The Stress Test Every Business Needs

Future-proof your business today for stronger performance tomorrow

The Stress Test Every Business Needs: A Capital Agenda for Confidently Facing Digital Disruption, Difficult Investors, Recessions and Geopolitical Threats provides a comprehensive approach to creating value and flexibility in an increasingly volatile business environment that presents both great risks and opportunities every day. The authors extend the banking “stress test” concept to a company’s Capital Agenda — how executives manage capital, execute transactions and apply corporate finance tools to strategic and operational decisions. Having a static Capital Agenda, however appropriate for your current market position, is not enough in today's uncertain world. Long-term success comes from building resilience into each element and in the way those elements interact.

The book uses a broader definition of business stress that includes traditional macroeconomic and geopolitical risks, as well as technological disruption, hostile takeovers and activist shareholders. Companies that make poor strategic decisions or underperform operationally will likely find themselves facing great stress. And that stress is symmetric; threats come from downside risks and from missed opportunities.

The chapters address the how and why of essential issues such as:

• Formulating corporate strategy in a digital world
• Pre-empting activist shareholders
• Restoring distressed companies to operational and financial health
• Ensuring effective collaboration among strategy, finance and operations
• Getting the most out of your advisors
• Proactively managing intrinsic value
• Rigorously allocating capital across the enterprise
• Acquiring and divesting for optimum value
• Syncing financing decisions with business strategy and capital market conditions
• Incorporating tax planning throughout the Capital Agenda
• Liberating excess cash with leading working capital management practices
• Aligning strategic goals and metrics to reach your company’s full potential

Companies that develop strategy and set operational priorities with a balanced Capital Agenda are best positioned to control their own destiny. The Stress Test Every Business Needs provides a roadmap to future-proof your business today for stronger performance tomorrow.

Chapter 1 How resilient is your Capital Agenda? 1
Jeffrey R. Greene

Chapter 2 Do you know the intrinsic value of your company and how to manage it? 17
Daniel Burkly

Chapter 3 Are you allocating capital across the enterprise to reduce C-suite stress? 33
Jeffrey R. Greene

Chapter 4 Are your portfolio reviews timely, objective, and thorough? 51
Jeffrey R. Greene and JeffWray

Chapter 5 Do your acquisitions consistently pay off for shareholders? 65
Brian Salsberg

Chapter 6 Are you planning and executing divestments for maximum value? 81
Paul Hammes and Subin Baral

Chapter 7 Do your financing choices support flexibility and efficiency? 101
K.C. Brechnitz

Chapter 8 How well does working capital management contribute to cash flow and earnings? 113
Sven Braun and Steve Payne

Chapter 9 Is tax a full partner in building resilience and driving value? 125
Bridget Walsh and Erica Lawee

Chapter 10 Are strategy, finance, and operations integrated for optimal value creation? 137
Sharath Sharma and Daniel Burkly

Chapter 11 How can you get the most out of your advisors? 151
Giri Varadarajan and Aayush Tulsyan

Chapter 12 Can your strategy thrive in a digital world? 169
Tony Qui and Glenn Engler

Chapter 13 How can you pre-empt activist shareholders? 185
Shyam Gidumal

Chapter 14 How should you restore a distressed company to health? 199
Andrew Wollaston and Donald Featherstone

Chapter 15 Will your strategic goals ensure your company reaches its full potential? 217
William Achtmeyer and John Trustman

Glossary 231

Contributor Biographies 237

About EY 249

Index 251

JEFFREY R. GREENE Leader, Corporate Development Leadership Network
Jeff leads EY’s Corporate Development Leadership Network—an invitation-only, permanent roundtable of the heads of M&A, strategy, and inorganic growth for 40 of the largest companies in North America. For more than three decades, Jeff has counseled senior executives on the corporate finance implications of their strategic and operating decisions. His previous roles include Global Vice Chair—Corporate Finance and Global Transactions Leader for Life Sciences.

STEVE KROUSKOS EY Global Vice Chair, Transaction Advisory Services, EY Global Limited
Steve has more than 25 years of experience in M&A, advising corporate and private equity clients on multibillion-dollar, cross-border transactions. He chairs the TAS Global Executive and is a member of the EY global board. Steve is also the senior advisory partner for several global EY accounts. He serves clients across a wide-range of industries spanning consumer products, industrial products, life sciences, transportation, technology, and communications.

JULIE HOOD EY Global Deputy Vice Chair, Transaction Advisory Services, EY Global Limited
Julie leads global teams to help companies solve their most pressing business challenges, and better manage their capital across five connected solutions of strategy, corporate finance, buying and integrating, selling and separating, and reshaping results. She has advised clients across a broad range of industries, establishing a deep level of operational transactional understanding of organizations in Asia, Europe, and the Americas.

HARSHA BASNAYAKE EY Asia-Pacific Managing Partner, Transaction Advisory Services
Harsha has more than 20 years of experience advising clients on complex cross-border transactions, as well as private and public sector capital decisions throughout the Asia-Pacific Region. His primary focus is in valuation, financial modeling, M&A, and restructuring. Harsha continues to be a practicing valuation professional and chairs the Council of the Institute of Valuers and Appraisers of Singapore.

WILLIAM CASEY EY Americas Vice Chair, Transaction Advisory Services
Bill has 35 years of experience advising on capital strategy, mergers and acquisitions, spinoffs, IPOs, and securities offerings. As EY’s Americas TAS leader and in prior roles, he has overseen a doubling of the practice to nearly 5,000 professionals. Bill has led some of EY’s largest client engagements for multinational corporations and leading private equity firms in the US and Latin America.

The Stress Test Every Business Needs: A Capital Agenda for confidently facing digital disruption, difficult investors, recessions and geopolitical threats is a comprehensive approach to creating value and flexibility in an increasingly volatile business environment that presents both great risks and opportunities every day. The authors extend the banking stress test concept to a company’s “Capital Agenda”—how executives manage capital, execute transactions, and apply corporate finance tools to strategic and operational decisions. Long-term success comes from building resilience into each element and in the way those elements interact.

The book considers traditional macroeconomic, sovereign-risk, and commodity-related shocks as well as how to deal with technological disruption, hostile takeovers, and activist shareholders. Companies that make poor strategic decisions or underperform operationally—even in a benign economic and geopolitical climate—will likely find themselves facing great stresses, not only from downside risks but from missed opportunities as well.

Drawing upon the experience of an international group of EY Transaction Advisory Services colleagues, the book challenges readers to think differently about many of the issues facing company executives today, including:

• Setting corporate strategy in a digital world
• Pre-empting activist shareholders
• Using advisors wisely
• Proactively managing intrinsic value
• Allocating capital across the enterprise
• Acquiring and divesting for optimum value
• Liberating excess cash
• Integrating strategy, finance and operations to realize a company’s full potential

Time and time again, EY’s Capital Agenda framework has proven to be a valuable tool to help boards and management teams make better, more informed decisions in today’s ever-changing markets.

PRAISE FOR THE STRESS TEST EVERY BUSINESS NEEDS

“The authors have distilled decades of specialized experience into compelling recommendations for executives striving to create value in a volatile world. One reason why I’ve worked with EY over the years is the depth of its bench, and I see a similar depth in the practical advice covered in this book.”
—Robert Nardelli, Founder, XLR-8, LLC, Former Chairman and CEO of The Home Depot and Chrysler

“The book’s clarity and comprehensive coverage make it an excellent practitioner’s guide to strategic capital management, especially for CEOs and CFOs who usually have to learn these lessons ‘on the job’.”
—Richard S. Ruback, Willard Prescott Smith Professor of Corporate Finance, Harvard Business School

“The authors expertly and succinctly detail how companies need to work, think and act differently to align their capital agenda to ensure profitable, sustainable growth—both organic and inorganic.”
—Nicholas Fanandakis, Executive Vice President, DowDuPont; Executive Vice President and Chief Financial Officer, DuPont

“This insightful book deserves to be read by a wide audience. For C-suite executives it is a salutary reminder and checklist to analyse and adapt to the dynamic ways investors and competitors argue for and deliver shareholder value. Conversely, this is a substantial resource for finance professionals seeking to understand the common disparities between market and internal views. Highly recommended.”
—Andrew Baum, Managing Director and Global Head of Healthcare Research, Citigroup, Inc.

“Strategic capital allocation is the key to long-term value creation and this book provides actionable insights into how to drive returns from high priority activities like complex acquisition integration and synergy capture.”
—Mark Long, Chief Strategy Officer and Chief Financial Officer, Western Digital Corporation

“This collaboration has the potential to be the rarest of books—an instant classic. The authors have produced what I consider to be a significant contribution to the discussion of all matters capital. In a world of transformative surprises a resilient Capital Agenda must be the goal of every C-suite. ”
—Professor Tasadduq Shervani, Cox School of Business, Southern Methodist University

This vital resource synthesizes lessons from thousands of client engagements by EY’s Transaction Advisory Services. Companies that formulate strategy and set operational priorities with a balanced Capital Agenda are best positioned to control their own destiny. The Stress Test Every Business Needs provides a roadmap to future-proof a business today for stronger performance tomorrow.

For more information, see ey.com/capitalagenda

This collection of writings has the potential to be the rarest of all books - an instant classic. EY’s team of partner-authors has produced what I consider to the first comprehensive book on all matters capital. In a world of transformative surprises a resilient capital agenda must be the goal of every C-Suite. Chapter by chapter the EY team addresses the various opportunities and threats a firm faces – from digital disruption to activist shareholders, acquisitions that must pay off, divestitures to release value from the business portfolio, and so many other topics of critical importance.

Professor Tasadduq Shervani
Cox School of Business
Southern Methodist University

Strategic capital allocation is the key to long term value creation and this book provides actionable insights into how to drive returns from high priority activities like complex acquisition integration and synergy capture.

Mark Long
Chief Strategy Officer and Chief Financial Officer
Western Digital Corporation