What is Corporate Development?
Corporate Development is the internal focus of a corporation to generate and weigh strategic decisions to grow and restructure the business. Often this development is through establishing strategic partnerships, mergers, acquisitions, and joint ventures. The purpose is to create opportunities for the company through actions and deals that leverage the value of the company’s business proposition.
Why is Corporate Development Needed?
Corporate development is needed to create and execute innovative strategies that will help the company establish and maintain its competitive advantage. The goal is to improve the financial and operating performance of the company. Also, to enable the company to outperform its competitors. Corporate development is important because it helps corporations:
- Improve financial performance.
- Grow and reach a greater level of organizational efficiency.
- Create Opportunities to raise the company’s value and competitiveness in the market.
- Analyze both internal and external development from portfolio enhancement to the acquisition of more strategic partnerships.
- Focus long-term on improving a corporation’s longevity.
Internal vs External Focus
In one sense, corporate development is an essential inward-looking function for an organization. It is required to fill gaps in the organization’s geographical outreach and product portfolio. On the other hand, corporate development is also an essential outward-looking function for an organization. This is so because organizations are dynamic enterprises, with valuable assets, that can be monetized and grown through different combinations of deals and partnerships. Thus, the corporate development department is required to innovate and create a range of business partners and transaction alternatives. (Source:corporatefinanceinstitute)
Corporate Development Structure
- Centralized Model – Typically, corporate development is a centralized function. It gives the Corp Dev team a birds-eye view of the organization helping them to spot opportunities and threats. This allows the company to take advantage of and be a first-mover in case of an opportunity. Also to quickly take pre-emptive action against threats. Such a structure allows the corporate development team to confidently structure deals with other businesses. However, this does not imply that the department works in complete isolation from other groups within the company. For example, after acquiring a business, the corporate development team should help integrate the acquisition into the company. They should actively collaborate with support functions and business lines within the company and with vendors outside the company.
- Decentralized model – A decentralized Corporate Development organizational model actually means there is no core corporate development department. Instead, a corporate development team is put together on a case-by-case, or ad hoc, basis. It is made up of individuals from various internal departments as required.
- Hybrid Model – Under this organizational model, the corporate development department is usually lean. Often, it consists of very few Corp Dev professionals. This lean team depends on a network of external and internal resources. Their role is to provide oversight and expertise when evaluating potential partnerships and strategic transactions.
The exact composition of the team is determined by the expertise required for the specific corporate development project. For example, if the project were a divestiture, then the team would require individuals from the corporate finance and legal departments. The centralized model is the most popular model of corporate development. The decentralized model is the least popular model.
Corporate Development Responsibilities
Corporate development groups are responsible for a wide range of functions. The range of functions may vary significantly from company to company. Many people think of Corp Dev as solely involved in mergers and acquisitions (M&A). But, Corp Dev is typically engaged in a number of other projects besides just M&A. This is especially true in larger corporations. Some of the most common responsibilities of Corp Dev include the following:
- Achieving operational excellence
- Analyzing and investing in new strategic initiatives (this encompasses mergers, acquisitions, and also strategic divestitures)
- Creating forecast models and budgets to determine asset allocations and monitor the performance of the company
- Dealing with government and/or industry regulators
- Ensuring capital adequacy
- Identifying and handling non-core business assets
- Improving client/customer experience
- Optimizing firm productivity
- Participating in financial conferences, shareholder meetings, Investor Days, and earnings releases in order to communicate the company’s strategy to shareholders
- Product development and market penetration
- Portfolio management
- Understanding key drivers of revenues and expenses; identifying the most important Key Performance Indicators (KPIs) to measure and evaluate company performance
Corporate Development Strategies
The following strategies are commonly used to achieve the goals of corporate development:
Mergers and Acquisitions
Large companies often acquire or buy out smaller firms. These provide skills, knowledge, customers, revenue, earnings, and/or cash flow. Acquisitions can significantly benefit both companies. In other cases, a company may acquire a firm that it thinks has potential. The objective is then to revamp its business model. Hopefully, to take it in a new, and profitable direction. To carry out mergers and acquisitions, corporate development professionals need to be skilled at corporate valuation. Also, risk management, financial modeling, negotiation, and integration. Merger and acquisition deals allow large companies to buy out smaller ones with resources. They then reap the benefits from revenue, customers, and cash flow.
When carrying out mergers and acquisitions, corporate development teams: (1) create a target list, (2) value the companies in a financial model, (3) negotiate terms of the deal, and (4) integrate the acquisition into the company. For more on this, please see our guide on the M&A Process. For successful integrations, Corp Dev teams often create a Transition Services Agreement (TSA) between the buyer and the seller. A TSA specifies the nature of and duration for which the seller will continue to provide services to the business which has been purchased. This creates value for the buyer as it provides them with time to integrate the newly purchased business. It also helps the seller as it allows them to mitigate stranded costs and restructure their systems (especially if only a part of their business has been acquired by the buyer). (Source: ibid)
Having a reputation in the marketplace as a solid partner provides a company with a competitive advantage. This is because stable partnerships provide all the partners with economies of scale. Often, in order to avoid a price war with a potential competitor, companies prefer establishing partnerships with them. Forming partnerships is usually much less capital intensive than acquiring a firm outright. There is great value in establishing partnerships in innovative ways. Knowing how to establish sustainable partnerships with other organizations creates a competitive advantage.
Strategic, long-term partnerships can give corporations an additional advantage in the marketplace. There is value in creating a reputation that they are a desirable company to work with. When multiple corporations partner together in a stable relationship, all parties benefit. They share an increased level of production with reduced costs. Some corporations partner to avoid competing against one another. Others do so to avoid the cost of acquisitions and mergers. Corporate development partnership strategies involve creating smart and innovative partnerships. This is cooperation that both companies can sustain and benefit from.
Companies face both internal and external pressure. There is always an incentive to make sure that portfolios are using capital in an efficient manner. As a result, divestitures have become an increasingly important strategy for companies. This involves offloading assets in a planned fashion, based on a regular review of the company portfolio. It can result in a high return for the company and it is another Corp Dev function. The process requires detailed financial modeling and a strong understanding of business valuation techniques.
Carried out properly, divestitures can offload assets through a strategic approach. This is to ensure the most efficient use of all corporate capital. Corporations require a highly skilled team with exceptional experience. The ability to create financial models and expert knowledge of business valuation strategies is a must. This includes asset valuation, historical earnings valuation, relative valuation, and discount cash flow. Eliminating underutilized assets can help strengthen a corporate balance sheet and result in higher returns.
Strategic alliances enable the companies involved to manage their risk better. They are able to leverage core capabilities and assets and speed up entry into new markets. In general, strategic alliances are particularly valuable when entering emerging markets like India, China, and Viet Nam. They can help the company form the required business relationships. Also, to learn the relevant business practices faster than would have been possible otherwise. Furthermore, strategic alliances often result in more efficient use of capital. This is because the cost of the investment is shared and the risk is dispersed. The partners all stand to benefit in accordance with their skill set and asset contribution.
By definition, a partnership is an actual business structure with multiple owners. An alliance, on the other hand, is an agreement between corporations to share assets, resources, and skills. This cooperation enables them to reach a shared goal at a faster pace. Alliances also allow parties to manage risk more efficiently. They increase the rate at which the parties can enter new markets, and normally lead to better use of capital. Alliances can also benefit corporations that need to learn more about business practices in their industry. Developing necessary business relationships can speed up this process. It particularly helps the party with less experience and resources build credibility.
Optimizing Shareholder Value
Activist shareholders often exert external pressure on a company. Shareholder preferences and views can greatly impact a company’s performance and strategic direction. However, the demands put forth by such investors act as incentives for the corporate development team. Their objective is to engineer new kinds of deals to optimize shareholder value. Researching and implementing new deals to optimize shareholder value is yet another corporate development function.
Shareholders must have a say in how to manage a company. They can vote on mergers, inspect books and records and give input on other corporate matters. This includes what strategic direction the corporation should take. How shareholders perceive a corporation’s ability to profit and grow will reflect in the company’s stock price. Happy shareholders usually mean a corporation is performing well. Companies should listen to the needs and viewpoints of their investors. Then optimize their value where they can.
Corporate Development Metrics
There are several ways to evaluate the success of corporate development. The most commonly used metrics for measuring the performance of a company’s corporate development department are:
Return on investment
Return on investment (ROI) refers to the amount of net profit a corporation gains over a period of time compared to the cost they spend investing in resources. A greater ROI indicates the corporation is financially healthy. An increasingly higher ROI reflects well on a Corp Dev department.
Net present value
Net present value (NPV) is the current value of cash inflows compared to the current value of cash outflows over a specified period. A higher NPV indicates a more significant inflow of cash, showing one component where the corporation is thriving financially. The higher the NPV, the better the performance of the company’s Corp Dev team is perceived to be.
Internal Rate of Return and Revenue growth
Corporate development performance is often judged by revenue growth and the Internal Rate of Return. The higher the margin by which the IRR exceeds the company’s required rate of return, the better. Revenue growth is another metric used to evaluate performance. An increase in revenue indicates success as one of the main goals of corporate development is to increase available finances.
During a merger and acquisition, the goal is for the two combined companies to perform better together than the two companies on their own. If the performance and value of the two organizations combined are greater than they were separate, the company is said to have captured synergy. The synergy capture of a deal should be easily seen in stock share prices. If the effect is positive, share prices should increase.
Strategic factor analysis
A strategic factor analysis determines how effective a company is including:
- What the company sells
- The company’s level of marketplace competition
- How easy it is for the company to enter the market
- The growth and profit potential of the company
- The company’s overall business environment
A higher overall score indicates the corporation is operating efficiently.
The turnover rate of employees
A reduction in the employee turnover rate indicates the corporate development strategies are working correctly. Creating a more successful organization includes retaining employees for longer periods. Business success and operational efficiency can contribute to achieving and maintaining a low employee turnover rate.
Customer and client retention rate
Development seeks to enhance client-customer experience. Working to improve this experience and higher customer retention rates demonstrate success in that area. Positive customer retention rates are another sign of successful corporate development.
Corporate Development Careers
Corporate development is responsible for executing mergers, acquisitions, and divestitures. Also, for raising capital in-house for a corporation. Professionals in this function work alongside investment bankers to identify acquisition targets. Also, to negotiate their purchase, as well as prepare to raise equity or debt as required.
Depending on the company, there may also be a component of FP&A or investor relations mixed in, or even interaction with the treasury department. Typically, only larger companies have a corporate development group. This is because the work can be sporadic, and it takes a large business to justify – and afford – having such professionals as permanent staff. (Source: ibid)
The personality of someone who would thrive in a Corporate Development role often has the following character traits:
- Good communicator
Corporate Development Salary and Bonuses
It’s difficult to pinpoint salaries and bonuses because they vary widely. Also, titles sometimes differ between different companies, making exact comparisons difficult. So, these are very rough, broad ranges. They are based on what you might earn at a large company in a major financial center:
- Associate: Base salaries of $100K – $120K and bonuses worth 20-30% of base salary, for total compensation of $120K – $160K.
- Manager: Base salaries of $140K – $160K and bonuses worth 35-50% of base salary, for total compensation of $190K – $240K.
- Director: Total compensation of ~$300K – $400K, with a higher percentage from the bonus and stock (over 50%).
- VP or Head of Corporate Development: Total compensation of $500K+, perhaps approaching $1 million depending on bonuses and stock-based compensation.
These may seem like impressive numbers, and they are. Nevertheless, there are also a few caveats.
- Director compensation – At the Director level, compensation is about what Associates in investment banking earn. It only takes 3-4 years to reach the Associate level at a bank (starting as an Analyst out of undergrad) vs. several more years for Director in corporate development. So, the potential is there, but corporate development careers offer slower advancement to the same compensation level.
- Lower outside major financial centers – These compensation figures are almost certainly lower outside of major centers like New York and London and at smaller companies.
- Stock-based compensation plays a major role in these figures, so you need to be aware of the type of equity you’re getting, the company’s valuation, and the vesting period for any options you receive.
Up Next: Equity Multiplier Definition – Formula and Example
The equity multiplier is a financial leverage ratio. It measures a firm’s assets that are financed by its shareholders. It does this by comparing total assets with total shareholder’s equity. In other words, the equity multiplier shows the percentage of assets that are financed or owed by the shareholders. At the same time, this ratio also shows the level of debt financing that is used to acquire assets and maintain operations.
Like all liquidity ratios and financial leverage ratios, the equity multiplier is an indication of company risk to creditors. Companies that rely too heavily on debt financing will have higher debt service costs. They have to raise more cash in order to pay for their operations and obligations. Both creditors and investors use this ratio to measure how much debt, or leverage a company uses.