Developing a Corporate Acquisition Strategy

DEVELOPING A CORPORATE ACQUISITION STRATEGYCase studies, Concepts, and Debatable Ideas

Kenny OngCNI Holdings Berhad

www.myCNI.com.my www.OOBEY.com

1. M&A Trends

2. Rationale for M&As

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

4. Considerations, Risks and Pitfalls

• How to fail without trying

The Roadmap to Failureby Fred Wiersema and Mike Treacy

Before we start…

The Roadmap to Failure

Fred Wiersema and Mike TreacyP

Clear Sailing

Today’s performance

Ad-hoc Tactics

Denial & Defense

Doom Projections

Overdue Failure

The Moment of Truth

Performance Freefall

Tomorrow’s actual

performance

Downpresure of Unclear Strategy

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

Clear Sailing

Ad-hoc Tactics

Denial & Defense

Doom Projections

Overdue Failure

The Moment of Truth

Tomorrow’s actual

performance

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

Clear Sailing

Ad-hoc Tactics

Denial & Defense

Doom Projections

Overdue Failure

The Moment of Truth

Tomorrow’s actual

performance

“What is the moral of the story?”

What is the Business Model?

Market Discipline

Profit Model

Intro: Market Discipline

• Mamak stall

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

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

The McPlaybook*

Make it easy to eat• 50% drive-thru• Meals held in one

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

Operational Excellence

• Competitive price

• Error free, reliable

• Fast (on demand)

• Simple

• Responsive

• Consistent information for all

• Transactional

• 'Once and Done'

• 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

Strategy: Value Disciplines

Sample KPIs for Each Discipline

• Price• Selection• Convenience• Zero Defects• Growth

Customer Intimacy

• Customer Knowledge

• Solutions Offered• Penetration• Customer Data• Customer-success

Customer Intimacy

• Customer Knowledge

• Solutions Offered• Penetration• Customer Data• Customer-success

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

1. M&A Trends

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

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

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

2. Rationale for M&As

Two Major Rationale for M&As:

1. Cost Reduction

2. Growth

Strategies for Growth

1.Base Retention

2.Share Gain

3.Positioning4.Adjacent Market

5.New Business

GROWTH

“Double-Digit Growth”, Michael Treacy

Rationale for M&As: Growth

Expansion

1.Consolidate

2.Geographic

3.Distribution

4.Compensate

Transformative

1.Portfolio refocus

2.Diversification

Easier Tougher

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

8.Expanding Sovereign Fundswww.myCNI.com.my www.OOBEY.com

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

15.Newer Assetswww.myCNI.com.my www.OOBEY.com

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

Rationale for M&As: Cross Sectors

Traditional

AlternativeIncremental

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

Example: Energy Sector

Possible ‘Outside’ Acquirers or Investors

Institutional

Fund Managers

Corporations

Sovereign Funds

Non-Profit Org

Financial (Loans)

JV Partners

Social VCs

Holding Co.

Gov. VCs

Supply Chain

Gov. Partnership

Competitors

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

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

Strategies for Growth

1.Base Retention

2.Share Gain

3.Positioning4.Adjacent Market

5.New Business

GROWTH

“Double-Digit Growth”, Michael Treacy

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

• 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

Fast Growth,

Low Churn

1.Market Positioning

2.Share Gain (M&A)

3.Base Retention

4.Adjacent Markets (M&A)

•Example: Energy Sector

• Create better ‘Value’ proposition

• Neutralize competitor advantages

• Buy Market Share outright– Price Premium– Operating Model– Integration

Strategy 2: Share Gain

Buying Market Share: Acquisition strategy

IntegrationOperating

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

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

*Adapted from Warren Buffet’s acquisition strategies

Strategy 4: Invade Adjacent Markets

Adjacent Market = Important Similarities and Large Differences in:

1. Cost Structure

2. Competitors

3. Customers

4. Critical Capabilities

Traditional

AlternativeIncremental

Traditional Utility

AlternativeEnergy

IncrementalTechnology

Example: Energy Sector

Upstream Midstream Downstream

DistributionConversionRaw Mat

Vendors/Services

• 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

• 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

• 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 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

Revenue Growth

Base Retention

Share Gain Positioning Adjacent Market

New Business

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

4. Considerations, Risks and Pitfalls

Types of M&A Deals vs. Considerations

Overcapacity Product/ Market Consolidation

Transformation/ Convergence

Roll-up Acquire products/ market

Strategic Growth Bet

Share Gain (Expansion)

Adjacent (Transformative)

New Business (Transformative)

“Running a winning M&A shop”, McKinsey

Overcapacity

•Reduce industry capacity•Control Pricing•Similar Product Offerings•Pay for Cost synergies

Roll-upSiz

•Transfer Core Strength to target•Pay for lower operating cost of target•Increase revenue thru broad strength

Product/ Market Consolidation

•Economies of Scale•Consolidate back office•Expand Market presence•Pay for Growth, Channels

Acquire products/ market

•Expand market offering•Expand Geographic reach•Pay for Growth, Channels•Revenue synergies

Transformation/ Convergence

•Transform Industry•Create new Value Proposition•Pay for New Markets, New Capabilities

Strategic Growth Bet

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

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?

3. Deal Approval

1. Price range2. Initial Due Diligence3. Vision for incorporation4. Key Synergies5. Nonbinding Term

Sheet/LOI6. Negotiation Roadmap7. Process to Close

3. Deal Approval

1. Answering Key Questions

2. Debating Valuations3. Aiming for Integration4. Dealing with Execution

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

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

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

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

End Note for M&A

“Go where the money is... then marry for love”

F. Scott Fitzgerald, Author

Thank You.

soft copy of slides: www.totallyunrelatedrandomanddebatable.

blogspot.com

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