Natural Owner

What is it?

Just because you happen to own a business doesn’t mean that you should.

The Natural Owner is a corporate strategy concept that tells you which business units belong in your portfolio, and which should be divested. You are the “Natural Owner” of a business if the business has a higher valuation under your ownership than any other owner

Natural owner
Natural owner

The challenge for multibusiness companies is not only to provide benefits that outweigh any damage done. They need to be the “natural owners”, able to achieve a more positive balance than any other company. If there are other owners who can realise a better balance, value will be created by selling the business to them, as illustrated in the diagram above.

The idea of natural ownership, and the term “natural owner,” appear to have been developed by John Stuckey and Rob McLean of McKinsey in the late 1980s in looking at how conglomerates create value.

When is it useful?

Use the “natural owner” concept to make Acquisition and Divestment decisions:

Acquisitions:

  • It is not enough to identify a robust “value hypothesis” that identifies synergies
  • The toughest test is “can we add more value than any other owner”?
  • When this is true, you are the “Natural Owner” and can bid confident you will not be outbid rationally – otherwise you could just put your target “in play” and lose out in the auction…or worse, get carried away with deal heat and overbid

Divestments:

  • Regularly assess all the businesses in your portfolio
  • Are there other owners who could do better with them? More synergies? More TLC? Better understand of the Key Success Factors in these industries?
  • Divesting will create value if you are not the natural owner. However, there are significant transaction costs to divestment – have a margin of error (10%?) to cover this, don’t divest for small differences in value with other owners

In practice, corporates tend to be too slow to divest, hanging on to businesses due to inertia or legacy emotion. Better to sell the “dead wood” and reinvest the funds in your exciting growth businesses.

An Example?

HP was not the natural owner of PCs, Printers and enterprise services all under one roof. there are few synergies between these divisions and no common Key Success Factors:

  • PCs are Operational Excellence, reliable delivery at low cost
  • Printers are Product Leadership, innovating to stay ahead of pirates and competitors
  • Enterprise Services are Customer Intimacy, integrating multiple products and software to provide full solutions for customers

Finally recognising this (2 decades too late), HP has split up into 3 separate units, one of which has already been acquired by a natural owner

How do you do the analysis?

The analysis is driven by a detailed quantitative understanding of synergies:

  • What is the value synergies (cross-selling or cost) between our businesses?
  • What is the value of synergies (cross-selling or cost) other companies might enjoy with our business?

This can be augmented with a qualitative understanding of your company’s  Parenting Style

A friendly Investment Banker will be very eager to confirm your analysis……..and manage the divestment process for you for a meager 4% fee.