that we were pants and narrowed down the list significantly.
beginning a process to explore strategic alternatives In the end, IPG emerged as the best home for AMS—
for AMS. We explained to employees how we one that could unlock significant value for our
intended to map various roles across both entities shareholders. The timeline for the deal is evidence
and communicate with those affected by the of our preparation. We announced our strategic
divestiture of AMS. In such situations, no solution exploration in early February 2018, then announced
is perfect, but we tried to eliminate as much the transaction with IPG in July 2018, and we
uncertainty as possible. With investors, we shared closed the deal in October 2018.
pro forma financials for a stand-alone LiveRamp,
including our approach to reduce overhead and our McKinsey: Fear of shrinking has kept lots of
expected transition costs. Even after the trans companies from pursuing separations and divesti
action, we continued to share information about tures. How did you overcome that bias?
these costs; we specifically called them out in our
financial reporting until they were fully absorbed. Warren Jenson: You need courage at the top and
relatively fearless leadership in your pursuit of value
McKinsey: What challenges did you face during the creation. Scott Howe, our CEO, provided that.
execution phase of the divestiture? There are a thousand times in a process like this
where you can easily stop; some people don’t
Warren Jenson: When the time came to launch the ever start. The process worked for us because we
divestiture, we were ready. We had mapped every believed in the vision, and we had confidence in
asset and employee to one of the two entities. We our numbers and analysis. In addition, we maintained
had prepared and documented more than 125 optionality. We knew we could continue to run the
separate transitional service agreements between business as is; we hadn’t limited our ability to do so.
LiveRamp and the eventual buyer, as well as eight When we announced that we were looking at
major intercompany agreements. Having auditable strategic alternatives, we were open to anything that
financial statements in place for each entity saved took us to our desired end state. It could have been
us a ton of time. The biggest challenge was finding a partnership or a tax-free merger. It ended up being

a sale, but we never closed any doors. Through Warren Jenson: There were a few places in the
our preparation, we not only protected but also original intercompany agreements where we wish
increased our optionality and value. there had been more clarity—nothing material
but where we wish we had another turn of the crank.
McKinsey: What effect has the divestiture had on The lesson there is, the more buttoned up you are
the business? going in, the better. My advice to everyone exploring
divestitures, separations, and carve-outs is to
Warren Jenson: While our company became much start with vision and strategy. Moves like this have
smaller, it also became more valuable—just as to make strategic sense and show a clear path
we had envisioned. Since early 2018, our share price to value creation. When you’re defining a carve-out,
has more than doubled, we have a strong balance remember that everyone has to win; both companies
sheet, and we have returned more than $750 million need to come out of the process strong and healthy.
in value to shareholders. The capital influx resulting To that end, you need a clear process for making hard
from the sale allowed us to execute an indepen- calls—our CEO; our chief strategy officer, David
dent strategy for LiveRamp. And the best thing about Eisenberg; and I were the tiebreakers. We also
the deal is that AMS is also flourishing under its learned that up-front planning is everything and that
new owners. business leaders shouldn’t skimp on resourcing.
Transactions like this are a huge undertaking and
McKinsey: What might you have done differently? can crush your team. They take real teamwork,
What advice do you have for others pursuing the right set of advisers, and a willingness to change
such transactions? course constantly.
Comments and opinions expressed by interviewees are their own and do not represent or reflect the opinions, policies, or
positions of McKinsey & Company or have its endorsement.
Anthony Luu (Anthony_Luu@McKinsey.com) is an associate partner in McKinsey’s Dallas office, and Paul Roche
(Paul_Roche@McKinsey.com) is a senior partner in the Silicon Valley office.

The one task the
CFO should not
delegate: Integrations
The numbers show that when the finance chief is directly involved in
identifying potential synergies, transformation and value-creation oppor
tunities, and cultural pitfalls, companies see greater deal success.
by Ankur Agrawal, Brian Dinneen, Edward Kim, and Robert Uhlaner
© Andriy Onufriyenko/Getty Images

Today’s CFO is busy in ways that previous gener categories, the numbers had increased since the
ations of finance leaders couldn’t have anticipated, previous years’ findings. Even more revealing,
with more responsibility for corporate strategy, when the CFO was “very involved” in merger inte
board engagement, digital initiatives, and the like.1 grations, companies were much more likely to
As the list of tasks grows, it’s important for the capture cost and revenue synergies that were at
CFO to identify and prioritize those business activities or above plan (exhibit).
in which they can help create the most value for
the organization. Our research shows that M&A has To integrate companies and cultures successfully,
become one of those critical areas of focus. business leaders must have an informed perspective
on the synergies to be captured, the transformation
Of more than 200 global CFOs polled, 39 percent opportunities to be pursued, the value to be created,
say they played major roles in initial merger and the cultural pitfalls to steer clear of. The CFO
strategy; 42 percent report involvement in deal operates at the nexus of all these concerns and has
MoF75 2020
execution; and 37 percent say they were both the information and the expertise to provide
The one in
involved task the CFO
merger should not
integrations. In alldelegate:
three Integrations
that perspective and help lead the way.
Exhibit 1 of 1
Exhibit
Cost and revenue synergies are more likely to be achieved when the CFO is
involved in merger integrations.
Cost synergies achieved, % of respondents1
At or above plan Below plan
(≥90% of expectations) (<90% of expectations)
CFO very involved 76 24
CFO not involved at all 46 54
100%
Revenue synergies achieved, % of respondents1

At or above plan Below plan
(≥90% of expectations) (<90% of expectations)
CFO very involved 67 33
CFO not involved at all 32 68
100%
1
Survey was conducted online April 18–30, 2018, garnering responses from 414 C-level executives and senior managers, and via phone interviews
June 20–July 2, 2018, garnering responses from 34 CFOs. In total, 212 CFOs at company, functional, or business-unit level responded to the survey.
To adjust for differences in response rates, data are weighted by contribution of each respondent’s nation to global GDP.
1
“The new CFO mandate: Prioritize, transform, repeat,” December 3, 2018, McKinsey.com.
The one task the CFO should not delegate: Integrations 35

Whether and how the CFO chooses to do so can processes across the companies being merged. A
determine the success or failure of large integrations detailed baseline can often be more effective
and corporate transformations. In our research, in than standard benchmarks; it becomes a “treasure
the companies that outperformed peers, for instance, map” that the CFO can use to identify duplicate
the CFO went above and beyond simply providing costs quickly and rationalize the people, processes,
guidance on synergies: 49 percent of respondents and systems. As any finance chief will admit, it
in outperforming companies say the CFO had can be onerous to incorporate every single detail
designed the company’s “transformation road into the baseline, but it’s worth the effort to
map” (versus only 34 percent of peers saying give business leaders the fullest possible picture of
the same). They point to the CFO as a cultural role the combined company’s financials and potential
model: 47 percent say the finance chief took the synergy opportunities.
lead in developing the capabilities required to sup
port integration, and an additional 41 percent The CFO can also help ensure that the company is
say the CFO was instrumental in encouraging new targeting the full range of opportunities from
mindsets and ways of working in the wake of the deal, not just those synergies required to justify
integration. Additionally, respondents in outper it. The most successful CFOs put aside the
forming companies saw the CFO take on an deal model and “cleansheet” the design of the
important communication role—for instance, new organization—or reimagine the way work
setting high-level goals for integration and trans is done today.
formation and communicating them effectively
to both internal and external audiences. On day one, the CFO can embed synergy targets
and metrics into normal finance processes.
In this article, we take a closer look at the varied For example, variance analyses and forecasting
roles the CFO can play in ensuring that companies processes for the newly combined company
capture the most value from critical deals. should break out the direct effects of the deal. In our
experience, the most successful integrations
involve companies that are able to merge synergies
Synergy leader into the budget within the first quarter, even for
The synergy leader is perhaps the most obvious large, complex deals.
role for the CFO to play in integrations, given
the impact of such transactions on company Through these actions, the CFO and top FP&A
financials and valuations. The finance chief must leaders can see and help remove roadblocks that
establish an end-to-end process for capturing are preventing a company from capturing value
the most value from a deal. This process involves from an integration. For instance, the CFO at one
assessing potential synergies, building forecasts software company continually monitored the
and scenarios, and involving top leaders in progress of its integration with the target company,
financial planning and analysis (FP&A) to ensure comparing objectives with outcomes and
that financial and strategic objectives can be establishing a monthly review process to update
met once the deal is completed. It means proactively forecasts associated with the initiative.
weaving synergy targets and metrics into current
financial processes—for example, building one-time The software company aimed to combine its
costs into budgets and creating incentive plans products with those of the target company, thereby
that support deal objectives. reducing costs. The risk was that some customers
might switch if their favorite products were discon
Ideally, the CFO starts this process during pre- tinued. During one review, the CFO and finance
close planning by developing a baseline that maps team discovered that, in their attempts to rationalize
the costs for similar activities and business products from both companies, they had over

estimated the savings coming from slimmed-down In one recent integration, for example, the CFO
product lines. Given the reduced savings, the CFO reimagined what the combination of two large tech
realized that certain products shouldn’t be nology companies could look like. One had a
discarded. By forgoing some synergies, the company strong brand and had increased market share by
more than met its target customer-retention rate, aggressively spending on marketing. The other
which created even more value for the company had a lean operating model and was keen on cutting
than promised cost savings. The CFO’s willingness costs to invest in adjacent areas that promised
to consider value, not just costs, helped make this growth. Rather than taking sides and saying one
deal successful. approach was right and the other wrong, the
CFO took a market-back view of the companies’
strategies and, with help from the finance team
Transformation sponsor and business-unit leaders, conducted a zero-based-
As most finance leaders know, a focus solely budgeting exercise to align the companies’
on traditional postmerger synergies, such as greater cost structures.
efficiencies and lower costs, will go only so far
in creating the value most companies are targeting The CFO also created a monthly review process that
with M&A. With guidance from the CFO, business brought the combined leadership team together to
leaders can open the aperture and view integrations debate openly the financial and operational choices
as opportunities for broader organizational and and gain agreement on important issues. In this
process change. way, the CFO was able to guide the conversation by
what was possible for the newly formed company
As a transformation sponsor, the CFO can facilitate instead of just looking for postmerger synergies.
discussions about the financial and strategic The CFO was also realistic about the costs required
trade-offs that are inevitable in any merger—for to achieve the merged company’s potential. Teams
instance, how to set up shared services, how were allowed to reinvest any synergies captured after
to rationalize IT systems, or how to upgrade talent the merger in transformational initiatives. For
and capabilities. instance, senior leaders in both companies reduced
As a transformation sponsor, the CFO

can facilitate discussions about the
financial and strategic trade-offs that
are inevitable in any merger.

More than other C-suite leaders, a finance
chief has the information and expertise
required to present a complete financial
picture while tailoring a value story to
each set of key stakeholders.
their marketing activities for certain products The CFO can help senior management address key
and reallocated some of those marketing dollars concerns from individual groups of stakeholders.
toward the launch of new offerings from the In the case of one large healthcare-player merger,
combined company. for instance, the CFO spoke frequently and
consistently about merger priorities, time frames
for capturing various synergies, and how the
Communication leader company was tracking synergies. The message was
Given proximity to the deal rationale and value- tailored for various stakeholders. For investors,
creation goals, the CFO is in a strong position to help the finance leader referenced the same metrics each
senior management build and communicate a quarter, with detailed supporting discussions on
compelling story (from announcement through post the progress made and opportunities that remained.
close execution) about how the acquisition has For employees, the CFO continually referred
progressed and the potential outcomes from back to the deal’s priorities and their connection to
integration. More than the CEO and other C-suite changes made in performance management,
leaders, the finance chief has the information financial metrics, and incentive rewards. For board
and expertise required to present a complete finan members, the CFO emphasized transparency on
cial picture while tailoring the value story to milestones achieved, as well as on any challenges
each set of key stakeholders—customers, suppliers, and risks (anticipated and unanticipated). The
investors, employees, and board directors. CFO also convened a special session in which the
board and senior leadership conducted a full
This capability is particularly important during postmortem on the merger and identified things to
integrations, in which the company will have new do differently in future deals.
sets of investors with limited understanding of
the combined entity or groups of employees being
asked to work in the new entity without a clear Cultural role model
sense of what the long-term organizational structure Integrations inevitably pose cultural challenges for
will look like. The wrong message to investors can business leaders. This is particularly true for the
make it appear as though an integration is off track. finance function, as employees come together and
An overly simplistic message to employees may realize that, given the many duplicative roles and
sound deceptive. An ambiguous update to the board processes, there might not be room for everyone in
may create anxiety about the true progress of the new organization. As a highly visible member
the transaction. of the top team and the leader most closely

associated with strategies and decisions relating organization to a shared-services model to take
to resource management and reallocation, the full advantage of scale and expertise across both
CFO is in a good position to ease such concerns and companies. The CFO also publicly committed to
model the culture of accountability required in retaining top talent because the merged businesses
such situations. still needed support from different kinds of subject-
matter experts.
Consider the following example. The CEO of
AcquireCo selected the CFO from TargetCo to lead The CFO’s actions sent a message to the whole
the finance function of the newly merged entity. organization: that the transformation was central to
Members of the finance function within TargetCo the merged company’s strategy and purpose,
welcomed the news happily, of course, while that top talent from both companies would be valued,
their counterparts in AcquireCo were unsettled. and that she and other leaders would be accountable
Their anxiety increased further when, weeks for successes or failures resulting from the
later, the CFO who had been selected decided to changes. The finance leadership, inspired by the
leave the organization. CFO, mirrored this culture of accountability.
The new CFO leading the merger between AcquireCo

and TargetCo had her work cut out for her. Her
first task was to work with the new top team to outline CFOs already play a leading role in M&A execution.
a clear vision for the future of the finance function, The number of hats they wear is multiplying,
factoring in the structural and cultural changes that however, with an expanding focus on the end-to-
would be required. She translated that vision into end management and integration of such deals.
specific goals for members of the finance team. The The reward for taking on this added responsibility?
CFO shared the merging companies’ aspirations to Improved operating models and investor confidence,
automate specific tasks, thereby freeing up finance- new capabilities, and value capture that goes
team members to work on higher-order assign beyond traditional synergies and veers toward
ments. She also shared plans to move the finance meaningful transformation.
Ankur Agrawal (Ankur_Agrawal@McKinsey.com) is a partner in McKinsey’s New York office, where Edward Kim
(Edward_Kim@McKinsey.com) is an associate partner; Brian Dinneen (Brian_Dinneen@McKinsey.com) is a senior expert in
the Boston office; and Robert Uhlaner (Robert_Uhlaner@McKinsey.com) is a senior partner in the San Francisco office.

Checking the health of your
business partnerships
Frequent, systematic assessments of joint ventures and alliances can
reveal hidden problems and opportunities to create more value.
by Ankur Agrawal, Kenneth Bonheure, and Eileen Kelly Rinaudo
© Eugene Mymrin/Getty Images

Formal business partnerships—whether In this article, we describe what such a health check
structured as joint ventures (JVs) or a series of looks like and how business leaders can use it to
alliances—can help companies enter new track the trajectory of critical business relationships,
markets, manage risk, and optimize costs. But as adjust them as necessary, and create more value
many executives know, even well-designed from them.
partnerships can be challenging to establish and
maintain, given inevitable changes in partners’ prior
ities, market dynamics, or ongoing operations. Health checks and balances
It may seem obvious to partner companies that they
The partners in one healthcare-company alliance, should regularly monitor the progress of their
for instance, were dutifully fulfilling the operational JVs and alliances. But knowing and doing are two
commitments they had agreed to, yet their joint separate things, and often it takes time and
initiatives were constantly falling behind schedule. intentional effort for partner companies to get on
In another JV, senior leaders of the chemical the same page.
companies involved put lots of time and attention
toward improving the JV’s governance processes When a high-tech company and a consumer company
and operations, yet managers on both sides were negotiating the terms of their partnership,
had to stave off employees’ declining morale and for example, leaders in both companies realized they
increased attrition. In both cases, the success were using similar language but in different ways.
factors associated with strong partnerships were in The high-tech company’s definition of a “priority deci
place, but the outcomes didn’t materialize as sion” was focused on speed, or the ability to make
expected, which was confusing and frustrating for a key decision within a certain time frame. Conversely,
all involved (see sidebar, “The six building blocks the consumer company’s definition was focused on
of successful partnerships”). process, or the ability to get senior partners to agree
on a course of action. This mismatch in terminology
Like others in their shoes, the executives in these accounted for several misunderstandings within the
companies likely neglected a critical task: regularly partnership early on.
monitoring the health and performance of their
business relationships. Their actions mirror those of It’s important to establish a clear set of health-
an individual who wants to get in shape and check protocols from the outset of the relationship—
commits to following certain dietary restrictions during negotiations if possible. Specifically,
and exercise routines but never schedules the partner companies should outline the processes
a visit with a doctor to assess how effective the and tools (and, yes, even the language) they will
changes have been. use to assess the business relationship. The earlier
this occurs, the more likely it is the partners will
By contrast, leaders in high-performing JVs and adhere to consistent, periodic reevaluations.
alliances routinely perform a “partnership health
check.” They review the goals and guiding frame Ideally, the health check should be conducted at
works for the partnership, conduct interviews with predetermined times—typically annually. The review
leaders, and measure performance against process is often coordinated by the manager of
jointly defined health metrics. And they put all the alliance or JV, with support from important stake-
their business relationships through these holders within each partner organization. The results
paces, no matter how old, how new, or how geo are typically shared with the partnership’s steering
graphically dispersed. committee or JV board as well. Some partnerships
Checking the health of your business partnerships 41

The six building blocks of successful partnerships
In our experience, executives need to — Operations—establishing a new oper — Adaptability—proactively planning

focus on the following six building blocks to ating model and performance how to tend the relationship
succeed with business partnerships: metrics (for instance, sales or quality- over time in the wake of industry
assurance metrics) and organizational shifts
— Strategy—gaining agreement on the
partnership’s objectives — Governance and decision making— In general, executives understand the
adhering to key decision processes, need to be diligent in all these areas;
— Culture and communication— metrics regarding speed of decision however, based on our observations and
encouraging open and trust-based making, stage gates, and timelines experiences in the field, the areas
communication among all parties most likely to be underemphasized are
— Economics—defining how value will those of culture and communication
be created from the partnership and of adaptability.
will even tap a trusted adviser or former board shifting. All the delays and rework on projects
member to lead the health-check process to gain an prompted many to leave the venture.
outside perspective; this approach can be
particularly effective when the partner compa- It was only after launching a partnership health
nies have tried and failed multiple times to check that the partner companies discovered the
identify root causes of poor performance or issues with the approval process and took steps
missed milestones. to address them, ensuring that everyone knew the
timing of go and no-go decisions. Once the health-
Early is better, but it’s never too late to establish a check process was established, senior leaders on
health-check process. Some partnerships won’t both sides of the business relationship were able
even realize they need a health-check process until to use it to ensure that the approval refinements were
well into the tenure of the relationship—typically working. Indeed, regular partnership checkups
when the partnership hits a speed bump. The can have lasting cultural benefits. They can help
partner companies in one established automotive reduce fear of change among employees and encour
venture, for instance, were stymied by the age them to consider and experiment with frequent,
partnership’s inability to reach its targets. What the small adjustments to the partnership as needed.
partner companies couldn’t see was that teams
were becoming frustrated by the venture’s project-
approval process: they would get the green light The elements of a good health check
on an initiative only to discover a few days later that There are two important elements of a good
requirements had changed, so it was back to the partnership health check. First, teams need
drawing board. It seemed to these managers that access to the most relevant information about the
the partnership’s priorities were constantly partnership (both historical and current

Early is better, but it’s never too late to
establish a health-check process.
perspectives). Second, they need access to deep- strong hypotheses from executives about why the
dive performance assessments. partnership is underperforming, but the deep-
dive assessment often shows that the root cause of
Information about the partnership a problem is something quite different.
The health check should start with an articulation
and confirmation of the core tenets of the At the healthcare-company alliance mentioned previ
partnership. To achieve this, the team will need ously, for instance, a health-check team conducted
to gather all the basic information about the partner interviews to help determine why they
business relationship—how it started and how it thought milestones were not being met as quickly as
has evolved (noting any team or leadership expected. The health-check team paired those
changes, for instance). A partnership among con responses with a holistic evaluation of the business
sumer companies, for example, was hitting partnership along several success factors: strategy,
many of its targets but much slower than expected. culture and communication, operations, governance
A health-check team comprising leaders from and decision making, economics, and adaptability.
both companies was prepared to restate the purpose
of the partnership and then proceed quickly to a Through this deep-dive assessment, the team
more detailed discussion about operations, which all recognized three trends. First, each partner organi-
considered to be at the crux of the partnership’s zation was contributing resources as agreed;
performance issues. The team was startled to see having clear evidence of this helped soothe tensions
how difficult it was to agree on a high-level and restored executives’ faith in the business
description of the partnership’s strategy and objec relationship. Second, operations were not failing
tives. There was a fundamental disagreement, to meet expectations; they were just doing so
for instance, about which market segments were more slowly than expected. This prompted a sepa
a priority. The team realized that it needed to rate discussion about how individual tasks and
identify and gain agreement on the fundamentals of decisions were being handled and how they could
the partnership before it could address any be managed differently. Finally, the deep-dive
operational shortcomings. assessment revealed that, in some joint initiatives,
partners were contributing overlapping resources,
Deep-dive performance assessments which had created overly complex processes.
In the second phase of the health check, the team This insight prompted the partner organizations to
should conduct a series of leadership interviews simplify them, thereby improving the speed
to get a sense of how senior executives perceive the of execution.
status of the partnership. These perspectives
should be combined with the information gathered
during the first phase of the health check to provide Implementing the health check
both qualitative and quantitative insights on how There is no one-size-fits-all approach to esta-
the partnership is performing along key measures blishing a health-check program for a partnership.
of success. The initial discussions may reveal It will be necessary, though, to build a dashboard
Checking the health of your business partnerships 43

that partners can use as a catalyst for considering slightly larger overview that included all the
potential interventions and then continually revisiting required information.
the health of the partnership.
With such information in hand, partner companies
The team designing and overseeing the health- can identify issues and consider potential
check process should build a dashboard that interventions. Depending on the partners’ objec
leaders on both sides of the relationship can access tives and the specific challenges in play, the
easily. It can be created manually and distributed interventions can be as simple as identifying a new
as a PowerPoint presentation or shared in a digital set of key performance indicators and reporting
format—either way, it should reflect the metrics processes for the partnership, or they can be as
most relevant to evaluating the partnership’s ability complicated as restructuring the partnership’s
to fulfill its objectives. operating model. On occasion, health checks can
also trigger a mutually agreed-upon exit for
Ideally, the dashboard should be standard for all; partnerships that have met their objectives or that
there should be no option for specialized reports for are no longer in line with market needs.
individual executives or teams within partner
companies. The health-check team should instead
try to incorporate as many of the standards and
preferences of each partner company into the As with good personal health, good organizational
dashboard as possible. Team members at one high- health requires frequent checkups. By consistently
tech JV were creating three different reports— assessing a partnership’s performance on the
one for each of the two parent companies and a third critical components for success (strategy, culture
to cover the joint-partner request. This created and communication, operations, governance
a lot of tension and confusion among the partners. and decision making, economics, and adaptability),
When it discovered the issue, the health- partners can improve their partnerships and
check team consolidated the reports into one, increase their likelihood of long-term success.
Ankur Agrawal (Ankur_Agrawal@McKinsey.com) is a partner in McKinsey’s New York office, where Eileen Kelly Rinaudo
(Eileen_Kelly_Rinaudo@McKinsey.com) is a senior expert; Kenneth Bonheure (Kenneth_Bonheure@McKinsey.com) is a
senior partner in the Singapore office.
The authors wish to thank Ruth De Backer for her contributions to this article.

Wall Street versus
Main Street: Why the
disconnect?
Despite turmoil in the real economy, the US stock market remains
resilient because of three critical factors: the basis of valuations, the
market’s composition, and investors’ expectations.
by Marc Goedhart, Tim Koller, and Peter Stumpner
© WoodenheadWorld/Getty Images
Wall Street versus Main Street: Why the disconnect? 45

On September 2, 2020, in the midst of the worst expectations. These factors are very much
economic crisis since before World War II, the S&P grounded in reality.
500 reached a record level of 3,580, representing
a year-to-date increase of about 9 percent in value.
Since then, the US stock market has been resilient The stock market takes a
in the face of continuing concerns about the global long-term perspective
COVID-19 pandemic and the lingering recession. Today’s investors realize that even if it takes two or
Some economists and investors claim that the stock three years to restore a normal level of GDP and
market is no longer guided by economic funda profits, the COVID-19 pandemic’s long-term effect on
mentals but is instead leading a life of its own—one share prices won’t be that high. The math explains
detached from reality. why. No one knows the extent or length of this eco
nomic recession. But let’s assume that for the next
We disagree. two years, corporate profits will be 50 percent lower
than they otherwise would have been and will then
The US stock market has remained resilient during return to their precrisis levels and growth rates. If we
the COVID-19 crisis because of three critical discount the impact of lower short-term profits
factors that reflect certain truisms about valua and cash flows, the present value of the stock market
tions, the market’s composition, and investors’ declines by less than 10 percent (Exhibit 1).
Exhibit 1
The
The stock
stock market during the
market during the COVID-19
COVID-19 crisis
crisis is
is still
stillfocused
focused on
on the
the long
long term.
term.
Illustrative impact of COVID-19 crisis on stock-market value, index (100 = 2020)
160 160
140 ~–10% 140
Base scenario
120 120
Crisis scenario
100 100
2-year
recovery
80 80
–52%
60 60
40 40
2020 2022 2024 2026 2028

Exhibit 2
Technology companies are driving

driving up
upthe
the market’s
market’s aggregate total shareholder
aggregate total
returns.
shareholder returns.
Shareholder returns by industry,¹ %
Technology, media,
and telecom (TMT)
Oil and gas
0.4 0.4
Insurance Business services
Real estate Real estate Retail
0.2 0.2
Conglomerates
0.0 0.0
Healthcare Industrial Other TMT Alphabet, Amazon,
Utility Material Apple, Facebook,
–0.2 and Microsoft –0.2
Travel, logistics, Pharmaceutical and
Financial and infrastructure medical products
services
–0.4 –0.4
0 1 2 3
Starting market capitalization, $ trillion

¹Largest 1,000 US companies. Year-to-date (September 15, 2020) weighted average; local currency.
Source: S&P Global; Corporate Performance Analytics by McKinsey; McKinsey analysis
The stock market doesn’t set a value increased from about 14 percent at the end of 1995
for the market as a whole to about 35 percent in September 2020. Alphabet,
The market values individual companies from many Amazon, Apple, Facebook, and Microsoft collectively
different sectors, and these companies add up account for 21 percent of the market’s value—up
to the whole. Especially now, performance differs from 2 percent in 1995 and 16 percent at the begin
vastly within and across sectors.1 Companies in ning of 2020 (Exhibit 2). Without these five
oil and gas, banking, and travel, for instance, have megacap companies, the value of the 2020 market
been significantly challenged during the COVID-19 would have increased by only 3 percent (versus
pandemic, and their performance is down. Within 9 percent). And without the TMT sector as a whole,
the retail sector, grocery stores have generally fared there would have been zero growth.
well, but department stores have not. Some
companies in pharmaceuticals and in technology,
media, and telecommunications (TMT) are actually The market value of listed US
doing better now than they were at the beginning companies doesn’t reflect employment
of the year—in part because the introduction of new or GDP levels in the real economy
products and services affects them more than the As we have said, companies from high-growth
health of the broader economy does. As a result, the sectors that have done relatively well during
stock market’s aggregate value remains resilient. the COVID-19 crisis now heavily weight the US stock
market. By contrast, many sectors that have done
This dynamic is even more pronounced now that the worse account for a smaller share of the market and
TMT sector carries greater weight than ever often have few listed companies. Many apparel
before: its share of the top 1,000 companies has retailers and department stores, for example, were
1
See “Market valuation of sectors in 2020” interactive, COVID Response Center, McKinsey.com.
Wall Street versus Main Street: Why the disconnect? 47

Exhibit 3
The
The market
market value
value of
of listed
listed US companies doesn’t
doesn’treflect
reflectthe
thedynamics
dynamicsofof the
US real economy.
the US real economy.
Contribution to GDP, % of total Market capitalization,¹ % of total
Technology, media, and telecom
8
Pharmaceutical and medical products 1
Banking, insurance, and financial services 9
35 Technology, media, and telecom
Healthcare 9
Professional and technical services 16

11 Pharmaceutical and medical products
Real estate and construction 20 12 Banking, insurance, and financial services

1 Healthcare
4
Professional and technical services
Other 37 37 Other
¹Largest 1,000 US companies as of September 15, 2020.

Source: S&P Global; Corporate Performance Analytics by McKinsey
already under pressure before the pandemic, and GDP and employment contributions. One important
their market values were low. The current collapse of difference is that there are no European megacap
these companies’ share prices doesn’t have much companies and fewer technology companies overall.
impact on market aggregates. Many of the construc In Europe, for instance, TMT companies account
tion and professional-services companies, gyms, for only 10 percent of the market, versus 35 percent
hairdressers, hospitals, restaurants, and other in the United States.
service businesses that generate lots of jobs and
contribute materially to GDP aren’t even listed.
The overall stock market can do relatively well even
when employment and GDP are severely The disproportionate weight that the TMT sector
depressed (Exhibit 3). and a handful of companies in that sector carry in the
US market could turn into a risk if investors decide
Similar dynamics are at play in Asia and Europe. to drop their growth expectations for even a few
The European market, for instance, is only 6 percent TMT companies. But the numbers show that the US
below precrisis levels. Variations in performance stock market is neither irrational nor erratic; the
across sectors resemble those we find in the United specific mix of industries in it has played a big role
States, and as in the United States, the composition in making it more resilient than the economy
of the European index doesn’t reflect real-world as a whole.
Marc Goedhart (Marc_Goedhart@McKinsey.com) is a senior expert in McKinsey’s Amsterdam office, Tim Koller
(Tim_Koller@McKinsey.com) is a partner in the Stamford office, and Peter Stumpner (Peter_Stumpner@McKinsey.com)
is an associate partner in the New York office.
The authors wish to thank Vartika Gupta for her contributions to this article.

Warren Buffett:
An appreciation
As Warren Buffett turns 90, the story of one of
America’s most influential and wealthy business
leaders is a study in the logic and discipline of
understanding future value.
by Tim Koller
© AP Photo/Nati Harnik
Warren Buffett: An appreciation 49

Patience, caution, and consistency. In volatile instead, his choices and communications have been—
times such as these, it may be difficult for executives and remain—grounded in logic and value.
to keep those attributes in mind when making deci
sions. But there are immense advantages to doing Buffett learned his craft from “the father of value
so. For proof, just look at the steady genius of now- investing,” Columbia University professor and
nonagenarian Warren Buffett. The legendary British economist Benjamin Graham. Perhaps as
investor and Berkshire Hathaway founder and CEO a result, Buffett typically doesn’t invest in
has earned millions of dollars for investors over opportunities in which he can’t reasonably estimate
several decades (exhibit). But very few of Buffett’s future value—there are no social-media companies,
investment decisions have been reactionary; for instance, or cryptocurrency ventures in his
Web <2020>
<buffet>
Exhibit <1> of <1>
Exhibit
Warren Buffett’s decisions, grounded in logic and value, have earned millions
Warren
of dollarsBuffett’s decisions, grounded in logic and value, have earned millions
for investors.
of dollars for investors.
Timeline of Warren Buffett’s career
28,000
1942 Buys first stock, Cities 1992 BH share price tops
Service, at $38; $10,000
sells at $40
1998 BH share price tops
$50,000 24,000
1951 Buys first shares of
GEICO
2006 Commits 85% of
1956 Forms first partnership wealth to Bill & Melinda
Gates Foundation; 20,000
1965 Takes control of BH share price tops
Berkshire Hathaway $100,000
(BH)
$200,000 16,000
1972 Buys See’s Candy
Shops
1983 BH share price tops $300,000
$1,000 12,000
2020 Addresses BH
1988 Buys >$1 billion in succession plan
shares of Coca-Cola
8,000
Value of $1 invested in 1964, $

BH S&P 500 4,000
$27,373 $198
0
1970 1980 1990 2000 2010 2020
Source: CNBC

Buffett banks on businesses that have
steady cash flows and will generate high
returns and low risk. And he lets those
businesses “stick to their knitting.”
portfolio. Instead, he banks on businesses that have out to be the ones that really don’t think that much
steady cash flows and will generate high returns about the shareholders. The two often go hand in
and low risk. And he lets those businesses “stick to hand,” Buffett explains.3
their knitting.” Ever since Buffett bought See’s
Candy Shops in 1972, for instance, the company has Every few years or so, critics will poke holes in
generated an ROI of more than 160 percent per Buffett’s approach to investing. It’s outdated, they
year 1—and not because of significant changes to say, not proactive enough in a world in which
operations, target customer base, or product mix. digital business and economic uncertainty reign. For
The company didn’t stop doing what it did well just so instance, during the 2008 credit crisis, pundits
it could grow faster. Instead, it sends excess cash suggested that his portfolio moves were mistimed,
flows back to the parent company for reinvestment, he held on to some assets for far too long, and
pointing to a lesson for many listed companies: it’s he released others too early, not getting enough in
OK to grow in line with your product markets if you return. And it’s true that Buffett has made some
aren’t confident that you can redeploy the cash flows mistakes; his decision making isn’t infallible. His
you’re generating any better than your investor can. approach to technology investments works for him,
but that doesn’t mean other investors shouldn’t
As Peter Kunhardt, director of the HBO docu seize opportunities to back digital tools, platforms,
mentary Becoming Warren Buffett, said in a 2017 and start-ups—particularly now that the COVID-19
interview, Buffett understands that “you don’t pandemic has accelerated global companies’
have to trade things all the time; you can sit on digital transformations.4
things, too. You don’t have to make many decisions
in life to make a lot of money.”2 And Buffett’s Still, many of Buffett’s theories continue to win the
theory (roughly paraphrased) that the quality of a day. A good number of the so-called inadvisable
company’s senior leadership can signal whether deals he pursued in the wake of the 2008 downturn
the business would be a good investment or not has ended paying off in the longer term. And press
been proved time and time again. “See how reports suggest that Berkshire Hathaway’s profits
[managers] treat themselves versus how they treat are rebounding in the midst of the current economic
the shareholders . . . .The poor managers also turn downturn prompted by the global pandemic.5
1
Theron Mohamed, “Warren Buffett’s favorite business is a little chocolate maker with an 8000% return. Here are 5 reasons why he loves See’s
Candies,” Business Insider, July 12, 2019, markets.businessinsider.com.
2
“Peter Kunhardt,” Charlie Rose, January 31, 2017, charlierose.com.
3
Tae Kim, “Warren Buffett on judging management: ‘See how they treat themselves versus how they treat the shareholders’,” CNBC,
May 9, 2018, cnbc.com.
4
Esther Shein, “COVID-19 is ‘the digital accelerant of the decade,’ forcing businesses to adapt quickly,” TechRepublic, July 15, 2020,
techrepublic.com.
5
Geoffrey Rogow, “Berkshire Hathaway’s profit jumps as market rebound boosts results,” Wall Street Journal, August 8, 2020, wsj.com.
Warren Buffett: An appreciation 51

At age 90, Buffett is still waging campaigns—for specific company and its investors, whether annual
instance, speaking out against eliminating the estate or otherwise,” he and Jamie Dimon wrote in the
tax and against the release of quarterly earnings Wall Street Journal.6
guidance. Of the latter, he has said it promotes an
unhealthy focus on short-term profits at the Yes, volatile times call for quick responses and fast
expense of long-term performance. “Clear com action. But as Buffett has shown, there are also
munication of a company’s strategic goals— significant advantages to keeping the long term in
along with metrics that can be evaluated over time— mind as well. Specifically, there’s value in
will always be critical to shareholders. But this consistency, caution, and patience and in simply
information … should be provided on a timeline trusting the math—in good times and bad.
deemed appropriate for the needs of each
Tim Koller (Tim_Koller@McKinsey.com) is a partner in McKinsey’s Stamford office.
6
Warren E. Buffett and Jamie Dimon, “Short-termism is harming the economy,” Wall Street Journal, June 6, 2018, wsj.com.

Despite their best intentions, executives fall prey to cognitive and organizational
biases that get in the way of good decision making. In this series, we highlight
some of them and offer a few effective ways to address them.
Our topic this time?
Bias Busters
War games? Here’s what

they’re good for
by Hugh Courtney, Tim Koller, and Dan Lovallo
© PM Images/Getty Images
Bias Busters: War games? Here’s what they’re good for 53

The dilemma competitive blind spots. It was first to market in the
There’s usually a steep price to pay when you fail to 1970s with groundbreaking technology for
anticipate competitors’ actions and reactions—or computed-tomography (CT) scanning, but it didn’t
who the competitors even are. France, for instance, anticipate how many other innovators would enter
spent ten years and billions of francs in the 1930s the market, find new uses for its technology,
to erect a collection of concrete forts, obstacles, and and build high-level sales and product-marketing
weapons installations (called the Maginot Line) capabilities around the applications. The medical-
to stop German forces from invading with tanks. But equipment manufacturer eventually ended up
French military leaders didn’t anticipate that, exiting the business because it couldn’t keep up
in the period between World War I and World War II, with the specialized competitors.1
Germany would change course and adopt a
blitzkrieg strategy, increasing its use of air strikes
and invading through neutral countries, such The research
as Belgium. French outposts and citizens were left Whether in the military or in business, strategy deci
MoF74 2020 open to attack (exhibit). sions are interdependent decisions most of the
Bias Busters: War games time. So why do executives so often fail to anticipate
Exhibit 1 of 1 The fate of a nation was not at stake, but a maker of competitors’ moves when making their own?
medical equipment similarly faltered because of Competitor neglect is a manifestation of the inside
view, in which decision makers lend more weight
to their own data and perceptions than to relevant
external factors. Because they’re focusing so
Exhibit much on their own plans and ambitions, they end up
blind to how competitive dynamics are shifting
The French military was so focused
around them—the big changes as well as the incre
on building terrestrial obstacles
mental ones.2 This bias is particularly common
that it didn’t anticipate Germany’s among leaders in new and rapidly changing markets,
invasion by air. such as those for streaming content, electric
vehicles, and artificial-intelligence software. The
NETHERLANDS data about competitors’ strategies may be
BELGIUM incomplete, inconsistent, and difficult to interpret.3
UNITED
KINGDOM GERMANY It can also be hard for companies to identify
German a meaningful group of peers with which to com-
forces pare themselves.
Maginot Line
The remedy
FRANCE War games4 can be an effective hedge against
ITALY competitor neglect. Not just for the military, these
exercises can also help senior business leaders
SPAIN assess potential strategies and determine how well
they are likely to perform given potential com
petitor responses.
1
Will Mitchell and Jennifer Smith, “Playing leap-frog with elephants: EMI, Ltd. and CT scanner competition in the 1970s,” case study,
August 1994, www-personal.umich.edu.
2
Colin Camerer and Dan Lovallo, “Overconfidence and excess entry: An experimental approach,” American Economic Review, March 1999,
Volume 89, Number 1, pp. 306–18, aeaweb.org.
3
Hugh Courtney, 20/20 Foresight: Crafting Strategy in an Uncertain World, Boston, MA: Harvard Business School Press, 2001.
4
Competitive simulation exercises are often referred to as “war games,” likely because the US Army War College uses such exercises extensively
and developed many of the protocols that other organizations use when designing, playing, and debriefing these exercises.

One consumer-electronics company used war games the company’s launch plans were adjusted
to optimize the launch of the next version of its accordingly, enabling it to achieve a first-mover
flagship product. The company convened a team of advantage in the market.
senior leaders and industry experts to build deeply
researched profiles of two primary competitors. The War games can take many forms and encompass
information in the dossiers informed a multiround many technologies—from simple to sophisticated—
war game that projected likely actions and reactions but the one constant should be a debriefing
among the three companies in response to the session, conducted within and across teams to
product launch. In each round, a team was assigned capture lessons and reformulate strategies
to represent a competitor, and each team indepen and processes as necessary.
dently chose pricing and promotion strategies for its
company. Industry experts weighed in about Particularly today, no company is an island. Those
whether their respective strategy choices were likely that most accurately perceive the competitive
to succeed or not, and the company developed landscape as it is—and is likely to be—will have a
a simple simulation model to crunch the numbers. distinct advantage.
After several rounds of analysis and discussion,
Tim Koller (Tim_Koller@McKinsey.com) is a partner in McKinsey’s Stamford office; Hugh Courtney is a professor of
international business and strategy at Northeastern University and an alumnus of the Washington, DC, office; and Dan Lovallo
is a professor of business strategy at the University of Sydney and a senior adviser to McKinsey.
Bias Busters: War games? Here’s what they’re good for 55

Podcasts
Learn more about these and other topics on our corporate-finance and strategy podcasts, available for
streaming or downloading on McKinsey.com, as well as on Apple Podcasts, Google Play, and Stitcher.
BOARDS AND GOVERNANCE How do share buybacks affect investment in growth?

What’s driving the recent increase in share buybacks
The pros and cons of activist investors
and dividends, and does that affect investment in growth?
Management teams that engage positively with attackers may
Marc Goedhart and Tim Koller, with Werner Rehm
find activist campaigns bring ideas that create value and improve
shareholder performance.
Getting a better handle on currency risk
Joe Cyriac and Sandra Oberhollenzer, with Sean Brown
When exchange rates are volatile, companies rush to stem
potential losses. What risks should they hedge—and how?
How activist investors are changing public-company boards
Marc Goedhart, Tim Koller, and Werner Rehm
Rotman professor and experienced board director David Beatty
considers several profound changes.
David Beatty, with Tim Koller DECISION MAKING
Bias Busters: How to take the ‘outside view’

What’s changing in board governance It may be easier than you think to debias your decisions and make
How has board governance changed—and how can CEOs and better forecasts by building the “outside view.”
CFOs work together to improve a company’s performance? Tim Koller and Dan Lovallo, with Sean Brown
Bill Huyett, with Werner Rehm
Bias Busters: Four ways to assess projects and

CORPORATE FINANCE keep them on track
Our experts suggest ways to avoid snap judgments, how to elicit
The evolution of the CFO
strong arguments for and against proposals, the benefits of
CFOs are playing an increasingly pivotal role in creating change
project premortems, and using contingency plans to avoid the
within their companies. How should they balance their traditional
sunk-cost fallacy.
responsibilities with the new CFO mandate?
Tim Koller and Dan Lovallo, with Sean Brown
Ankur Agrawal and Priyanka Prakash, with Sean Brown
Starting from zero M&A

Zero-based budgeting (ZBB) is experiencing a resurgence. But Why you need to keep changing your company’s business mix
why this—and why now? An expert in the field helps us understand Because the market is always moving, a static portfolio of
how digitization has given new life to ZBB, the benefits it offers, businesses tends to underperform.
and how to implement it in both large and small organizations. Sandra Andersen and Andy West, with Sean Brown
Wigbert Böhm, with Roberta Fusaro
Toward faster separations

When should companies sell off their accounts receivable? Successful divestors “move slow to move fast”: they carefully
It’s a form of borrowing known as factoring, but it isn’t always think through all the strategic and operational considerations
necessary or even possible. before making a public announcement. Then they systematically
Tim Koller and Emily Yueh, with Werner Rehm assess what and when to divest, as well as how to manage the
task most efficiently.
Getting better at resource reallocation Obi Ezekoye and Andy West, with Roberta Fusaro
Although managers understand the value of shifting resources
into more productive investments, obstacles stand in the way. Reflections on digital M&A
These can be overcome. What exactly is digital M&A, and how does it compare with
Yuval Atsmon, with Werner Rehm garden-variety deal making?
Robert Uhlaner, with Werner Rehm
November 2020
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McKinsey on

Circulation: Diane Black

4 Why you’ve got to put your portfolio

12 Three degrees of separation: How to

18 What’s keeping you from divesting?

45 Wall Street versus Main Street:

Interested in reading McKinsey on

by Sandra Andersen, Chris Bradley, Sri Swaminathan, and Andy West

© Ray Massey/Getty Images

4 McKinsey on Finance Number 75, November 2020

The outperformers in our research use

Why you’ve got to put your portfolio on the move 5

The remaining 23 percent of the companies we

6 McKinsey on Finance Number 75, November 2020

Industry momentum, 2007–17 Company’s portfolio exposure Company’s portfolio momentum

Why you’ve got to put your portfolio on the move 7

8 McKinsey on Finance Number 75, November 2020

Top performers tend to aim their M&A outside the

Growing core Growing beyond core

Company’s primary Industry adjacent

Existing M&A not in adjacent

Company’s primary BU 0.7

Existing, noncore BU 1.6

Why you’ve got to put your portfolio on the move 9

10 McKinsey on Finance Number 75, November 2020

Copyright © 2020 McKinsey & Company. All rights reserved.

Why you’ve got to put your portfolio on the move 11

by Jamie Koenig, Anthony Luu, and Steve Miller

© Jorg Greuel/Getty Images

12 McKinsey on Finance Number 75, November 2020

Separations completed within 12 months

Three degrees of separation: How to successfully execute divestitures 13

14 McKinsey on Finance Number 75, November 2020

Exhibit 1 In the case of the software company mentioned

Three degrees of separation: How to successfully execute divestitures 15

Board Valuation Positive Round 1: Round 2: Signed Day 1/

Develop Solicit Execute

Board Development Planning for independent High market Floating of Postspin

Gate 1 Gate 2 Gate 3 Gate 4 Gate 5 Gate 6

Typical demerger road map and stage gates

16 McKinsey on Finance Number 75, November 2020

An agricultural company was uncertain about

Copyright © 2020 McKinsey & Company. All rights reserved.

Three degrees of separation: How to successfully execute divestitures 17

by Gerd Finck, Jamie Koenig, Jan Krause, and Marc Silberstein

18 McKinsey on Finance Number 75, November 2020

Misperception of asset value 56

Concern about timing 33

Concern about damage to rest of company 29

Stakeholders’ emotional attachment to asset 29

Fear of sunk costs 29

Underestimation of buyer interest 23

Multiple answers allowed; n = 128.

What’s keeping you from divesting? 19

Both acquisition and divestiture 37

Figures may not sum to 100%, because of rounding; n = 128.

20 McKinsey on Finance Number 75, November 2020

What’s keeping you from divesting? 21

The right time to begin the process

In our experience, executives need to — Operations—establishing a new oper — Adaptability—proactively planning