How to Build a M&A Strategy
DevelopmentCorporate
DevelopmentCorporate

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
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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
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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?
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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
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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
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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
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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”
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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
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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.
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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
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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
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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
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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?
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2. Determine Acquisition
Financing Constraints
Determine the constraints associated
with financial resources to support
acquisitions
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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)
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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
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3. Develop Acquisition
Candidate List
Identify the specific public and
private companies that you are
interested in acquiring
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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
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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
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4. Build Preliminary Valuation
Models
What are the initial estimates of
acquisition cost? What returns could
be produced?
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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
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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
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Sample Returns Analysis
• Model estimates incremental exit valuation of
combining ‘MyCo’ & QAD
• Valuation is based on EBITDA multiple – your firm
may choose different metrics
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5. Rate/Rank Acquisitions
How do various acquisition
candidates rank in terms of impact to
business and feasibility of closing
acquisition?
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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.
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6. Review & Approve Acquisition
Strategy
Socialize acquisition strategy and
receive feedback/concurrence from
key stakeholders
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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
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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
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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.
www.developmentcorporate.com
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