Introduction Strategic M&A

Timothy Kiessling, PhD Head of Strategy Department Associate Professor of Strategy and International Business

A Companys StrategyMaking Hierarchy

Tasks of Corporate Strategy

Moves to achieve diversification

Actions to boost performance of individual businesses Capturing valuable cross-business synergies to provide 1 + 1 = 3 effects! Establishing investment priorities and steering corporate resources into the most attractive businesses

Corporate Strategy

Economies of Scale: cost per unit decreases as volume goes up

and Scope: Same raw material an semifinished materials and production processes to make a variety of products. Multi-brand strategies successful at this. Scope: Also management/overhead activities

Corporate Level Rules

First Mover advantage Huge (though issues?) Logic: The right combination of scale and scope economics, marketing and distribution power, management structure, and first mover (all intertwined and rely on one another) = corporate strategy. Few firms can rely on internal sources of growth alone. (what does this mean?)

Corporate Strategy
BCG: 1975 = based on the finding that high market share and profitability are strongly correlated in many stable market situations. Unrelated versus related diversification Strategic Fit amongst businesses

Types of Strategic Fits

Cross-business strategic fits can exist anywhere along the value chain

R&D and technology activities

Supply chain activities

Manufacturing activities Distribution activities Sales and marketing activities Managerial and administrative support activities

One Strategic Option: Single product line Concentrated Growth Focus on single product line (ex. Apple, McDonalds, Mack Truck, John Deere)

Must: 1)No major technological advances 2)Not product saturated/alternatives for growth 3)Competitors difficult to enter market 4)Inputs are stable
Why single product line powerful? Why do we see many firms spin-off in todays global marketplace?

Vertical/Horizontal Integration

Vertical: Industry Value Chain (backward more profitable than forward) Horizontal: increase range of products offered to current markets or into new geographic location (Use of strategic alliances)

Diversification

How used: new industries, technologies, supplier bases, customer segments, geographical regions, sources of funds
In Strategy: investing corporate resources in a number of different product/market combinations

Evaluating Performance and Making Corrective Adjustments Tasks of crafting and implementing the strategy are not a one-time exercise / NOR ONE M&A
Customer

needs and competitive conditions

change New opportunities appear; technology advances; any number of other outside developments occur One or more aspects of executing the strategy may not be going well New managers with different ideas take over Organizational learning occurs

Entering other markets or Diversification

1.

2.

3.

4. 5.

6.

What can we do better than any of the competitors in our market? What strategic assets are needed to succeed (Implementation)? Leapfrog competitors? (change the rules WalMart Banking) Hurt our strategic assets if we diversify? If we diversify, will we be a leader or in the pack? Can we learn by diversifying, are we organized to do so?

Strategies for Developing New Capabilities

Acquire existing company

Internal start-up

Joint ventures/strategic partnerships

Group Work
Acquire Develop Internally JV/SA

1) What are all the variables that must be taken into account when considering each of these? 2) What are the strengths and weaknesses of each?

A Career
Differentiating between emotion and fact Understanding goals and benchmarks Succeeding is vague/but known How get in the business How get better

General Motives for a M&A

Opportunity Threat or Opportunity Strategic Organizational (change agent) Brand

Is it hard to get a good deal anytime?

Steps

Strategic Analysis Develop Acquisition Plan Establish Screening criteria Generate Deals Narrow the field Due Diligence Documentation How to Finance/Deal Design Negotiation / Bidding Integration

1. 2. 3. 4.

Leadership Communication Managing Key Personnel

Introduction: Acquisitions
Continues to be one of the most popular Global strategies for firms $2.9 trillion in 2005 $3.4 trillion in 2006 In 2007, $4.367 trillion Fell $1.1 trillion 2008, volume dropping 15,256 deals in 2007 to 12,018 in 2008 2010 = 2.66 trillion 2011 = 2.6 trillion 2012 = 2.6 trillion

Yet our Academic Research in the past suggests that it is a failure most of the time. Is there a disconnect? (Example) Estimated failure rates are typically between 60 and 80 percent (Capron and Shen, 2006) Dont you read often that acquisitions are failures? WHY DO YOU THINK THIS IS SO?

Typical research:
$500 million plus Measure of success/performance Often short term stock price (days before/after) Secondary data Must have significant ownership USA based (Researchers have suggested cannot publish this type of research in Top Journals otherwise: Grinstein and Hribar, 2004) Publicly traded: (Although 75 percent of the firms acquired in the United States between 2000 and 2004 were privately held) Capron/Shen, SMJ 2009

Theoretical reasons for Acquisitions (Used in the past)

Transaction Cost Economics (bounded rationality (incomplete contracts) and
opportunism (acting with guile), uncertainty, frequency, asset specificity)

Make or Buy (diadic) Agency Theory (information asymmetry, uncertainty and risk) TMT (top management team)
Hubris Risk Aversion Compensation Characteristics (Age, tenure, global experience, stock option in the money, etc.)

Board of Directors
Large holdings of stock (active) Inside/Outside Directors Director Charcteristics (previous acquisition experience, etc.)

Market for Corporate Control

Theoretical reasons for Acquisitions (Contemporary)

Institutional Theory (Especially for Global Acquisitions)
RBV (Resource Based View): Complementary Resources Network Theory Dynamic Capabilities Knowledge Based View

Market for Corporate Control (Agency Theory) and TMT

TMT (top management team) of target firms leaves losing about 2/3, even higher if the acquirer is a multinational Market for corporate control suggests that target firms underperforming TMT is fired Synergy literature suggests TMT let go, lowering costs

Research also suggests to retain the TMT after Acquisition

Loss will heighten the level uncertainty affects the communication For integration of complementary human resources TMT tacit knowledge is the most strategically important resource Synergy; expertise needed for post-acquisition integration TMTs participation in the buy-in, development and implementation monitoring systems

SO WHICH IS IT? WHY?

What is a hostile takeover? Are there many hostile takeovers? What are the issues with these?

M&A. Does this exist? What are other ways instead of acquisition? Strengths and weaknesses of each. So why acquire?

For most industries, competition is intensifying from all of Porters five forces
The Internet changes everything

New entrants
Low cost global rivals Radical new business models

Global race for raw materials Suppliers moving up to become rivals Supply-chain transparency Regulatory and other barriers continue to fall Consolidation provides little relief

Customers wallets are flat Superempowered customers know more than ever

Customers

Suppliers

Rivalry

rading down T New media vs. old media Substitutes

Booz & Company DATE

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Every organization also faces intense pressure in terms of operational effectiveness and strategic differentiation

Operational effectiveness means performing similar activities better than rivals perform them.In contrast, strategic positioning means performing different activities from rivals or performing similar activities in different ways.

Executives, pulled in too many directions, say strategies are not clearly defined or likely enough to succeed
Booz & Company survey of 1,800 execs shows they believe their strategy will lead to success their companys capabilities fully support their strategy their company has a right to win in all the markets in which it competes they have too many conflicting priorities 64%

% of respondents

48%

33% 21%

Why is it that with so many available strategy frameworks many companies still struggle with sustained value creation?
Evolution of Strategy
Adaptation
Act quickly and creatively in response to events (organizational warning) Henry Mintzberg
The Rise and Fall of Strategic Planning 1994

Future
Michael Porter
Competitive Strategy 1980

Position
Exploit the high ground: create and hold a distinctive position (market-back strategy) W. Chan Kim & Rene Mauborgne Bruce Henderson
Essays 1966 Blue Ocean Strategy 2005

Tom Peters & Robert Waterman

Kenneth Andrews
The Concept of Corporate Strategy 1971

Many
W. Edwards Deming
Out of the Crisis 1986

In Search of Excellence 1982

Few

William Abernathy & Robert Hayes

Managing Our way to Economic Decline 1980

Gary Hamel & C.K. Prahalad

Competing for the Future 1994

Ram Charan & Larry Bossidy

Execution 2002

Chris Zook Michael Hammer & James Champy

Profit from the Core 2001

Execution
Align people and processes for operational excellence (the quality movement)

Reengineering the Corporation 1993

Concentration
Focus on your current core business (private equity)

Present

Strategy in a single slide

Future

First and foremost, CHANGE

First and foremost, DIFFERENTIATE

Many

Few

First and foremost, EXECUTE

First and foremost, STICK WITH WHAT YOU KNOW

Present

The essential strategic choice is about the identity of a firm

From struggling with push-me, pull- me tensions
Strategic thinking often centers on tensions between long term vs. short term, and many vs. few To Seeking the Answers to these sets of Questions: Positioning questions: How are we going to create value for our customers? How do we position ourselves vis a vis competitors? Leaders tend to "yin and yang" between Where will we play and where not? these tensions over time in a Resource questions: What intellectual, financial, tangible, and point/counter- point fashion tangible capabilities and assets can or should we deploy? The inescapable truth is that (a) Do we build, buy, or rent them? advantage is transient but (b) Which matter most? companies are sticky Market questions: What do we sell, and to whom? There is no winner between these Whats our portfolio of offerings--what tensions, only a resolution of business lines, what products, what services? them at a higher level

Coherence confers the right to win

The Power Of Coherence
A coherent company strikes a balance where the right product and service portfolio naturally thrives within a capabilities system consciously chosen and implemented to support a deliberate way to play
HOW WILL WE CREATE VALUE FOR OUR CUSTOMERS/ MEMBERS?

WHAT MUST WE DO WELL TO DELIVER THAT VALUE PROPOSTION?

Essential Advantage

WHAT ARE WE GOING TO DELIVER TO WHOM?

Why do coherent choices create value?

Focus and dedication on creating a winning capabilities system in your way to play Barriers for competitors who are less coherent, with less effective capabilities Ongoing improvement engine for the few capabilities that matter

Effectiveness

Efficiency

Highlighting of what is non-essential through clarity on way to play Less spend on those capabilities that are non-differentiating Capability scale through focus and often ability to deploy more broadly

Focused Investment

Provision of objective for the enterprise the value behind the portfolio Direction of capital and attention to those opportunities that extend a capabilities lead Guide for both organic growth and M&A decisions

Alignment

Alignment of strategic intent and day-to-day decision making thanks to capabilities lens Organization moving in lockstep and executing faster and with more force Talent attraction to organizations that clearly value what they do

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Financial

Good

Familiar
Industry or market based knowhow and management practices presumed similar

Coherent
Businesses linked by capabilities or common assets

Portfolio assembled for financial compatibility

Strong brands or other performance characteristi cs

Coherence Continuum

COHERENCE PAYS
32%

Coca-Cola
28%

24%

EBIT Margin 2003-2007 20%

16%

Campbells General Mills Kraft Unilever ConAgra Clorox

P&G

Wrigleys Heinz PepsiCo Kimberly Clark

12%

Nestle
Size of bubble: Revenue

8% 4% 0

Sara Lee

Coherence Score 20 Capabilities 40 60 80

100

Capabilities must be mutually reinforcing and integrated into a system that best supports a chosen way to play
Example: The Pepsi-Frito Lay Capabilities System
Direct-store delivery (DSD) allowing easy testing of new products by introducing them in a handful of stores

Continuous innovation of new products with store level response information going directly to R&D

Skilful global consumer marketing to rapidly build demand for initially successful products

Way to Play Rapid innovation, distribution and marketing to stimulate and meet customer snacking needs

A starting point: Is our strategy coherent?

The Coherence Test
Can We State It? Way to Play Are we clear about how we choose to create value for our members? Do We Live It? Are we investing in the capabilities that really matter to our way to play?

Capabilities System

Do all our service offerings draw on this superior Can we articulate the three to six capabilities that capabilities system? describe what we do uniquely better than anyone else? Have we defined how they work together in a system? Do our organizational structure and operating model support and leverage it? Do our strategy documents reflect this? Does our performance management system reinforce it? Have we specified our product and service sweet spot? Do we understand how to leverage the capabilities system in new or unexpected arenas? Can everyone in the organization articulate our differentiating capabilities? Do most of the products and services we offer fit with our capabilities system? Are new products and acquisitions evaluated on the basis of their fit with the way to play and capabilities system? Do we have a right to win in our chosen field? Do all of our decisions add to our coherence, or do some of them push us toward incoherence?

Product & Service Fit

Coherence

Is our associations leadership reinforcing these capabilities?

M&A
Follows the coherence test The reason for M&A Seeking Frms to answer the questions, and ever changing needs.

Acquisition of an Existing Company

Most popular approach to diversification Advantages

Quicker entry into target market

Easier to hurdle certain entry barriers

Acquiring technological know-how Establishing supplier relationships

Becoming big enough to match rivals efficiency and costs

Having to spend large sums on introductory advertising and promotion Securing adequate distribution access

Vertical Integration Strategies

Extend a firms competitive scope within same industry

Backward Forward

into sources of supply

toward end-users of final product

Problems going backward or forward? So why?

Activities, Costs, & Margins of Suppliers

Internally Performed Activities, Costs, & Margins

Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners

Buyer/User Value Chains

When the CEO of Schick (disposal razers) stated he was going to buy Duracell (batteries) the stock dropped by 15% and I agreed, because the CEO said (as is always the norm from an Agency Theory perspective), he was going to get synergies. We could not see how, but then in a few days knowing his mistake of not enough information, the CEO explained and the stock went up. Where were the synergies?

Related vs. Unrelated Diversification

Related Diversification Involves diversifying into businesses whose value chains possess competitively valuable strategic fits with value chain(s) of firms present business(es) Unrelated Diversification Involves diversifying into businesses with no competitively valuable value chain match-ups or strategic fits with firms present business(es)

8-43

Figure 8.2: Related Businesses Possess Related Value Chain Activities and Competitively Valuable Strategic Fits

8-44

Strategic Appeal of Related Diversification

Reap competitive advantage benefits of

Skills

transfer

Lower

costs
brand name usage competitive capabilities

Common Stronger

Spread investor risks over a broader base

Preserve strategic unity across businesses

Types of Strategic Fits

Cross-business strategic fits can exist anywhere along the value chain
R&D

and technology activities chain activities activities

Supply

Manufacturing Distribution Sales

activities

and marketing activities and administrative support activities

Managerial

Core Concept: Economies of Scope often Called Synergies

Stem from cross-business opportunities to reduce costs
Arise when costs can be cut by operating two or more businesses under same corporate umbrella Cost saving opportunities can stem from strategic fits anywhere along the value chains of different businesses. Rarely is this successful In long term.. Let us stop and discuss Psychological contract.

Research Suggests that these are the attractive Acquisition Targets

1.

Companies with undervalued assets

1.

Capital gains may be realized

2.

Companies in financial distress

1.

May be purchased at bargain prices and turned around

3.

Companies with bright growth prospects but short on investment capital

1.

Cash-poor, opportunity-rich companies are coveted acquisition candidates (Is it Cash poor that is the issue?) Big buying small

Do you agree?

How do you value a firm? How do you find an acquisition target? How much do you pay?

Term Sheet

Steps
Strategic Analysis Search Due Diligence Negotiation / Bidding Legal Deal Design Integration

1. 2. 3. 4.

Leadership Communication Managing Key Personnel

Cross Border
Significant Disruptive: Why? Time consuming: Why? Different from domestic: How? Country specific: Why? Affects analysis and due diligence

Cross Border
More likely to be related (What is related versus unrelated?) Payment in cash: Why? Competitor reaction different: Why?

First Round Document

Cross Border: Macroeconomy Issues

Fiscal Policy Monetary Policy Trade Policy Intervention Policy Employment Policies

Cross Border: Microeconomy Issues

Industry Structure FDI issues Infrastructure Porters Diamond

Cross Border: Institution Issues

Banks Financial Markets Legal Watchdogs Education

Cross Border: Cultural Issues

Business Practices MoW Hofstede stuff Leadership Entrepreneurship

Cross Border and Valuation

Inflation Exchange Tax rates Cash transfers Accounting principles Political Risk

Vendors Suppliers Customers Social Risk (not to buy foreign) Corruption

Due Diligence

Checklist and Global and private

Page 228

Due Diligence
Can degrade to checking facts Keep in mind the whole strategic picture Keep in mind if you have to manage the firm after purchase What is the risk? Does it feel right

Due diligence
Time pressure Reluctance to offend Price versus worth (targets perspective) = conflict Too brief Situation always changing Hidden unknowns

Due Diligence
Seek patterns Talk to employees (if possible) Understand employee mood Prepare for integration / corporate culture Been frank whenever possible Be inquisitive but not invasive Develop relationship

Due diligence Major focus

Legal Accounting Tax IT Risk Insurance Warranty Corporate Culture

Market share / Brand Operations and Supply Chain Equipment Property / Lease IP Finance Cross Border HR

Who wants this deal to get done? 1) Publicly traded? 2) Private

Or are there any differences?

TMT (top management team)

Berkshire Hathaway
Management

in place (they wont supply it, and Managers must remain significant owners who continue to run their companies as they have done so in the past

Large purchases Consistent earnings Good returns on little debt Simple business

WHY?

Berkshire Hathaway: 2011 Annual Report

On September 16th we acquired Lubrizol, a worldwide producer of additives and other specialty chemicals. The company has had an outstanding record since James Hambrick became CEO in 2004, with pre-tax profits increasing from $147 million to $1,085 million. Lubrizol will have many opportunities for bolt-on acquisitions in the specialty chemical field. Indeed, weve already agreed to three, costing $493 million. James is a disciplined buyer and a superb operator. Charlie and I are eager to expand his managerial domain. Charlie and I measure our performance by the rate of gain in Berkshires pershare intrinsic business value. If our gain over time outstrips the performance of the S&P 500, we have earned our paychecks. If it doesnt, we are overpaid at any price. We have no way to pinpoint intrinsic value. But we do have a useful, though considerably understated, proxy for it: per-share book value. This yardstick is meaningless at most companies.

How Accountants like to value

Book value Liquidation value Replacement cost (of assets) Current market value Discounted cash flow Multiples

How to value strategically

After acquisition, target valuation Synergy After acquisition, our valuation Value of intangible (like?) Value of long term association Value in combination with other acquisitions (stream!)

How measure success? Stream?

Which is easier for long-term success: Buying a small private firm or a Publicly traded firm?

Deal Design
Price is unimportant (is this a surprise?) Do I buy a poorly performing firm and get a deal? Trade-offs Whole deal view systems approach How pay? How Finance? Timing Commitments and follow-up

Deal Design
Controls Governance Decentralization versus Centralization Internal Power alignments Synergistic firings / closings

Deal Design Issues

Feedback and flexibility Speed and momentum (but beware of the rush) Simplicity versus complexity (where is the strength in the deal?) Initial meetings and reinforcement over time (why there is one point of major contact)

When to say no an stop?

Winners curse? Escalation of commitment?

Who influences the deal to Get done? Why? What is their reward? How measure their success? How many GE M&A per week?

Integration
Where M&A mostly fails: Why? Autonomy Interdependence Control Speed Important Flexible

Reasons for M&A Failure (60% fail to deliver value)

Execution
Poor Leadership Poor Integration Cultures too different Unclear Leadership 23% 21% 22%

18%

Wrong Focus 16%

Major Risks
Approach Risk

Resources focused on transaction and not integration and its costs

Wrong targets Handoff Risk No recognition of the unique source of value Poor transfer of knowledge to integration team Execution Risk Failure to mobilize and capture value Lack of resources No accountability for value capture

Top 12 Best M&A Practices

Approach 1.Focus on Source of value 2.Calculate Maximum price early 3.Need superior Due diligence

Top 12 Best M&A Practices

Execution 1.Address integration early, especially management and culture. 2.Quantify target success 3.Speed in integration 4.Focus on value drivers 5.Small rapid integration teams

Top 12 Best M&A Practices

Execution (continued): 6. Align Roles and responsibilities and communicate these 7. Retention/Retention/Retention 8. Culture: Humanize the M&A 9. Communicate frequently to all stakeholders in regard to implications and progress

Integration
Uncertainty Employee issues Change Management Objectives set Culture needs to change Value Chain

Integration
Start at the beginning Point man / leader Communication Deadlines Talent retention plans Production / Supply Chain Management Intangible retention MIS

Speed Errors
1.
2. 3. 4. 5.

6.

Obsessive list making Content free communication Too many planning meetings/committees Ignoring hierarchy Too much Emphasis on vision/values Rewarding A, getting B

Integration Maxims
Publish/Communicate Integration (if at all) plan Clear targets Integration short Swift decisions (mostly decentralize) Involve many employees (both sides) Common MIS (if possible)

MRP/LP Email Case

JV example
Alcatel/Lucent example

M&A Trends
1. 2. 3. 4.

5.

6.

Booming Demand Supply/Demand shift to remote, unstable locations Demand shift in Asia Middle East cheap energy = diversification Natural resources depleting fast Massive capital required

8. 9. 10. 11. 12.

13. 14.

Supply security Scarcity of Talent Global labor market New, low cost players Niche companies in new technologies* Private Equity Restructuring undervalued Conglomerates

M&A Trends
15. 16. 17.

18.

19. 20.

Low priced firms Antitrust Regulations Cross-border Regulations Traditional MNC consolidation Competition for Assets Rise of Sovereign Funds

21.

22.

23. 24. 25. 26.

Alternative Industries growth, fragmented* Low R&D, demand for new technologies Credit Crunch Foreign entities Political instabilities De-regularization, Unbundling

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

Two Major Rationale for M&As:

1.

2.

Cost Reduction (how effective? Synergies?) Growth

Strategies for Growth

Double-Digit Growth, Michael Treacy

1. Base Retention

5. New Business

2. Share Gain

GROWTH

4. Adjacent Market

3. Positioning

Rationale for M&As: Growth

Expansion Transformative

1.Consolidate
2.Geographic

1.Portfolio refocus 2.Diversification

3.Distribution
4.Compensate Easier

Tougher

Rationale for M&As: Expansion

Expansion 1. Gain Scale to compete 2. Integrated Solutions 3. Financial Growth 4. Supply (security, mix) 5. Developing markets 6. High cost of Extra Capacity

1. Consolidate
2. Geographic 3. Distribution 4. Compensate

Rationale for M&As: Expansion

Expansion 9. De-regularization

1. Consolidate
2. Geographic 3. Distribution 4. Compensate

10.Demand outstrip supply

11.Revenue Mix Tax optimization 12.Talent 13.New, Low-cost Entrants

14.Undervalued Big Players

15.Newer Assets

Rationale for M&As: Transformative

Transformative
1. New Business Lines 2. Selling/Spin-off non-core 3. Increase product line 4. New customers

1. Portfolio refocus
2. Diversification

5. New technologies
6. Complementary Business 7. Up-down Supply Chain 8. Patent 9. Convergence anticipation

Rationale for M&As: Cross Sectors

Traditional

Incremental

Alternative

Rationale for M&As: Cross Sectors

Example: Energy Sector
Traditional Utility
Oil, Gas, Electricity, Coal

Incremental Technology
New Delivery, New Sources, Existing Resources

Alternative Energy
Biomass, Nuclear, Ethanol, Wind, Solar

Why are international acquisitions more difficult?

Possible Outside Acquirers or Investors

Institutional
Fund Managers
Corporations Financial (Loans) JV Partners

Gov. VCs
Supply Chain

Sovereign Funds
VCs NGOs

M&A
Social VCs Holding Co.

Gov. Partnership
Non-Profit Org

Competitors

Why do Outsiders Acquire or Invest?

1. 2.

3. 4. 5. 6.

7. 8.

Return/Profit Risk Management/ Hedging Tax-benefits CSR/Image Diversify revenue Counter-cyclical balance Support Mission Exclusive rights

Contractual obligation 9. National Agenda 10. Control Supply Chain 11. R&D portfolio 12. Control Management 13. Alternative Cash Flow
8.

3. Strategies, Structure, and Optimizing Value in M&As

Strategies for Growth

1. Base Retention

5. New Business

2. Share Gain

GROWTH

4. Adjacent Market

3. Positioning

Buying Market Share: Side notes on Funding

Preferable 1. Cash from Earnings 2. Cash from Borrowings OK, but not preferred 1. Cash from Stock sale 2. Issue more stock

Strategy 4: Invade Adjacent Markets

Adjacent Market = Important Similarities and Large Differences in: 1. Cost Structure 2. Competitors 3. Customers 4. Critical Capabilities

Strategy 4: Invade Adjacent Markets

Traditional

Incremental

Alternative

Strategy 4: Invade Adjacent Markets

Upstream Raw Mat

Midstream Conversion Vendors/Services

Downstream Distribution

Strategy 4: Invade Adjacent Markets

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

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 competitors Standards

Strategy 4: Invade Adjacent Markets

Make or Buy?
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
1.

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

Which is easier: Big acquisitions or small firms?

4. Considerations, Risks and Pitfalls

www.myCNI.com.my

www.OOBEY.com

Types of M&A Deals vs. Considerations

Large Size (Relative) Overcapacity Transformation/ Product/ Convergence Market Consolidation Acquire products/ market Strategic Growth Bet

Roll-up

Small Share Gain (Expansion)

Adjacent New Business (Transformative) (Transformative)

Running a winning M&A shop, McKinsey

Types of M&A Deals vs. Considerations

Large Size (Relative) Overcapacity Reduce industry capacity Control Pricing Similar Product Offerings Pay for Cost synergies

Small Share Gain (Expansion) Adjacent New Business (Transformative) (Transformative)

Running a winning M&A shop, McKinsey

Types of M&A Deals vs. Considerations

Large Size (Relative) Transfer Core Strength to target Pay for lower operating cost of target Increase revenue thru broad strength

Roll-up

Small Share Gain (Expansion) Adjacent New Business (Transformative) (Transformative)

Running a winning M&A shop, McKinsey

Types of M&A Deals vs. Considerations

Large Size (Relative) Economies of Scale Consolidate back office Expand Market presence Pay for Growth, Channels Adjacent New Business (Transformative) (Transformative) Product/ Market Consolidation

Small Share Gain (Expansion)

Running a winning M&A shop, McKinsey

Types of M&A Deals vs. Considerations

Large Size (Relative) Small Expand market offering Expand Geographic Acquire reach products/ Pay for Growth, market Channels Revenue Share Gain Adjacent New Business synergies (Expansion) (Transformative) (Transformative)
Running a winning M&A shop, McKinsey

Types of M&A Deals vs. Considerations

Large Size (Relative) Transform Industry Create new Value Proposition Pay for New Markets, New Capabilities Transformation/ Convergence

Small Share Gain (Expansion) Adjacent New Business (Transformative) (Transformative)

Running a winning M&A shop, McKinsey

Types of M&A Deals vs. Considerations

Large Size (Relative) Skill transfer into new business Pay for High Risk options, ability to act in new market space

Strategic Growth Bet

Small Share Gain (Expansion) Adjacent New Business (Transformative) (Transformative)

Adapted: Running a winning M&A shop, McKinsey

Three-Stage Process for Evaluating M&A deals

1. Business Dev + Business Unit 2. Worth of Target? 3. Attractiveness of Target vs. Others 4. Target compatible with Strategy? 5. Support from Acquirer? 6. Integration possibilities?
Running a winning M&A shop, McKinsey

1. Strategy Approval

2. Approval-toNegotiate

3. Deal Approval

Three-Stage Process for Evaluating M&A deals

1. Price range 2. Initial Due Diligence 3. Vision for incorporation 4. Key Synergies 5. Nonbinding Term Sheet/LOI 6. Negotiation Roadmap 7. Process to Close
Running a winning M&A shop, McKinsey

1. Strategy Approval

2. Approval-toNegotiate

3. Deal Approval

Three-Stage Process for Evaluating M&A deals

1. Strategy Approval
1. Answering Key Questions 2. Debating Valuations 3. Aiming for Integration 4. Dealing with Execution Risks
Running a winning M&A shop, McKinsey

2. Approval-toNegotiate

3. Deal Approval

Considerations, Risks and Pitfalls

1. 2. 3. 4.

5.

6.

Global footprint vs. Local Presence Anti-trust and Regulatory permissions M&A Accounting Standards Fair Value definition in financial reporting = Exit price Acquirer and Target having different Risk Tolerances Public (or Public-hopeful) companies need to consider EPS after acquisition

Considerations, Risks and Pitfalls

7.
8.

9. 10. 11.

12.

Synergies and Improvements need to realized as quickly and efficiently as possible Combined Management capability to deliver improved performance First 100 days post-acquisition blueprint Culture management Staff Poaching from Competitors (and noncompetitors) Customer Poaching from Competitors

Why do Acquisitions fail?

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, McKinseys 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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Introduction Strategic M&A

Timothy Kiessling, PhD Head of Strategy Department Associate Professor of Strategy and International Business