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Strategy and

Target Selection

Presented by Andy Sheats

AGENDA

Strategy and M&A

Target Selection: Case study

International expansion of REA Group

– Company Background

– Which Markets?

– Which Companies?

Tools of the Trade

Why Do Companies Acquire?

Enter new businesses: Diversify

Enter new businesses: Vertical

Enter new businesses: Vertical

Scale

Scale

Enter new businesses

Scale

Scale

Scale

“Some analysts told me to”

Scale

Business vs Corporate Strategy

The Common word in all three … STRATEGY

Scale Enter new businesses

Business Strategy

Buying a business like

mine, to improve our

competitive position and

vanquish our competitors

(eg. “scale” or scarce

resources)

Corporate Strategy

Buying a business that is not like mine,

to

“Link” different sorts of businesses

together creating competitive advantage

in each of them

(e.g. “vertical integration”, or common

sales channel)

Business Strategy

Strategic Planning

IS NOT

STRATEGY

Business Strategy

Your Business Strategy

IS NOT A

SECRET

Business Strategy

Your Business Strategy

IS NOT A

SECRET

What is Business Strategy?

Michael Porter Says its just 2 things

1. Market Selection:

(aka “where you play”)

2. Competitive Advantage

(aka “how you plan to win”)

5 years to win as many “digital-native” customers

as possible

through iSelect sales channel on the basis of

straight-forward products designed to rank well in

comparisons

and then retain them for as long as possible with

really focused online customer service model

Example: health.com.au Strategy

What is Business Strategy?

Michael Porter Says its just 2 ways…

1. Cost Leadership

(Cheaper, more profitable, and/or

able to invest more in differentiation)

2. Differentiation

(Unique things that customers value,

like local contact, better service,

higher quality, … )

What’s M&A got to do with it?

Basically, driving unit economics

(incremental cost/revenue/value in each customer interaction)

Cost Leadership

Use M&A to reduce cost:

• Aggregate scale

• Acquire low-cost assets

• Access unique/scarce

resource or capability

Differentiation

Use M&A to build differentiation:

• Provide more complete

service (or lower transaction

cost for consumer) through

bundling

• Increase product/service

quality through vertical

integration

• …

Agenda

Strategy and M&A

Target selection: Case study

International expansion of REA Group Limited

– Company Background

– Which Markets?

– Which Companies?

Tools of the trade

#1 in Australia – Residential +

Commercial Property

AU Competitive Position

Source: Nielsen Market Intelligence June2010

Realestate.com.au

2.8 M hours

3.3x Domain

67% share

Realestate.com.au

5.7 M UBs

1.9x Domain

49% share

One of the largest and most successful

online real estate “pure-plays”

Source: Nielsen Market Intelligence June 2010

A world leader in sector

~$500 million in revenue, 50% EBIT

~$5.5 billion market cap

~60% owned by News Corp

REA

SEEK Carsales

Fairfax

Long-term growth is driven by

three key questions

1. What else can

REA sell Australian

Real Estate Agents?

• What do they need/want?

• What can REA make

money from?

• How does REA leverage its

current business to do it

better/faster/cheaper than

the other guy?

• How does it improve

competitive position and

economics of our core

business?

• What are the risks?

2. Are there more

opportunities to

monetize

Australian

consumer traffic?

• Can REA make more

simply selling the

advertising space?

• Does it improve customer

experience?

• Build/buy economics and

timing

1. What else can

REA sell Australian

Real Estate Agents?

2. Are there more

opportunities to

monetize

Australian

consumer traffic?

Long-term growth is driven by

three key questions

3. Can REA replicate its Australian success

in other countries? • Which market?

• Entry Strategy

(Buy/build/partner)

• Target selection

Agenda

Strategy and M&A

Target selection: Case study

International expansion of REA Group Limited

– Company Background

– Which Markets?

– Which Companies?

Tools of the trade

Which country has a stronger growth

proposition for REA in 2007?

India

1 Billion people

$56B Real estate sector

Australia

20 Million people

$3B Real estate sector

OR

Using a SCREEN to determine which

countries does REA care about

Screen 1:

Macro Factors Ranking:

Market Potential

Developed

markets

Countries -- Targets

Developing

markets

Countries -- Targets

• Population

• GDP + Growth

• Real estate sector

(size + growth + profit

potential)

• Corruption

• Legal

• Etc.

Screen 2:

Internet Adoption

• Internet

• Broadband

• eReadiness

Screen 3:

Market Maturity

• Online real estate

usage patterns

Market maturity is a major driver of

near-term market attractiveness

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

India MY CN FR US NZ DE UK AU

India MY CN

FR

US

NZ

DE

UK

Australia

Consumer Penetration for Online Real Estate Sites c 2005

“Consumer

Penetration”

(1)

(1) An indicator of consumer penetration is Unique Visitors for the #1 player / population

Which country has a stronger growth

proposition for REA?

India

1 Billion people

$56B Real estate sector

Australia

20 Million people

$3B Real estate sector

OR

Agenda

Strategy and M&A

Target selection: Case study

International expansion of REA Group Limited

– Company Background

– Which Markets?

– Which Companies?

Tools of the trade

“best target” = “best company”

+ “best match”

“The Target” • Financials (revenue,

earnings, growth, etc)

• Completive position

(offset by valuation

expectations)

• Inherent risk (tax, fraud,

customer, reputational,

etc.)

Rollup Strategy Low capabilities

mean lower valuation

and greater value add

400K UVs + 4M UVs = 2x advertising prices Unprofitable #2 + semi-profitable #1 = profitable #1 at scale

“best target” = “best company”

+ “best match”

“The Target” • Financials (revenue,

earnings, growth, etc)

• Completive position

(offset by valuation

expectations)

• Inherent risk (tax, fraud,

customer, reputational,

etc.)

Geo Expansion

High capabilities

Provide a base of

expansion

REA’s tech/model/branding/traffic/capital

+

albabworlds local team/contacts/magazines

Where REA finds them

Business Partners Intermediaries “Fly-Ins”

Target List

Using a SCREEN to target

companies in each market

Screen 1:

Strategic fit Ranking & Profiles

Profile 1

Profile 2

Screen 2:

Financial

Screen 3:

Culture

All targets

Target List

Agenda

Case study overview on “Which Companies”:

Entry to Dubai through Acquisition

Dubai:

2003

Dubai has become the richest urban

population of any area in the world

*Middle East Economic Digest Report

Dubai: Target Selection Process

Interest in country: press, stats, UK experience, fly-through

Desktop research – Market, regulatory, FDI restrictions

First “fly-in”: – Team member goes on “Invest Victoria” sponsored trade mission

– Dubai property expo, Victoria

– Developed 3 best options: Organic, JV w/ RE Company, Majority investment

Second “fly-in”: – REA developed all 3 on parallel tracks, worked through potential Ts and Cs with each

– Built financial model with the one that “felt best” and most likely

– Agreed terms

Prepare company for purchase by reincorporating as a FTZ LLC

DD

Completion

~12 months elapsed time

2003

Dubai: Post-Script

2020?

Agenda

Strategy and M&A

Target selection: Case study

International expansion of REA Group Limited

– Company Background

– Which Markets?

– Which Companies?

Tools of the trade

Tools of the Trade

• Strategic Screening

• Managing the Acquisition Pipeline

Screening Process

Benefits

Why M&A is sort of like being a sales

person

Prospecting Conferences

Networking

Cold-calling

Intermediaries

50+

Developing F2F

Whiteboarding

Selling the REA USP

20+

Qualifying Board interest

Saleability

Strategy alignment

Valuation reality

10-ish

Ts & Cs

2

DD A deal

6 to 12 month “sales cycle”

Need to put 50 to 100 into

the funnel each year

(1 or 2 every week)

1 Need to keep them

moving at a good pace

2

Closing Remarks:

Strategy Drives Successful M&A

• Be really clear on your strategy

– What markets

– How we will win – focus, differentiation or cost

• Be explicit about how M&A improves your chances of this success

• Rigorously screen targets based on your strategy

• Build your information and contacts until the time is right

• You need to very disciplined for a long time