developing a corporate acquisition strategy
DESCRIPTION
*Key elements involved in developing an acquisition initiative that will meet corporate growth objectives *Fine-turning an acquisition strategy that will increase the probability of creating shareholder value *Effective ways of conducting a search campaign that will result in finding attractive opportunitiesTRANSCRIPT
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DEVELOPING A CORPORATE ACQUISITION STRATEGYCase studies, Concepts, and Debatable Ideas
Kenny OngCNI Holdings Berhad
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1. M&A Trends
2. Rationale for M&As
3. Strategies, Structure, and Optimizing Value in M&As
4. Considerations, Risks and Pitfalls
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• How to fail without trying
The Roadmap to Failureby Fred Wiersema and Mike Treacy
Before we start…
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The Roadmap to Failure
Fred Wiersema and Mike TreacyP
erf
orm
ance
Time
Clear Sailing
Today’s performance
Ad-hoc Tactics
Denial & Defense
Doom Projections
Overdue Failure
The Moment of Truth
X
Performance Freefall
Tomorrow’s actual
performance
Downpresure of Unclear Strategy
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Denial and Defense
• “It’s not really good value our competitor is offering, because it doesn’t include a lot of our features.” - ABC vs Air Asia
• “It’s good value but not in our preferred customer market.” - ABC vs Toyota
• “Sure they’re hurting us, but with their unfair advantage, what can we do?” – ABC vs MILO
• “The rules we are playing by have always worked before” – AMEX vs VISA
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The Roadmap to Failure
Fred Wiersema and Mike TreacyP
erf
orm
ance
Time
Clear Sailing
Today’s performance
Ad-hoc Tactics
Denial & Defense
Doom Projections
Overdue Failure
The Moment of Truth
X
Performance Freefall
Tomorrow’s actual
performance
Downpresure of Unclear Strategy
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Ad Hoc Tactics• Selectively hold discounts to hold business that has
started to go elsewhere• Introduce new promotions, terms, conditions, and offers to
confuse and cloud the market• Beef up customer service by adding people to fix mess-
ups and quicken delayed shipments• Delay capital investments and adjust accounting methods
to portray quarterly financial results more favorably• Introduce “new and improved” products that are new in
form, but not in substantive ways that are of consequence to purchasers
• Merge, Acquire, Joint Venture and Ally out of desperation or without proper considerations
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The Roadmap to Failure
Fred Wiersema and Mike TreacyP
erf
orm
ance
Time
Clear Sailing
Today’s performance
Ad-hoc Tactics
Denial & Defense
Doom Projections
Overdue Failure
The Moment of Truth
X
Performance Freefall
Tomorrow’s actual
performance
Downpresure of Unclear Strategy
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“What is the moral of the story?”
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What is the Business Model?
USP
Market Discipline
Profit Model
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Intro: Market Discipline
• Mamak stall
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Intro: Market Discipline
"They are the most innovative"
"Constantly renewing and creative"
"Always on the leading edge"
"A great deal!"
Excellent/attractive price
Minimal acquisition cost and hassle
Lowest overall cost of ownership
"A no-hassles firm"
Convenience and speed
Reliable product and service
"Exactly what I need"
Customized products
Personalized communications
"They're very responsive"
Preferential service and flexibility
Recommends what I need
"I'm very loyal to them"
Helps us to be a success
Product Leadership
OperationalExcellence
CustomerIntimacy
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Operational Excellence(low cost producer)
Ref: The Discipline of Market Leaders, Michael Treacy & Fred Wiersema; 1995
Product Leadership(best product)
Customer Intimacy(best total solution)
Strategy: Disciplines, Priorities, and KPIs
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The McPlaybook*
Make it easy to eat• 50% drive-thru• Meals held in one
hand
Make it easy to prepare• High Turnover• Tasks simple to learn
& repeat
Make it quick• “Fast Food”• Tests new products
for Cooking Times
Make what customers want• Prowls market for new
products• Monitored field tests
*Adapted from: Businessweek , Februrary 5th 2007
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Operational Excellence
• Competitive price
• Error free, reliable
• Fast (on demand)
• Simple
• Responsive
• Consistent information for all
• Transactional
• 'Once and Done'
Operational Excellence
• Competitive price
• Error free, reliable
• Fast (on demand)
• Simple
• Responsive
• Consistent information for all
• Transactional
• 'Once and Done'
Customer Intimacy
• Management by Fact
• Easy to do business with
• Have it your way (customization)
• Market segments of one
• Proactive, flexible
• Relationship and consultative selling
• Cross selling
Customer Intimacy
• Management by Fact
• Easy to do business with
• Have it your way (customization)
• Market segments of one
• Proactive, flexible
• Relationship and consultative selling
• Cross selling
Product Leadership
• New, state of the art products or services
• Risk takers
• Meet volatile customer needs
• Fast concept-to- counter
• Never satisfied - obsolete own and competitors' products
• Learning organization
Product Leadership
• New, state of the art products or services
• Risk takers
• Meet volatile customer needs
• Fast concept-to- counter
• Never satisfied - obsolete own and competitors' products
• Learning organization
Strategy: Disciplines, Priorities, and KPIs
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Operational Excellence(low cost producer)
Ref: The Discipline of Market Leaders, Michael Treacy & Fred Wiersema; 1995
Product Leadership(best product)
Customer Intimacy(best total solution)
Strategy: Value Disciplines
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Operational Excellence(low cost producer)
Ref: The Discipline of Market Leaders, Michael Treacy & Fred Wiersema; 1995
Product Leadership(best product)
Customer Intimacy(best total solution)
Strategy: Value Disciplines
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Sample KPIs for Each Discipline
Operational Excellence
• Price• Selection• Convenience• Zero Defects• Growth
Operational Excellence
• Price• Selection• Convenience• Zero Defects• Growth
Customer Intimacy
• Customer Knowledge
• Solutions Offered• Penetration• Customer Data• Customer-success
focus
Customer Intimacy
• Customer Knowledge
• Solutions Offered• Penetration• Customer Data• Customer-success
focus
Product Leadership
• Marketing• Functionality• # of Successes• # of Failures• Learn from key
users• Interdisciplinary
teams• Pipeline
Product Leadership
• Marketing• Functionality• # of Successes• # of Failures• Learn from key
users• Interdisciplinary
teams• Pipeline
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M&A Trends
1. Booming Demand
2. Supply/Demand shift to remote, unstable locations
3. Demand shift in Asia
4. Middle East ‘cheap’ energy = diversification
5. Natural resources depleting fast
6. Massive capital required
8. Supply security
9. Scarcity of Talent
10.Global labor market
11.New, low cost players
12.Niche companies in new technologies*
13.Private Equity
14.Restructuring undervalued Conglomerates
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M&A Trends
21.Alternative Industries – growth, fragmented*
22.Low R&D, demand for new technologies
23.Credit Crunch
24.Foreign entities
25.Political instabilities
26.De-regularization, Unbundling
15.Record profits, High Prices
16.Antitrust Regulations
17.Cross-border Regulations
18.Traditional MNC consolidation
19.Competition for Assets
20.Rise of Sovereign Funds
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Biggest Trend
“Earnings Per Share growth expectations are way above what companies can
achieve in most territories from organic growth alone”
John McConomy, US Power and Utilities Transaction Services Leader, PricewaterhouseCoopers
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Two Major Rationale for M&As:
1. Cost Reduction
2. Growth
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Strategies for Growth
1.Base Retention
2.Share Gain
3.Positioning4.Adjacent Market
5.New Business
GROWTH
“Double-Digit Growth”, Michael Treacy
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Rationale for M&As: Growth
Expansion
1.Consolidate
2.Geographic
3.Distribution
4.Compensate
Transformative
1.Portfolio refocus
2.Diversification
Easier Tougher
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Rationale for M&As: Expansion
Expansion
1.Consolidate
2.Geographic
3.Distribution
4.Compensate
1.Gain Scale to compete
2. Integrated Solutions
3.Financial Growth
4.Supply (security, mix)
5.Developing markets
6.High cost of Extra Capacity
7.Private Equity
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Rationale for M&As: Expansion
Expansion
1.Consolidate
2.Geographic
3.Distribution
4.Compensate
9.De-regularization
10.Demand outstrip supply
11.Revenue Mix – Tax optimization
12.Talent
13.New, Low-cost Entrants
14.Undervalued Big Players
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Rationale for M&As: Transformative
Transformative
1.Portfolio refocus
2.Diversification
1. New Business Lines
2. Selling/Spin-off non-core
3. Increase product line
4. New customers
5. New technologies*
6. Complementary Business
7. Up-down Supply Chain
8. Patent
9. Convergence anticipation
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Rationale for M&As: Cross Sectors
Traditional
AlternativeIncremental
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Rationale for M&As: Cross Sectors
Traditional Utility
AlternativeEnergy
IncrementalTechnology
New Delivery, New Sources, Existing Resources
Oil, Gas, Electricity, Coal
Biomass, Nuclear, Ethanol, Wind, Solar
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Example: Energy Sector
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Possible ‘Outside’ Acquirers or Investors
Institutional
Fund Managers
Corporations
Sovereign Funds
VCs
NGOs
Non-Profit Org
Financial (Loans)
JV Partners
M&A
Social VCs
Holding Co.
Gov. VCs
Supply Chain
Gov. Partnership
Competitors
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Why do ‘Outsiders’ Acquire or Invest?
1. Return/Profit
2. Risk Management/ Hedging
3. Tax-benefits
4. CSR/Image
5. Diversify revenue
6. Counter-cyclical balance
7. Support ‘Mission’
8. Exclusive rights
8. Contractual obligation
9. National Agenda
10.Control Supply Chain
11.R&D portfolio
12.Control Management
13.Alternative Cash Flow
14.M&A
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3. Strategies, Structure, and Optimizing Value in M&As
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Strategies for Growth
1.Base Retention
2.Share Gain
3.Positioning4.Adjacent Market
5.New Business
GROWTH
“Double-Digit Growth”, Michael Treacy
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How Markets determine Growth Strategies (1)
• Growth Rate
Growth Rate
Strategy Why?
Fast 1. Market Positioning
2. Share Gain
3. Base Retention
•Maintain market share in strategic segments•Prepare for market decline•Competitors focus too much on getting new customers
Flat 1. Base Retention
2. Share Gain (Acquisitions)
•Lose customers slower than competitors•Create scale economics, squeeze costs
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• Churn RateChurn Rate
Strategy Why?
Low 1. Share Gain (Acquisitions)
2. Adjacent Markets
•Buying customer base is cheaper than own efforts•New products, old customers strategy
High 1. Base Retention
2. Share Gain
3. Adjacent Market
•Lose customers slower than competitors•Customers are always open to the best value and offer•Desperate to gain revenue
How Markets determine Growth Strategies (2)
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How Markets determine Growth Strategies (3)
Fast Growth,
Low Churn
1.Market Positioning
2.Share Gain (M&A)
3.Base Retention
4.Adjacent Markets (M&A)
•Example: Energy Sector
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• Create better ‘Value’ proposition
• Neutralize competitor advantages
• Buy Market Share outright– Price Premium– Operating Model– Integration
Strategy 2: Share Gain
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Buying Market Share: Acquisition strategy
IntegrationOperating
Model
PricePremium
Buying Market Share
Net Cost per Customer < Direct Acquire
No evidence of previous company
One Kingdom
Pre-integration Blueprint
Slow Trigger, Fast Bulletwww.myCNI.com.my www.OOBEY.com
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Buying Market Share: Side notes on Funding
Preferable OK, but not preferred
1. Cash from Earnings
2. Cash from Borrowings
1. Cash from Stock sale
2. Issue more stock
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*Adapted from Warren Buffet’s acquisition strategies
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Strategy 4: Invade Adjacent Markets
Adjacent Market = Important Similarities and Large Differences in:
1. Cost Structure
2. Competitors
3. Customers
4. Critical Capabilities
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Strategy 4: Invade Adjacent Markets
Traditional
AlternativeIncremental
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Strategy 4: Invade Adjacent Markets
Traditional Utility
AlternativeEnergy
IncrementalTechnology
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Example: Energy Sector
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Strategy 4: Invade Adjacent Markets
Upstream Midstream Downstream
DistributionConversionRaw Mat
Vendors/Services
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• Is it a promising market?– Best when market is new and not stable– You must time your entry carefully– Entrenched companies usually delay
embracing new technology or process
• Can you win in this market?– Must be built on advantages that are tangible,
practical and easily implemented
Strategy 4: Invade Adjacent Markets
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• Can you match the Standards of Competition in this Market?–You do have to meet the quality level that is
common in the market–Three Standards:- Technology,
Relationships, Business-model–You must have 80 percent of the capabilities
you need to match competitor’s Standards
Strategy 4: Invade Adjacent Markets
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• Make or Buy?1. It is easier to meet the standards of
competition if you buy an existing player
2. Adjacent acquisitions must remain as a separate enterprise
3. Integrate Management Control (systems, technology)
4. Inter-transfer of management talent, knowledge and capability are important
Strategy 4: Invade Adjacent Markets
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Strategy 5: Acquire new Business
• No core advantage to bring in
• Investors mind-set vs. Managers mind-set
• Value unlocking via operational improvements
• Invest in Management/Leadership
• Premium = Combined value > stand alone
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Revenue Growth
Base Retention
Share Gain Positioning Adjacent Market
New Business
Operational Excellence
Product Leadership
Customer Intimacy
Competencies Information Systems
Motivation, empowerment,
alignment
Financial
Learning & Growth
Internal Process
Customers
Investment Strategy
Productivity Market Value
Linking BSC to M&A Strategy
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4. Considerations, Risks and Pitfalls
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Types of M&A Deals vs. Considerations
Overcapacity Product/ Market Consolidation
Transformation/ Convergence
Roll-up Acquire products/ market
Strategic Growth Bet
Siz
e (R
elat
ive)
Share Gain (Expansion)
Adjacent (Transformative)
New Business (Transformative)
Small
Large
“Running a winning M&A shop”, McKinsey
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Types of M&A Deals vs. Considerations
Overcapacity
Siz
e (R
elat
ive)
Share Gain (Expansion)
Adjacent (Transformative)
New Business (Transformative)
Small
Large
“Running a winning M&A shop”, McKinsey
•Reduce industry capacity•Control Pricing•Similar Product Offerings•Pay for Cost synergies
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Types of M&A Deals vs. Considerations
Roll-upSiz
e (R
elat
ive)
Share Gain (Expansion)
Adjacent (Transformative)
New Business (Transformative)
Small
Large
“Running a winning M&A shop”, McKinsey
•Transfer Core Strength to target•Pay for lower operating cost of target•Increase revenue thru broad strength
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Types of M&A Deals vs. Considerations
Product/ Market Consolidation
Siz
e (R
elat
ive)
Share Gain (Expansion)
Adjacent (Transformative)
New Business (Transformative)
Small
Large
“Running a winning M&A shop”, McKinsey
•Economies of Scale•Consolidate back office•Expand Market presence•Pay for Growth, Channels
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Types of M&A Deals vs. Considerations
Acquire products/ market
Siz
e (R
elat
ive)
Share Gain (Expansion)
Adjacent (Transformative)
New Business (Transformative)
Small
Large
“Running a winning M&A shop”, McKinsey
•Expand market offering•Expand Geographic reach•Pay for Growth, Channels•Revenue synergies
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Types of M&A Deals vs. Considerations
Transformation/ Convergence
Siz
e (R
elat
ive)
Share Gain (Expansion)
Adjacent (Transformative)
New Business (Transformative)
Small
Large
“Running a winning M&A shop”, McKinsey
•Transform Industry•Create new Value Proposition•Pay for New Markets, New Capabilities
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Types of M&A Deals vs. Considerations
Strategic Growth Bet
Siz
e (R
elat
ive)
Share Gain (Expansion)
Adjacent (Transformative)
New Business (Transformative)
Small
Large
Adapted: “Running a winning M&A shop”, McKinsey
•Skill transfer into new business•Pay for High Risk options, ability to act in new market space
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Three-Stage Process for Evaluating M&A deals
1. Strategy Approval
2. Approval-to-Negotiate
3. Deal Approval
1. Business Dev + Business Unit
2. Worth of Target?3. Attractiveness of Target
vs. Others4. Target compatible with
Strategy?5. Support from Acquirer?6. Integration possibilities?
“Running a winning M&A shop”, McKinsey
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Three-Stage Process for Evaluating M&A deals
1. Strategy Approval
2. Approval-to-Negotiate
3. Deal Approval
1. Price range2. Initial Due Diligence3. Vision for incorporation4. Key Synergies5. Nonbinding Term
Sheet/LOI6. Negotiation Roadmap7. Process to Close
“Running a winning M&A shop”, McKinsey
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Three-Stage Process for Evaluating M&A deals
1. Strategy Approval
2. Approval-to-Negotiate
3. Deal Approval
1. Answering Key Questions
2. Debating Valuations3. Aiming for Integration4. Dealing with Execution
Risks
“Running a winning M&A shop”, McKinsey
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Considerations, Risks and Pitfalls
1. Global footprint vs. Local Presence
2. Anti-trust and Regulatory permissions
3. M&A Accounting Standards
4. ‘Fair Value’ definition in financial reporting = ‘Exit’ price
5. Acquirer and Target having different Risk Tolerances
6. Public (or Public-hopeful) companies need to consider EPS after acquisition
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Considerations, Risks and Pitfalls
7. Synergies and Improvements need to realized as quickly and efficiently as possible
8. Combined Management capability to deliver improved performance
9. First 100 days post-acquisition blueprint
10.Culture management
11.Staff Poaching from Competitors (and non-competitors)
12.Customer Poaching from Competitors
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Consideration: Alternative Deals to M&A
“When companies are unwilling to sell or acquisition premiums are too high, alliances are the next best thing to a
merger. In other cases, they are actually preferable to M&A”
David Hernst, Principal, McKinsey’s Washington, DC
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Consideration: Alternative Deals to M&A
Joint Venture
Unite business units
Problem with shared ownership
New Product Lines
Cost Reductions
Share risk, Share Cost in new markets, R&D
Buy-out clause
Alliances Reduce non-core or commoditizing parts
Outsourcing, Offshoring
Help supplier gain Scale
Enter Complementary business
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End Note for M&A
“Go where the money is... then marry for love”
F. Scott Fitzgerald, Author
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Thank You.
soft copy of slides: www.totallyunrelatedrandomanddebatable.
blogspot.com