544  Corporate Portfolio Strategy a leading market share, this analysis suggested that it had room to increase revenue significantly and earn even higher margins: • Consumerco had been cutting back on R&D and advertising spend- ing to generate cash for Hexa’s efforts to diversify and to buffer poor performance in other parts of Hexa’s portfolio. Boosting investments in R&D and advertising would likely lead to higher sales volumes in exist- ing Consumerco products and encourage the introduction of additional high-margin products. • Despite Consumerco’s leading position in its market categories, its prices were lower than for less popular brands. The value created by price increases would more than offset any losses in volume. • Consumerco’s sales force was less than half as productive as sales forces at other companies selling through the same channels. Sales productiv- ity could increase to near the level of Consumerco’s peers. • Consumerco had room to cut costs, particularly in purchasing and in- ventory management. In fact, the cost of sales could easily be reduced by one percentage point. When the team factored in these possibilities, it found that Consumerco’s value could be increased by at least 37 percent. Similar analysis of Foodco showed that it was clearly a candidate for divesti- ture. Foodco’s ROIC was less than its cost of capital, so its growth was destroying value. Its industry as a whole was extremely competitive, although a few large players were earning respectable returns. However, even their returns were start- ing to decline. The Consumerco brand, which Foodco used, was found to be of Exhibit 28.3  Hexa Corporation: Current Situation Sales, $ million EBITA, $ million Revenue growth, % ROIC, % DCF value of momentum case, $ million Consumerco 6,300 435 3 30 6,345 Foodco 1,500 120 15 9 825 Woodco 2,550 75 19 6 1,800 Newsco 300 45 6 20 600 Propco – 15 – – 450 Finco – 9 – – 105 Corporate overhead – – – – (1,275) Total 10,650 699 8,850 Debt (900) Equity value 7,950 Less: Stock market value 7,200 Value gap 750 % of stock market value 10 Constructing the Portfolio  545 little value in building the business, and Foodco would be unable to develop significant scale economies, at least in the near future. To make matters worse, Foodco had a voracious appetite for capital to build facilities but was not gener- ating a return on new investment sufficient to cover the cost of its capital. Last, Foodco was a particularly strong divestiture candidate because a new owner that was a larger, growing competitor could dramatically improve its performance. Woodco, too, was in a position to improve on its performance dramatically as planned under Hexa’s ownership, if it could achieve the same level of per- formance as other top furniture companies. This would likely require Woodco to focus less on growth and more on higher margins. To do this, Woodco would need to build better management information and control systems and would have to stick to its familiar mass-market products instead of striking out into new upmarket furnishings, as it had planned. Although this analysis suggested that Woodco also might be sold (for instance, to a company that bought and improved smaller furniture firms), it would make little sense for Hexa to sell Woodco right away, midway through its consolidation, when potential buyers might be concerned that the business could fall apart. If the consolidation succeeded, Hexa could sell Woodco for a much higher price in 12 to 18 months, and Woodco’s value could increase as a result by 33 percent. Newsco and Propco were both subscale and could not attract top talent as part of Hexa. Furthermore, ready buyers existed for both, so divestiture was the clear choice. The consumer finance sector had become so competitive that the spread between borrowing costs and the rates Finco earned on new loans did not cover the consumer finance company’s operating costs. It turned out that the existing loan portfolio might be sold for more than the entire business was worth. In effect, each year’s new business was dissipating some of the value inherent in the existing loan portfolio. The team recommended that the board liquidate the portfolio and shut down Finco. Looking for further internal improvements, the team found that Hexa’s corporate staff had grown with the increasing complexity of its portfolio to the point where the business units had been obliged to add staff simply to interact with the corporate staff. By simplifying the portfolio, Hexa would be able to cut corporate costs by 50 percent. On the revenue side, Hexa had done little to take advantage of Consum- erco’s strong brands to incubate new businesses. A quick analysis showed that if Hexa could find new growth opportunities that generated $1.5 billion to $3 billion in sales, it could increase the market value of Consumerco by $2.4 billion or more. While restructuring was Hexa’s priority, it decided to keep generating new growth ideas as well. All told, the restructuring could increase Hexa’s value by 48 percent with- out the extra growth initiatives and by as much as 78 percent with successful growth initiatives, although these might be hard to realize. Exhibit 28.4 sum- marizes Hexa’s restructuring plan.