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Economic downturns can be an ideal time for a well-positioned company to hunt for acquisitions, but the risk in picking up bargains is that it may add inappropriate businesses to its portfolio. Even the standard “rebalancing” approach of normal times—investing free cash flows in seemingly more attractive businesses, preferably with synergies to existing ones—often creates little value. McKinsey research suggests that the right portfolio strategy, in essence, is to be the natural owner of your businesses, in any of several ways: operational synergies, distinctive skills, or specific strengths, such as superior access to capital and talent in emerging markets. The most important thing is the difference an owner can make to a business, not its absolute level of returns.
The exhibit below shows how one company judged its opportunities for M&A and divestitures, given the predicted returns of current and potential investments.
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