Behind the Curtain of Corp Dev: Buy High, Sell Low
As an entrepreneur, I interact with many different branches of business at our various partners, customers and vendors: from sales and marketing, to engineering, to IT and corporate development. While I’ve spent the least amount of time interacting with Corp Dev, I’ve nonetheless maintained a highly ambivalent view of them—until very recently.
I’ve always been amazed at the pattern of “Buy High, Sell Low” that Corp Dev organizations tend to follow to a ‘T’. Because of the incredibly high visibility of these organizations, the force they exert on the market through this pattern is not only written about in the WSJ, but is materially impactful. One could even argue that this pattern exacerbates the natural ups and downs of a market cycle, not to mention that it goes against an investment philosophy of “Buy Low, Sell High.”
When I imagine myself in this role, I fantasize about revolutionizing it and saving up all of my powder to buy lots of companies during a recession, making a bundle of money along the way. There are smart people running these groups, some much more fiscally savvy than myself, so why aren’t they doing this?
The answer was shared with me over a few glasses of whiskey the other night by a top-10 corp dev player and I found it very insightful (special thanks to Ken H):
Corp Dev invests off of a P&L strategy not a balance sheet strategy.
While this distinction may differ from organization-to-organization, the inherent contrast between these two above approaches is phenomenal. The Corp Dev soldiers aren’t tasked with the mission of “Maximize return on our capital by buying complementary companies”, and herein lies the rub.
On the one hand, the treasury is tasked with cash maximization and cash preservation—the vehicles for this are typical financial vehicles (not strategic vehicles): stocks, bonds, mutual funds, or even venture limited participation. On the other hand Corp Dev soldiers whistle to the tune of “Drive the P&L objectives of our business units using cash on the balance sheet.” While folks in Corp Dev have similar backgrounds to the treasury—self-proclaimed “Finance Geeks”—their latitude is limited to deal structure, price and company selection, as opposed to driving what to buy when. This means that if the objectives of a business unit are to cut costs (i.e. recessionary times) Corp Dev’s role is to figure out how to sell at the best price possible at the time. If the business unit, however is driving revenue (i.e., in a boom time), Corp Dev’s role is to allocate funds from the balance sheet to maximize revenue at the best price possible at the time.
In a sentence: buy when prices are high, and sell when prices are low.
If this seems elementary to you, well bully on you, and silly me for missing the memo; for the rest of you—if you found it useful, I’d love to hear your thoughts or any nuggets you’ve gleaned through your own experiences.