Developing a Corporate Acquisition Strategy

DEVELOPING A CORPORATE ACQUISITION STRATEGY Case studies, Concepts, and Debatable Ideas Kenny Ong CNI Holdings Berhad www.myCNI.com.my www.OOBEY.com

M&A Trends

Rationale for M&As

Strategies, Structure, and Optimizing Value in M&As

Considerations, Risks and Pitfalls

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

How to fail without trying

The Roadmap to Failure by Fred Wiersema and Mike Treacy

Before we start… www.myCNI.com.my www.OOBEY.com

The Roadmap to Failure Fred Wiersema and Mike Treacy Performance Time www.myCNI.com.my www.OOBEY.com Clear Sailing Today’s performance Ad-hoc Tactics Denial & Defense Doom Projections Overdue Failure The Moment of Truth X 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

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

“ What is the moral of the story?”

What is the Business Model? USP Market Discipline Profit Model www.myCNI.com.my www.OOBEY.com

Intro: Market Discipline

Mamak stall

Intro: Market Discipline

"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

"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 Product Leadership Operational Excellence Customer Intimacy www.myCNI.com.my www.OOBEY.com

Strategy: Disciplines, Priorities, and KPIs 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) www.myCNI.com.my www.OOBEY.com

The McPlaybook*

Make it easy to eat

50% drive-thru

Meals held in one hand

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 5 th 2007 www.myCNI.com.my www.OOBEY.com

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

Operational Excellence

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

Strategy: Value Disciplines 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) www.myCNI.com.my www.OOBEY.com

Sample KPIs for Each Discipline

Operational Excellence

Price

Selection

Convenience

Zero Defects

Growth

Customer Intimacy

Customer Knowledge

Solutions Offered

Penetration

Customer Data

Customer-success focus

Product Leadership

Marketing

Functionality

# of Successes

# of Failures

Learn from key users

Interdisciplinary teams

Pipeline

1. M&A Trends www.myCNI.com.my www.OOBEY.com

M&A Trends

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

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

Alternative Industries – growth, fragmented*

Low R&D, demand for new technologies

Credit Crunch

Foreign entities

Political instabilities

De-regularization, Unbundling

Record profits, High Prices

Antitrust Regulations

Cross-border Regulations

Traditional MNC consolidation

Competition for Assets

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

2. Rationale for M&As www.myCNI.com.my www.OOBEY.com

Two Major Rationale for M&As:

Cost Reduction

Growth

Strategies for Growth “ Double-Digit Growth”, Michael Treacy www.myCNI.com.my www.OOBEY.com

Base Retention

Share Gain

Positioning

Adjacent Market

New Business

GROWTH

Rationale for M&As: Growth

Expansion

Consolidate

Geographic

Distribution

Compensate

Transformative

Portfolio refocus

Diversification

Easier Tougher www.myCNI.com.my www.OOBEY.com

Rationale for M&As: Expansion

Expansion

Consolidate

Geographic

Distribution

Compensate

Gain Scale to compete

Integrated Solutions

Financial Growth

Supply (security, mix)

Developing markets

High cost of Extra Capacity

Private Equity

Expanding Sovereign Funds

Rationale for M&As: Expansion

Expansion

Consolidate

Geographic

Distribution

Compensate

De-regularization

Demand outstrip supply

Revenue Mix – Tax optimization

Talent

New, Low-cost Entrants

Undervalued Big Players

Newer Assets

Rationale for M&As: Transformative

Transformative

Portfolio refocus

Diversification

New Business Lines

Selling/Spin-off non-core

Increase product line

New customers

New technologies*

Complementary Business

Up-down Supply Chain

Patent

Convergence anticipation

Rationale for M&As: Cross Sectors www.myCNI.com.my www.OOBEY.com Traditional Alternative Incremental

Rationale for M&As: Cross Sectors New Delivery, New Sources, Existing Resources Oil, Gas, Electricity, Coal Biomass, Nuclear, Ethanol, Wind, Solar www.myCNI.com.my www.OOBEY.com Example: Energy Sector Traditional Utility Alternative Energy Incremental Technology

Possible ‘Outside’ Acquirers or Investors

Institutional

Fund Managers Corporations Sovereign Funds VCs NGOs Non-Profit Org Financial (Loans) JV Partners M&A Social VCs Holding Co. Gov. VCs Supply Chain Gov. Partnership Competitors www.myCNI.com.my www.OOBEY.com

Why do ‘Outsiders’ Acquire or Invest?

Return/Profit

Risk Management/ Hedging

Tax-benefits

CSR/Image

Diversify revenue

Counter-cyclical balance

Support ‘Mission’

Exclusive rights

Contractual obligation

National Agenda

Control Supply Chain

R&D portfolio

Control Management

Alternative Cash Flow

M&A

3. Strategies, Structure, and Optimizing Value in M&As www.myCNI.com.my www.OOBEY.com

Strategies for Growth “ Double-Digit Growth”, Michael Treacy www.myCNI.com.my www.OOBEY.com

Base Retention

Share Gain

Positioning

Adjacent Market

New Business

GROWTH

How Markets determine Growth Strategies (1)

Growth Rate

Base Retention

Share Gain (Acquisitions)

Market Positioning

Share Gain

Base Retention

Strategy

Lose customers slower than competitors

Create scale economics, squeeze costs

Maintain market share in strategic segments

Prepare for market decline

Competitors focus too much on getting new customers

Why? Flat Fast Growth Rate

Churn Rate

How Markets determine Growth Strategies (2) www.myCNI.com.my www.OOBEY.com

Base Retention

Share Gain

Adjacent Market

Share Gain (Acquisitions)

Adjacent Markets

Strategy

Lose customers slower than competitors

Customers are always open to the best value and offer

Desperate to gain revenue

Buying customer base is cheaper than own efforts

New products, old customers strategy

Why? High Low Churn Rate

How Markets determine Growth Strategies (3)

Example: Energy Sector

Market Positioning

Share Gain (M&A)

Base Retention

Adjacent Markets (M&A)

Fast Growth, Low Churn

Create better ‘Value’ proposition

Neutralize competitor advantages

Buy Market Share outright

Price Premium

Operating Model

Integration

Strategy 2: Share Gain www.myCNI.com.my www.OOBEY.com

Buying Market Share: Acquisition strategy No evidence of previous company One Kingdom Pre-integration Blueprint Slow Trigger, Fast Bullet www.myCNI.com.my www.OOBEY.com Integration Operating Model Price Premium Buying Market Share Net Cost per Customer < Direct Acquire

Buying Market Share: Side notes on Funding www.myCNI.com.my www.OOBEY.com *Adapted from Warren Buffet’s acquisition strategies

Cash from Stock sale

Issue more stock

Cash from Earnings

Cash from Borrowings

OK, but not preferred Preferable

Strategy 4: Invade Adjacent Markets

Adjacent Market = Important Similarities and Large Differences in:

Cost Structure

Competitors

Customers

Critical Capabilities

Strategy 4: Invade Adjacent Markets www.myCNI.com.my www.OOBEY.com Traditional Alternative Incremental

Strategy 4: Invade Adjacent Markets www.myCNI.com.my www.OOBEY.com Example: Energy Sector Traditional Utility Alternative Energy Incremental Technology

Strategy 4: Invade Adjacent Markets Upstream Midstream Downstream Distribution Conversion Raw Mat Vendors/Services www.myCNI.com.my www.OOBEY.com

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

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?

It is easier to meet the standards of competition if you buy an existing player

Adjacent acquisitions must remain as a separate enterprise

Integrate Management Control (systems, technology)

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

Linking BSC to M&A Strategy Revenue Growth Base Retention Share Gain Positioning Adjacent Market New Business Operational Excellence Product Leadership Customer Intimacy Competencies Information Systems Motivation, empowerment, alignment Financial Learning & Growth Internal Process Customers Investment Strategy Productivity Market Value www.myCNI.com.my www.OOBEY.com

4. Considerations, Risks and Pitfalls www.myCNI.com.my www.OOBEY.com

Types of M&A Deals vs. Considerations Overcapacity Product/ Market Consolidation Transformation/ Convergence Roll-up Acquire products/ market Strategic Growth Bet Size (Relative) Share Gain (Expansion) Adjacent (Transformative) New Business (Transformative) Small Large “ Running a winning M&A shop”, McKinsey

Types of M&A Deals vs. Considerations Overcapacity Size (Relative) Share Gain (Expansion) Adjacent (Transformative) New Business (Transformative) Small Large “ Running a winning M&A shop”, McKinsey

Reduce industry capacity

Control Pricing

Similar Product Offerings

Pay for Cost synergies

Types of M&A Deals vs. Considerations Roll-up Size (Relative) Share Gain (Expansion) Adjacent (Transformative) New Business (Transformative) Small Large “ Running a winning M&A shop”, McKinsey

Transfer Core Strength to target

Pay for lower operating cost of target

Increase revenue thru broad strength

Types of M&A Deals vs. Considerations Product/ Market Consolidation Size (Relative) Share Gain (Expansion) Adjacent (Transformative) New Business (Transformative) Small Large “ Running a winning M&A shop”, McKinsey

Economies of Scale

Consolidate back office

Expand Market presence

Pay for Growth, Channels

Types of M&A Deals vs. Considerations Acquire products/ market Size (Relative) Share Gain (Expansion) Adjacent (Transformative) New Business (Transformative) Small Large “ Running a winning M&A shop”, McKinsey

Expand market offering

Expand Geographic reach

Pay for Growth, Channels

Revenue synergies

Types of M&A Deals vs. Considerations Transformation/ Convergence Size (Relative) Share Gain (Expansion) Adjacent (Transformative) New Business (Transformative) Small Large “ Running a winning M&A shop”, McKinsey

Transform Industry

Create new Value Proposition

Pay for New Markets, New Capabilities

Types of M&A Deals vs. Considerations Strategic Growth Bet Size (Relative) Share Gain (Expansion) Adjacent (Transformative) New Business (Transformative) Small Large 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

Business Dev + Business Unit

Worth of Target?

Attractiveness of Target vs. Others

Target compatible with Strategy?

Support from Acquirer?

Integration possibilities?

“ Running a winning M&A shop”, McKinsey

Price range

Initial Due Diligence

Vision for incorporation

Key Synergies

Nonbinding Term Sheet/LOI

Negotiation Roadmap

Process to Close

Answering Key Questions

Debating Valuations

Aiming for Integration

Dealing with Execution Risks

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

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 non-competitors)

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

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

End Note for M&A