ACQUISITION ASSESMENT

1. 2. 3. 4. 5. 6. 7. 8.

Executive Summary The Acquisition Logic Assessing Industry Attractiveness Assessing Country Attractiveness Assessing the Company by itself Acquisition Logic: The Company with Us Managing the Integration Process Scenarios for Financial Valuation

1. Executive summary 1.1. Summarize the acquisition logic from Section 2 What is the relation between this acquisition and the corporate or business strategy of our company? Discuss in broad terms as well as more specifically (domain penetration versus extension or prospection; platform versus position etc.) Does the acquisition imply a need to revise the strategy of our companies business? What elements other than the acquisition opportunity itself, have brought about this need? What other alternatives including acquisitions, partnership possibilities and internal development, were considered? 1.2. Provide a short description of the opportunity Name: Activities: What would we be buying (a business, a part of a business, a diversified firm where the client would only keep part of, key skills new technology, fixed assets, cash, etc.) Size (assets, sales, people, and market position) Performance: How healthy both competitively and operationally is the firm?

1.3. What is the origin of this acquisition opportunity? 1.4. Who is proposing this acquisition? Who are the members of the evaluation team? 1.5. Summarize the assessment of the industry (Section 3) Include the assessment: - Main strategic segments - A picture of the industry structure - A prognosis of its evolution 1.6. Summarize any country-specific considerations (Section 4) 1.7. Summarize the assessment of the company by itself (Section 5) What are the main strengths and weakness of the company in the light of the assessment of the industry evolution? Assessment of the quality of the current management. What risks does this acquisition expose the buyer to? Has anything been done to investigate or reduce those risks? 1.8. Summarize how we propose to create value in this acquisition (Section 6) Through improvements in the company by itself. Which ones? Through strategic capability transfers between the company and our clients business. Which ones? Describe briefly how we see this process over time and in organizational terms. What costs will be involved? What risks? What subsequent investment needs? 1.9. Describe the overall integration approach (Section 7) Summarize our assessment of the:

- Stand alone value - Quantifiable synergy value (operating and non-operating) - Unquantifiable benefits and risk components

1.10. Summarize key environmental, legal, fiscal issues, or any other broader aspects that need investigation 1.11. Conclusion and recommendations What are the next steps in the acquisition process? What key ambiguities need to be resolved? What approach to the company or the bidding process is recommended? 2. The acquisition logic in general 2.1. What is the broad strategic logic behind this acquisition? How does this logic correspond with the strategy for this business area? If the acquisitions purpose is domain strengthening, clarify: - The foreseen industry solution - The requirements for a viable competitive position - The key lags in current competitive position/capabilities - The broad impact of the acquisition on these lags and leads in competitive position and capabilities - The main sources of the acquisitions impact (combination benefits, resource sharing opportunities, functional skill transfer, general management improvements - The magnitude of further investments or acquisitions required to reach a viable position If the acquisition is a domain extension, clarify: - The nature of the complementarity in business positions and capabilities - We can bring the strategic capabilities to the acquired firm
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- From which unit in the organization? To which unit in the acquired firm? - The strategic capabilities the acquired firm can bring and to which units - The opportunities for learning from the best practice in both directions - Further strategic options the acquisition open or foreclose

If the main purpose is domain exploration, clarify: - The motivation for this unrelated diversification - The potential for nurturing this as a stand-alone business - Why would we be the appropriate host - Are we able to provide the funding over time that successful growth may absorb? - The learning we hope to derive about this business; the potential leverage of this learning in later commitments - Why not develop that capability within the current business. What learning do we hope to derive for our current business - The potential synergies between this business area and our current business in the long run. 2.2. Choice of renewal mode Why should we consider achieving the strategic objective through an acquisition, rather than internally or through a partnership? What would be the best internal development scenario? What would be the best partnership scenario? 2.3. Why this company How did this opportunity come about? Why is the company for sale? What are the motives of the seller?
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Why this particular company? Which better alternatives have we dismissed as impossible or impractical? 2.4. What are the strategic implications of not acquiring this company? 3. Assessing industry attractiveness 3.1. What are the strategic segments in the targets industry Strategic Segments: segments that serve different user needs and have a segment-specific cost structure, and as a result, represent competitive arenas. In which is the target firm present or absent? 3.2. Provide by segments a current picture of the industry What is the return potential of this industry? By what is it limited? What are the customers needs? How do they buy? How loyal are they? What is the structure of distribution? What are their needs? How powerful/dependent are they? Describe the build-up of the cost structure in this business, from raw materials through customer service. What is the range of competitive weapons used to compete? Who are the competitors? Group them in types of competitors that use similar strategies. For each competitor in the strategic group of the target and for relevant key competitors in other strategic groups describe: - Their performance in the segment - Their objectives/commitment to this segment - The strategic approach they have to it - The resources they have available - Their relative cost position Any substitute products? Any substitute segments?

What are the core technologies underlying this product market? What are the key technology issues? What position and capabilities seem required to be a viable competitor? What artificial barriers of regulations, if any, underpin of limit industry development and profitability? What management capabilities are crucial to succeed in this industry? 3.3. What is by segment, the prognosis about the evolution of the target industry? How will the segmentation evolve? What expected growth do we see for each segment? Why? How doe we see the evolution of returns in this business? Why? What could destroy the industry as it is? What could destroy its profitability? Consider major threats of any kind (regulatory, environmental, substitution, foreign competition, etc.) How will the competitive forces in the industry change: - Relations with suppliers - Relations with customers - Relations with distribution - Substitution trends Among the factors that influence the industry, which ones are: - Controllable (barriers to exit/entry, distribution channels) - Influencable (customer preferences, power of suppliers, competition characteristics) - Uncontrollable (economic fluctuations, demographic trends) Sum up the attractiveness of the industry:
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- Very attractive, attractive, moderately attractive, not very attractive, other qualifications An outline from three to five main reasons that support this opinion can be used for a (public) announcement of the decision to enter the industry. 4. Assessing country attractiveness 4.1. What are the main relevant differences between this country and the countries in which we are currently operating? On which dimensions can we understand them? In the immediate industry environment: - Growth - Customer needs - Price levels - Nature of competition - Cost structure elements (raw materials, labor, transportation, energy) - Technologies used and technical sophistication - Other key factors In the broader environment: - What is the availability of skilled labor - Labor relations policies and issues - Environmental policies and issues - Regulation (employment law, taxation, dividend repatriation local content, export subsidies, financing, ) - Business practices - Political risk factors - Other key factors
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4.2. What impact could these differences have on the performance of the combined companies? 4.3. What restrictions to strategic freedom would we be operating under in terms of: - Funding - Repatriation of dividends - Local content - Taxation - Accounting practices - Other 4.4. How do we evaluate the overall political and economic risk of the country? How is the business tied to those risks? 4.5. Can we find experiences by other foreign entrants in the same industry? - Who was involved in these acquisitions - Why have they (not) been successful - What does it seem to take to succeed there - What else can we learn from these experiences 4.6. Have other firms from our country made acquisitions in this country. What can we learn from them? 4.7. Sum up the pros and cons and decide if having an activity in this country would be: - very attractive, attractive, moderately attractive, not very attractive, other qualifications. 5. Assessing the company by itself 5.1. Provide a brief description of the acquisition candidate - Short history of the development and performance of the firm
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- Main activities and locations - Size of the company and sales - Nature and description of the assets (human and balance sheet) its management and organization - Main strengths and weaknesses - Relevant relationships with governmental or regulatory groups - Has the business previously been sold or has it been for sale? 5.2. What are the main products and services and their history (volume, sales, unit prices, etc.) - What are the main products and services and their history (volume, sales, unit prices, etc.) - What is the profitability by product line? - What is the level of quality and the reputation for quality compared with those of competitors products? - What are the objectives of R&D? - What are the objectives for ICT? - Are there some potential new products? - Are there some major products to be started? - Assess the strength of patents and trademarks 5.3. Position in the market - What is the firms market by strategic segment? - What is the relative position by segment? - What changes can be expected? - What image and reputation does the target firm have among the customer and professional groups? - Why?
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- If it is the distributor, how do its suppliers rate it? 5.4. Customers - How are their needs? - How are those needs changing? - Who are the main group of customers? - Assess the quality of the brand franchise? - How do its major clients perceive the company? - What would be the influence of this acquisition on these customers? 5.5. Suppliers - Who are the key suppliers? - How dependent is the company on these suppliers? - To what extent does the company receive best client price levels? 5.6. Distribution Channels - Through what channels do they distribute? - What is the structure of these channels? - What are the main characteristics? - How are the channels evolving? - How much does it cost to use the various channels? - What are the main logistics operations? How are they handled? 5.7. What is the evolution over the past 5 to 10 years of: - Sales - Manufacturing costs - Contribution margins

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- Selling costs - Administrative expenses - Capital structure (debt/equity) - Depreciation and interest - Profit before taxes - Net profit - Cash flows 5.8. Compare the competitive position of the firm in relation to the competitors defined in Section 3 on each of its key functions What is the competitive position of the firm in relation to its most profitable and successful competitors? What is the potential for improvement? What is required to realize that potential (e.g.: specialization, industrial rationalization, productivity and organization, investments, technology) 5.9. Ratio analysis (to compare the firms performance with that of other firms in the same industries). 1. Efficiency Ratios - Sales to total assets (sales/total assets) - Inventory turnover (cost of sales/average inventory) - Average collection period (accounts receivable x 360/net sales - Average payment period (accounts payable x 360/cost sales 2. Profitability Ratios Net profit margin (net income/net sales) Return on total assets (net income/total assets) 3. Leverage ratios

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 Debt ratio (long term debt/total assets) Times interest earned (net income/interest) 4. Liquidity ratios Current ratio (current assets/current liabilities) Quick ratio (cash + short term investments + accounts receivable/current liabilities) 5. Market value ratios Price/earnings ratio (market price per share/earnings per share) Market to book value ratio (market value per share/book value per share) 6. Risk, what is the firms beta 5.10. If it is a public firm, what is the markets perception - How is the company perceived by its shareholders? - How has the stock been traded for the past two years (price and volume) - What is the firms credit rating? Has is changed recently? 5.11. Organization and Management - Formal organizational chart - Beyond the formal chart, what does the real informal organization look like? - Who are the members of the board of directors (names, position powers) - What are the profiles and competencies of the key managers? - What are the motives of the key managers? - How are their compensation packages structured? 5.12. Culture - Characterize the management style
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- What kind of group spirit is there? - How are decisions made? - How are the main business functions and their role defined by the firm (marketing, production, finance control,) - Historically, are there some dominant functions? - What is the philosophy of management on matters such a growth industrial relations, organizational planning, industrial engineering, merchandising, educational selling, advertising, accounting, R&D, product design, dividends, financing expansion. - On what dimensions is the firms culture compatible with, the same as, or different from our culture? How great are these differences? 5.13. Human Resources - What are the strengths and weaknesses of the management team? - What are the skills/capabilities of the workforce? - How disciplined and motivated are the employees - How strong is their identification with the current owner or management team? - Job classification (skilled/semi-skilled, salaried/hourly, full-time/part-time) - What is the number of employees by job classification? - What is the wage level? How does it compare with the industry? - Age and seniority in the company - What education do the employees have? - What is the employee turnover? Does it vary by level? How does it compare with the industry average? - Is it appropriate to adjust the workforce to the volume of activity (overtime, seasonal schedules, temporary workforce) How much does it costs?

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- Do any employees hold special employment contracts? What are employees pension rights and benefits? - How compatible are they with those of our clients firm? - What other fringe benefits are present (company cars, vacation, health, home-telephone, profit-sharing, stock options) - What is the overall cost of fringe benefits? - What are the strengths and weaknesses of the management team? - Are the employees organized? Which unions? What is the history of labor relations at the firm? If there are some contracts currently in force, what are the key terms? 5.14. Relation to other stakeholders - What is the importance of the companys various operations in different local communities? - What is the history of the companys relations with these communities? - Who are the opinion leaders in this respect? 5.15. Ownership structure - What is the structure of the firm? - Who exercises control of the company and how? - Who are the shareholders? - Are there any voting agreements? - How widely is the firms stock held? - Are there some warrants, rights or options? - Who wants to sell and what do they want to sell? - Why do they want to sell? 5.16. Relation with advisers etc. Banks, insurance, brokers, accountants, consultants, etc.
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5.17. Legal considerations - How and where is the firm registered? - Are there any current active lawsuits? - Does the firm have any particular liabilities? - Are there any mortgage provisions or liens that could affect the sale of some properties? - Are there other contracts of informal agreements that should be taken into consideration for the sale? - Has it been completely clarified what is and what is not part of the sale in a legal sense? 5.18. Environmental issues - Are there environmental problems resulting from the firms operations of from use of its products of services? - Are the premises, equipment and working conditions safe? - All necessary permits present? - Does the company have proper insurance coverage 5.19. Information Systems ICT-Strategy - Is an ICT-strategy plan available? If so, what is the major content of the plan? - What is the relation between de company-strategy and the ICTstrategy plan? - Is the ICT-strategy plan created from a business point-of-view or from an ICT point-of-view? Why? ICT-environment - What type of information systems are being used (e.g. ERP, CRM etc.)?
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- What is the brand-name of each system? (IT-architecture) - Which systems are connected by an automatic interface? Which by a manual interface? (IT-architecture) - Which main business-process does the company have (e.g. purchasing, manufacturing, distribution? (IT-coverage) - Describe the impact/support of each system on the main business processes? (IT-coverage) Application and hardware management & Support - How is support organized for hardware and for software (0-line support, 1-line support, 2-line support)? - Are external companies involved in giving application/hardwaresupport? - After completion of a project, support has to be arranged by the standing organization. Describe this process for the company? Project-management - What is the relation between the ICT-strategy plan and the projects that are being executed? - What method is being used for project-management? - What does multi-project management (or program-management) mean for the organization? Is it being used? - What were the 5 most recent ICT-projects that have been started last 12 months? How many of them succeeded and were successful? How many of them did not succeed? Why? Management Information - Do managers get the information they need to make decisions? Is this information accurate and timely? Is the information related to the achievement of objectives? - What method is being used to identify information-needs?

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- Does the company use specific tools to generate management information? (see also ICT-environment) 5.20. Assess the competitive position of the target firm on its own. What are the major areas where improvement is possible? What resources would be needed? (overall assessment, see Section 3 & 4) 6. Acquisition logic: the company with us 6.1. Restate in more detail the acquisition logic from Section 2 - What are the main areas in which the firms might create value together? - Given our business positions and capabilities, are there different strategic logics that could be followed in this acquisition? - For each of those logics, provide a brief scenario of integration, investments, benefits and timing. - Which of these scenarios or combinations there of is the chosen logic to guide the evaluation and integration? Explain choice 6.2. How specifically are we going to create value in this approach? What is the relative emphasis on: - Resource sharing - Functional skill transfer - General Management improvements - Combination benefits - Describe the trade-offs that need to be made for these to occur. - Provide your arguments for making the trade-off you advocate. - How do you see the sequencing of benefits over time. 6.3. List the expected benefits that will be detailed in the synergy scenario, the time horizon within which they are achievable, and most importantly, the organizational interdependence requirements without these benefits will not be achieved: financial estimation of expected benefits, organizational conditions for implementation and time horizon.
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Resource Sharing - Share - Production - Service - Logistics - ICT - Overhead - Other Functional Skill Transfer - R&D - Production - Marketing - Other General Management Capability Transfer - Operating Efficiencies - Better Strategic Focus - Other Managerial Improvements Combination Benefits - Market Power - Purchasing Benefits - Financial Benefits - Fiscal Benefits - Other
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6.4. What cots and negative synergies might be associated with the acquisition? - Restructuring costs - Customer conflict - Supplier impact - Image impact 6.5. What are the main commercial and non-commercial risks? How can they be contained? 6.6. What are the risks and costs of not making the acquisition 6.7. If a competitor were making the acquisition; for which competitor would the fit be best? 6.8. What options is the acquisition likely to open up? Which does if foreclose? 7. Managing the integration process Deciding on the integration Mode 7.1. Complementarity of acquired positions and core capabilities List the product-market positions and the core capabilities that would be available to our client if he acquired the firm. Do the same for the business with which the acquisition is to be integrated. Explain the degree of overlap, coplementarity, and benefits expected. 7.2. Strategic interdependence required Given the extent of this complementarity and overlap, and given the synergy expectations, what is the need for strategic interdependence among the two firms for each capability, each position, and for each individual function? 7.3. Organizational autonomy required

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Is there a need to preserve distinct cultures after the acquisition? Specify which of these capabilities and business positions could be destroyed. Can these capabilities and positions be preserved in distinct submits or do they depend on broader organizational qualities. 7.4. In light of this need for interdependence and organizational autonomy, what is the best metaphor for the overall integration? - Absorption (low autonomy, high interdependence) - Preservation (high autonomy, low interdependence) - Symbiosis (high autonomy, high interdependence) 7.5. Within this overall choice of integration approach, how could the integration approach best be differentiated for each of the different capabilities? - Which ones ideally need strong preservation? - Which ones ideally, require full absorption? - Which ones, ideally, need to evolve symbiotically? - To what extent is such differentiation manageable? How? Managing Gate keeping 7.6. Preparing the interface management In case of an absorption approach: - Who will be in charge of the transition process? - Who will be on the steering committee that makes the policy decisions with respect to the acquisition integration? - What temporary integration structure is envisioned? - What timetable is seen for the integration process? - What attitude will be taken vis--vis the acquired company and vis--vis our unit?
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In the case of a preservation approach: - Who will be the gatekeeper? - How will this be communicated to our organization? - Which managers will be seconded to the host structure or the acquired firm? Why were they chosen? - What needs to be done to protect the acquired firms dynamic? In the case of a symbiotic approach: - Who will be the gatekeeper? - How will the need for initial preservation be communicated to our organization? - How long will the initial preservation period last? - Who has been identified to assist the acquired firm? Why were the chosen?

7.7. How will the acquired firm initially report into our existing organization? 7.8. Will the acquired firm be reorganized? - If so, what will the new organization look like? - How fast should such a reorganization be decided? - How fast should it be implemented? 7.9. What organizational changes does this acquisition call for - What will the new organization look like? - How fast should this be implemented? 7.10. Other employees - What are the functions that represent critical skills?

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- What will be done to maintain those skills? - What is the possible redundancy impact? - How will the impact of this redundancy be managed? Creating the Appropriate Atmosphere and Context 7.11. What actions can be envisaged vis--vis employees, distributors, and customers to put operations on an even keel? 7.12. What immediate actions will we take to strengthen the acquired company? 7.13. What will we communicate as the new purpose to both sides? How? 7.14. What systems and processes will or will not be implemented in the acquired company? 7.15. What actions will be undertaken to foster natural understanding? Preparation of the Subsequent Integration Phase 7.16. Outline the status of our current planning for the actual integration phase. Who will need to become involved beyond the initial gatekeeping team? 8. Scenarios for financial evaluation The purpose of this section is to narrate briefly the scenarios for the financial valuation of the acquisition. These scenarios are important because they focus attention on the assumptions underlying the numbers and because a realistic approach to best and worst cases requires a coherent scenario, instead of merely adjusting all the financial variables lower or higher. If the acquisition is a platform, it may be preferable to base the acquisition decision on a complete strategy scenario for decision purposes, rather than stand-alone value plus synergy value. If the acquisition involves a business position, the development of a standalone value plus synergy value may be the most practical. 8.1. Develop a base case scenario for stand-alone value and synergies

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8.2. Develop a pessimistic scenario for stand-alone value and synergies 8.3. Develop an optimistic scenario for stand-alone value and synergies 8.4. Develop the appropriate competitive scenarios This would typically include: - the scenario of an LBO bid for the company - a synergy scenario with relevant competitors

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