How To Build A M&A Strategy


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A basic primer on how to develop an M&A strategy for your company

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How To Build A M&A Strategy

  1. 1. How to Build a M&A Strategy DevelopmentCorporate DevelopmentCorporate
  2. 2. Contents • What is an M&A Strategy • Strategy Development Process Overview • Determine Business Plan Drivers • Determine Acquisition Financing Constraints • Develop Acquisition Candidate Lists • Build Preliminary Valuation / Return Models • Rate / Rank Acquisition Candidates • Review / Approve Acquisition Strategy • DevelopmentCorporate Overview DevelopmentCorporate 2
  3. 3. What is an M&A Strategy? • Roadmap for your firm’s corporate development efforts • Translates strategic business plan into a list of target acquisition candidates • Provides a framework for evaluating acquisition candidates • Enables management team, board of directors, and investors to get on the same page DevelopmentCorporate 3
  4. 4. M&A Strategy Process • Determine Business Plan Drivers • Build Preliminary Valuation – How can your strategic business plan Models be accelerated or more successful via – What are the initial estimates of M&A? acquisition cost? What returns could • Determine Acquisition Financing be produced? Constraints • Rate/Rank Acquisition Candidates – How can you fund acquisitions? – How do various acquisition What returns must be achieved? candidates rank in terms of impact to Who approves funding? business and feasibility of closing acquisition? • Develop Acquisition Candidate List • Review & Approve Acquisition – What specific private and public Strategy companies are you interested in – Do all of the critical stakeholders acquiring? (executive team, board, & investors) agree with strategy and priorities? DevelopmentCorporate 4
  5. 5. 1. Determine Business Plan Drivers Translate your company’s strategic business plan into a set of drivers and requirements that your M&A strategy will address DevelopmentCorporate 5
  6. 6. Business Plan Drivers Extract key information from your firm’s strategic business plan 1. What markets do you want to be in? 2. What share do you want of each market? 3. What products/technologies does your roadmap require? 4. What geographies do you want to operate in? 5. What types of people, skills, & experiences do you need? Acquisition strategies are derived 6. What financial targets do you wish to achieve? from strategic business plans. You need to have your basic strategic 7. Do you need to pre-empt your competitors? plan in place first before you can 8. How much risk are you willing to take? develop an effective M&A strategy DevelopmentCorporate 6
  7. 7. What markets do you want to be in? Supply Chain Related Markets Plan Make Distribute Sell Service Demand Planning Manufacturing Planning Inbound Logistics Sales Forecasting Returns / Exchanges Apparel Assortment Planning Manufacturing Scheduling Inventory Management Shelf Assortment Warranty Service Planogram Planning Inventory Management Carrier Capacity Management Price Management Field Service Floor Planning Inbound Logistics Fleet Management Trade & Promotion Mgmt Loyalty Programs Space Planning Production Control Outbound Logistics Point of Sale Spend Management Quality Control Store Replenishment Markdown Management Procurement Outbound Logistics Vendor Managed Inventory E-Commerce Reverse Auctions Cost Accounting Warehouse Replenishment Consumer Credit & Payments Order Management Supplier Payments Transportation Procurement Advertising Management Supply Chain Network design Supplier Performance Mgmt Freight Audit & Payment Labor Management Supply Chain Optimization Warehouse Management Global Trade Management Loss Prevention Product Lifecycle Management Supplier Payments Product Data Management Horizontal / Enabling Technologies EDI Translators Bar Coding RFID SOA ERP EDI VAN Order Life Cycle Management CPFR BPM CRM EDI - Enterprise-scale Application Development / Warehouse Management Supplier Collaboration Portals EAI Outsourcing Deployment Data Synchronization - Private Electronic Payments Web Forms B2B Integration Content Management Catalogue Data Synchronization - GDSN Systems Infrastructure & POS - Analytics Supply Chain Analytics Adapters Data Pool Management AS2 Communications POS - Transaction Systems Supply Chain Visibility Business Intelligence Mass File Transfer Scan-based Trading Trading Partner Mgmt Security = solid growth = flat to low growth = flat to declining growth 1. Understand the structure, size, growth, and trends of existing markets 2. Identify markets/market segments your firm wishes to enter via M&A DevelopmentCorporate 7
  8. 8. What share do you want of each market? • Once you’ve identified the markets you want to participate in, you need to determine what your target market share is • You need to be honest. All tech companies claim to “be the leading provider of XYZ solution” • The reality is that product/service revenues determine market share • Your relative position in the market determines what strategies & tactics will yield best results • Review Geoffrey Moore’s Gorillas, Chimps, & Monkeys concepts in his book “The Gorilla Game” DevelopmentCorporate 8
  9. 9. What products/technologies does your roadmap require? Build Buy • Identify specific products or technologies that your strategic product roadmap requires • Determine timeline when solution has to be available to achieve market share targets • Honestly assess the time, costs, resources, and risks associated with build options • Recognize that ‘buy option’ may not yield a solution that is 100% match with your team’s vision of the market requirements DevelopmentCorporate 9
  10. 10. What geographies do you want to operate in? • Determine your current geographic footprint • Identify major geographies you want to expand to: • Europe • Middle East • Asia • South America • Determine the relative sequence you would prefer (Europe first, Asia second) • Determine preference for either direct operations or build presence via agents, resellers, partners, etc. DevelopmentCorporate 10
  11. 11. What types of people, skills, & experiences do you need? • Based on your market, product/service/technology, and geographic requirements you should identify what types of human capital needs you have that could be addressed by M&A • For example: • Specific technologies like AJAX, social media APIs, non-relational databases, MapReduce, Hadoop, etc. • Language skills (German, French, Arabic, Japanese, Chinese) for local customer service support, localized UIs, etc. • Indirect channel marketing and sales skills • Social media platforms and execution DevelopmentCorporate 11
  12. 12. What financial targets do you wish to achieve? • 1, 3, & 5 year targets for: • Revenue • Revenue Mix (License, Maint, SaaS, etc.) • Gross Margins • Operating Profit • EBITDA • Valuation (Enterprise Value / Market Cap) • Determine split between organic versus M&A growth • “We are a $65 million business today. By the end of 2012 we will have annual revenues in excess of Financial targets tend to $225 million. We expect that existing products and be the primary drivers of services will contribute to 20% of the growth target M&A strategies. and the rest will come via mergers & acquisitions DevelopmentCorporate 12
  13. 13. Do you need to pre-empt your competitors? • Is there a need to deny a competitor the opportunity to acquire a specific company? If competitor A buys acquisition candidate D • What is the relative value of a competitor not before we do, we’re owning a specific company screwed • Rarely does one single acquisition change the dynamics of an overall market • There are generally other companies that could fill the strategic requirements DevelopmentCorporate 13
  14. 14. How much risk are you willing to take? • What is your risk profile -- conservative, moderate, or aggressive? • How much financial risk are you willing to take? • 5% of combined company revenues? • 50% of combined company revenues? • Are you willing to invest in pre-revenue products / technologies? Risk/reward is best examined in • Are you willing to enter totally new markets that context of a specific acquisition your business has no position in today? candidate, unless your execs, board, & investors have specific • Are you willing to invest in international geographies hard/fast risk management policies outside of your current geographic footprint? DevelopmentCorporate 14
  15. 15. 2. Determine Acquisition Financing Constraints Determine the constraints associated with financial resources to support acquisitions DevelopmentCorporate 15
  16. 16. How Big is Your War Chest? • Acquisitions can be funded multiple ways: cash, public and private equity, debt, earn outs, minority investments, PIPEs, etc. • You need to understand the size of your ‘war chest’ before you can finalize your strategy • How much surplus cash and untapped credit facilities are available? • How much untapped equity is available and what is it’s value • How much new equity can you raise? • How much new debt can you raise? (hint 2x restructured EBITDA is about all that’s available these days) DevelopmentCorporate 16
  17. 17. Understand the Hurdles • CFOs, Board of Directors, Investors, Debt Holders all have criteria by which they evaluate potential acquisitions • You need to understand these criteria since they will definitely impact the types of acquisition candidates you can pursue • Some example criteria include: • Valuation multiples (“We never pay more than 2x It is not unusual for trailing twelve months revenues or 4x restructured various stakeholders EBITDA”) to disagree on M&A • ROI Hurdles (“We expect a low risk 5X return on approval criteria. It is invested capital in less than 5 years”) better to learn about • Debt Terms (We never do more than 4X coverage ratios, the requirements before you pitch your convertible debt deals, or covenant-heavy deals) first deal DevelopmentCorporate 17
  18. 18. 3. Develop Acquisition Candidate List Identify the specific public and private companies that you are interested in acquiring DevelopmentCorporate 18
  19. 19. Build Your Initial List • Identify acquisition candidates by: • Market research (Gartner, AMR, IDC) • Public stock research / analysts • Competitor sections of public company 10-K’s • Recommendations from employees • Referrals from investment bankers, attorneys, board members, investors • Develop summary profile for each company • Target markets • Key products/services • Revenues • Profitability • Enterprise Value • Geographic footprint DevelopmentCorporate 19
  20. 20. Researching Private Companies • Researching public companies is easy – 10-Ks, Proxy Statements, Investor presentations contain the bulk of the info you need • Some ideas for researching private companies: Private • Industry analyst reports (Gartner, AMR, IDC, etc.) • Interviews with analysts and journalists who have covered the company • Interview former employees / sales people • Deep Google searches and analysis • Develop an estimate of company’s enterprise value. Check out • How to Calculate the Enterprise Value of Private Companies • How to Calculate the Enterprise Value of Your Private Company DevelopmentCorporate 20
  21. 21. 4. Build Preliminary Valuation Models What are the initial estimates of acquisition cost? What returns could be produced? DevelopmentCorporate 21
  22. 22. Preliminary Valuation Models • Preliminary valuation models provide you with key metrics to help understand the costs and return potential of a specific acquisition • At this point in the process, these models are high level and preliminary in nature. They are intended to provide you with an indication of potential costs and value. Definitive analysis of acquisition opportunities occur after the initial strategy has been developed and approved. • Most organizations have a preferred format for presenting preliminary valuation. Get a copy of a model from past deals and use it as your template. Each executive team, board, investors, or debt holders have key metrics that matter to them. • A sample valuation and return models are presented on the next pages DevelopmentCorporate 22
  23. 23. Sample Quick Valuation Analysis QAD as of 9/10/09 • Sample analysis of ERP Enterprise Value Equity Value 113.3 Company QAD Cash Debt (40.6) 16.9 Enterprise Value 89.6 • Used to illustrate the Premium Price 0% 3.68 20% 4.42 33% 4.89 Shares Out 30.8 30.8 30.8 costs and multiples Market Cap 113.3 136.0 150.7 less cash (36.6) (36.6) (36.6) associated with a deal plus debt 16.9 16.9 16.9 Total Enterprise Value 93.6 116.3 131.0 plus: Fees & Expenses* 14.9 14.9 14.9 Gross Purchase Price 108.5 131.2 145.9 • Can be developed very quickly with limited info Standalone Multiples EBITDA/Rev TEV / LTM EBITDA 4.9 19.1x 23.7x 26.7x TEV / LTM Revenue 233.4 0.4x 0.5x 0.6x • This organization places Gross PP / LTM EBITDA Gross PP / LTM Revenue 4.9 233.4 22.1x 0.5x 26.8x 0.6x 29.8x 0.6x value on revenue & PF Contribution Multiples EBITDA/Rev EBITDA multiples. Your TEV / PF 20% EBITDA Margin @ LTM Rev TEV / PF 25% EBITDA Margin 46.7 58.4 2.0x 1.6x 2.5x 2.0x 2.8x 2.2x TEV / PF 30% EBITDA Margin 81.7 1.1x 1.4x 1.6x organization may have Fees & Expenses different metrics (EPS Legal & Accounting 1.0 Debt Costs 1.9 Growth, Cash Flow, etc.) Restructuring 12.0 Total 14.9 Gross Purchase Price Funding Requirements 20% Restructured EBITDA Case: Debt @ 2.00x 93.4 93.4 93.4 Required Equity: 15.2 37.8 52.6 DevelopmentCorporate 23
  24. 24. Sample Returns Analysis • Model estimates incremental exit valuation of combining ‘MyCo’ & QAD • Valuation is based on EBITDA multiple – your firm may choose different metrics DevelopmentCorporate 24
  25. 25. 5. Rate/Rank Acquisitions How do various acquisition candidates rank in terms of impact to business and feasibility of closing acquisition? DevelopmentCorporate 25
  26. 26. Strategic Matrix Exit Impact $500M+ Company A • Rating/Ranking of acquisition candidates Company D lets you understand the relative impacts of specific acqusitions Company G • The sample matrix on the right looks at two Company C Acquirability dimensions • Acquirability – the relative price required $250M+ to win acquisition as measured by <10X 4-6X 1-2X restructured EBITDA multiples RR EBITDA RR EBITDA RR EBITDA • Exit Impact – the dollar impact to the Company E company’s valuation in 3 years Company B • Once again, you need to develop/use metrics that Company F make sense for your business. EBITDA and Revenue $0M multiples are just two of dozens of potential metrics that could be used. DevelopmentCorporate 26
  27. 27. 6. Review & Approve Acquisition Strategy Socialize acquisition strategy and receive feedback/concurrence from key stakeholders DevelopmentCorporate 27
  28. 28. Review & Approval • Prepare summary briefing of strategy Acquisition Strategy Presentation (See table of contents on right) • Executive Summary • Acquisition Strategy Drivers • Schedule and deliver briefings to: • Target Markets & Market Share • Executive team • Products/Technologies • Board of Directors • Geography • Key investors/debt holders • People / Skills • Financial Targets • Consolidate feedback and produce final • Competitive Pre-Emption strategy package • Risk • Funding Constraints / Metrics • Review/revise strategy each quarter. Do • Acquisition Candidate List a major update in conjunction with annual • Preliminary Valuation / Return Models strategic planning • Strategic Matrix DevelopmentCorporate 28
  29. 29. What’s Next This is the first in a series of presentations on Merger & Acquisition basics. The remaining posts in this series will cover: 1. How to Build an Exit Strategy 2. How to Build an Acquisition Pipeline 3. How to Divest a Business 4. How to Analyze an Acquisition Candidate 5. How to Pitch an Acquisition to a Board of Directors, Private Equity Firm, or a VC 6. How to Work with Private Equity, Venture Capital, & Investment Bankers 7. The Art of the Initial Management Meeting 8. Operational Due Diligence or What the Lawyers & Accountants Can’t Tell You 9. Acquisition Integration Planning the Sterling Software Way 10. Acquisition Cultural Integration. Horror Stories & Best Practices DevelopmentCorporate 29
  30. 30. DevelopmentCorporate DevelopmentCorporate is a strategic corporate development advisory firm for enterprise and mid-market technology companies. We assist management teams, board of directors, and investors in updating their merger, acquisition, and divestiture strategies and then we provide tactical support for the implementation of those strategies. We also provide support for strategic initiatives such market assessments, competitive intelligence updates, product/service portfolio analysis, etc. Finally, we have significant experience in guiding large scale organizations through corporate restructurings to either take advantage of new market opportunities or respond to changes in market conditions. DevelopmentCorporate 30
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