Today’s surprise announcement that the Washington Post Company is selling its flagship newspaper along with several other newspapers to Jeff Bezos is only part of a wider, ongoing story of transformation. Earlier this year, the company took a sharp turn away from publishing and media with the purchase of Celtic Healthcare, a provider of home healthcare and hospice services, and last month it bought Forney Corporation, a supplier of systems for power and industrial boilers. These moves follow the sale of Newsweek in 2010, and subsequent divestiture of some smaller publishing properties. The company still owns Slate, The Root, and Foreign Policy magazine as well as Kaplan, the for-profit education company, but it has clearly decided that its future lies outside of publishing and media.
Other companies have made equally dramatic transformative moves through recent and not-so-recent M&A activity:
- McGraw-Hill divested its education division in March as part of an effort to re-shape itself around financial information (or so the company’s new name says).
- Thomson was years ahead of the market in divesting its large newspaper business in the 1990s — a step that laid the foundation for giant moves into financial information and then legal information businesses. Along the way, Thomson divested its educational publishing business in 2007 and healthcare information business in 2012.
- LexisNexis’ formed its risk analysis division by purchasing Seisant in 2004, a move that was bolstered by the much larger acquisition of ChoicePoint in 2008.
- Google paid a whopping $1.65 billion for YouTube in 2006, anticipating the importance of video for both consumer and businesses applications.
Transformational transactions such as these are characterized by their focus on optimizing a company’s whole portfolio by moving into or out of entire businesses. That distinguishes these transactions from the more routine M&A transactions that companies large and small undertake for a variety of reasons, such as rolling up competitors, adding complementary products and capabilities to existing product lines, and expanding into new markets. From our experience in helping companies transform themselves, we observe that successful transformations share certain characteristics:
A transformational culture: Companies that integrate M&A into their ongoing strategic planning are more likely to be more successful in transforming themselves than those that think about M&A primarily as an opportunistic activity. That means that operating executives, not just a company’s professional strategists, need to think about M&A as much as ongoing operations.
Rigorous analysis: The foundation of any transformation is portfolio analysis, a systematic review of a company’s business units to assess their future growth prospects, resource requirements, and likely returns. Portfolio analysis must consider such factors as underlying market growth, competition, and the impact of new technologies. Since operating executives typically have the keenest understanding of their markets, the fusion of their knowledge with the analytical skills of professional strategists often generates critical insights and decision-making.
Nimbleness: Successful transformation often result when companies are willing to act early, even paying a premium for an asset before it can be fully justified by financials or divesting before a business shows signs of distress. Thomson was able to realize an attractive price for its newspaper businesses because it recognized the need to divest well before anyone else, and Google was willing to pay a large multiple for YouTube to secure an important new asset.
Of course, not all M&A-driven transformations work out well. In the 1990s, Knight Ridder made the wrong bet by divesting its information businesses to focus on newspapers, spending over $1 billion in acquisitions before ultimately unloading the entire company in 2006.