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Best Practices In Corporate Development: Revenue Synergies At Rockwell Collins
Best Practices In Corporate Development: Revenue Synergies At Rockwell Collins
Best Practices In Corporate Development: Revenue Synergies At Rockwell Collins
Best Practices In Corporate Development: Revenue Synergies At Rockwell Collins
Best Practices In Corporate Development: Revenue Synergies At Rockwell Collins
Best Practices In Corporate Development: Revenue Synergies At Rockwell Collins
Best Practices In Corporate Development: Revenue Synergies At Rockwell Collins
Best Practices In Corporate Development: Revenue Synergies At Rockwell Collins
Best Practices In Corporate Development: Revenue Synergies At Rockwell Collins
Best Practices In Corporate Development: Revenue Synergies At Rockwell Collins
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Best Practices In Corporate Development: Revenue Synergies At Rockwell Collins

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A small piece of larger processes I created & implemented at Rockwell Collins. …

A small piece of larger processes I created & implemented at Rockwell Collins.

Best practices research firm Corporate Strategy Board concluded this to be an "innovative and potentially pivotal approach to strategy" beyond just the aerospace & defense industry.

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  • 1. © 2006 Corporate Executive Board. All Rights Reserved. Corporate Strategy Board® Rockwell Collins Teleconference Becoming the Buyer of Choice Revenue Synergy Line-Item Forecast Discussion with Rockwell Collins
  • 2. 2© 2006 Corporate Executive Board. All Rights Reserved. A Perfecting Market for Cost Synergies? …and are improving cost synergy capabilities at a faster rate… Improvement at Valuing and Capturing Synergies Over Past Five Years Corporate Strategy Board Pulse Survey, 2005 Source: Christofferson, Scott A., Robert S. McNish, and Diane L. Sias, “Where Mergers Go Wrong,” The McKinsey Quarterly (2004); Corporate Strategy Board research. Continual Frustration “There’s a perfecting market for cost synergies. Everyone can take costs out of a target, so all my competitors look at it the same way. Most of the cost synergies end up being bid away to the seller.” VP, Strategy and Corporate Development Consumer Products Company …but could be approaching diminishing returns relative to revenue synergies Diminishing Returns to Synergy Improvement Illustrative Companies are better at valuing and capturing cost synergies than revenue synergies… Ability to Capture Estimated Synergies McKinsey Postmerger-Management Survey, 2002 0% 50% 100% 0% 50% 100% 86% 52% n = 77.n = 92. Companies That Capture at Least 70% of Cost Synergies Companies That Capture at Least 70% of Revenue Synergies 0 5 0 2.5 5 3.48 2.82 n = 43. Valuing and Capturing Cost Synergies Valuing and Capturing Revenue Synergies Time Capability Revenue Synergies Cost Synergies Large Improvement No Improvement Average Member
  • 3. 3© 2006 Corporate Executive Board. All Rights Reserved. A Recognized Revenue Challenge Senior executive reluctance to include revenue synergies in valuation… Percentage of Deals That Include Revenue Synergies in Valuation Corporate Strategy Board Pulse Survey, 2005 …stems from a lack of confidence in the organization’s ability to estimate and capture synergies Revenue Synergy Forecast Challenges Lack of Executive Confidence in Revenue Synergies Widespread Skepticism “Our senior team is very skeptical of revenue synergies. We find it extremely difficult to use revenue synergies to convince executives of the merits of a deal.” Deputy Director, Group Strategy and Corporate Development European Financial Services Company n = 63 companies. 53% 47% Fifty-three percent of deals do not include revenue synergies in valuation… Lack of Experience Insufficient Information Forecasting Method Lacks Rigor Estimates Inaccurate Breakdown in Capture …and in deals that do, revenue synergy forecasts are often missed. Do Not Include Revenue Synergies Include Revenue Synergies Source: Corporate Strategy Board research.
  • 4. 4 Revenue Synergy Line-Item Forecast Company Profile Rockwell Collins, Inc., (NYSE: COL) is a worldwide leader in the design, production, and support of communication and aviation electronics for commercial and government customers. The company delivers industry-leading solutions in communication, navigation, surveillance, display, flight control, in-flight entertainment, information management, and simulation. In addition, Rockwell Collins operates 60 service centers worldwide, offering repair, overhaul, service parts, field service engineering, and training. Selected Statistics • FY2005 Revenue: US$3.445 Billion • FY2005 Earnings: US$396 Million • FY2005 Employees: 17,000 Source: Rockwell Collins, Inc.; Corporate Strategy Board research.
  • 5. 5© 2006 Corporate Executive Board. All Rights Reserved. Toward a More Rigorous Forecast Rockwell Collins Leverages More Detailed Sources of Information from the Bottom up to Improve the Accuracy of Its Revenue Synergy Forecast Revenue Synergy Forecasting Process – + Brainstorm Major Synergy Opportunities. Gather Aggregate Sales Data. Estimate an Aggregate Synergy Amount. Embed Synergies in Profit and Loss Goals. Goal Gather Granular Sales Data. Assign Synergy Line Items to Specific Sales Team Goals. Goal Apply Synergy Identification Framework. Top-down perspective causes forecast to lack specificity – + + + – Conventional Revenue Synergy- Assessment Process Rockwell Collins Revenue Synergy- Assessment Process Misses vital informationOverlooks some potential synergies, both positive and negative Does not target or measure sales capture of specific synergies No basis for effective feedback – – Preparation to Submit Nonbinding Offer Due Diligence Valuation and Negotiation Deal Close and Integration Enables focus on individual accountability to ensure capture Provides detailed feedback for continuous improvement Refines detailed estimates with customer knowledge and past performance Build a Bottom-Up, Fact-Based Forecast on the Line-Item Level. Classifies synergies in a disciplined manner Collects detailed information critical for forecasting + Data Discovery-Driven Synergy Identification Bottom-Up Build Sales Action Planning Data • • • • • • • • Source: Rockwell Collins, Inc.; Corporate Strategy Board research. Forecast Actual Past Synergy Capture Target Data SalesOps Forecast Predicted Revenue
  • 6. 6© 2006 Corporate Executive Board. All Rights Reserved. From Strategy to Synergy Using a standard framework to identify revenue synergies… Revenue Synergy Opportunity Identification Framework From Rockwell Collins’ Perspective, Illustrative …to guide go/no-go decisions and surface key uncertainties Decision Meeting to Submit Nonbinding Offer Rockwell Collins …enables grading of synergy opportunities… Initial Revenue Synergy Evaluation Rockwell Collins, Illustrative “Executive Revenue Synergy Check” • Do the synergies support the deal’s strategic rationale? • What are the sources of uncertainty in conceptual revenue synergy assessment? Markets/ Channels Existing New Primary Revenue Synergies Benefit • RCI flight simulator sold to Europe High • Target’s avionics product sold to RCI U.S. market High • Medium • Low Deal Sponsors • BU COO • BU VP GM • BU Deal Champion • CD Manager CFO CEO Sr. VP CD GC Outcomes Conceptual Revenue Synergy Assumptions to Verify Decision to Submit Offer or Not Submit Offer Existing New Products/ Services For revenue synergies representing key value drivers, the deal team creates synergy-specific due diligence work plans to collect specific data for later forecasting. Rockwell Collins deliberately delays quantifying synergies until more information can be obtained. RCI product sold through target’s channel Negative synergies from loss of target’s current sales to RCI competitors Reputation-related synergies Negative synergy from product/ customer overlap Adopting best practices Target’s product sold through RCI channels … Source: Rockwell Collins, Inc.; Corporate Strategy Board research.
  • 7. 7© 2006 Corporate Executive Board. All Rights Reserved. Bottom-Up Fact-Based Forecasting Operational Performance Data and Insight from the BU Sales Force Improve the Accuracy of Revenue Synergy Forecasts Development of Revenue Synergy Forecast Rockwell Collins, Illustrative Source: Rockwell Collins, Inc.; Corporate Strategy Board research. Operational Market Forecasts Underpinning RCI Strategic Plan 1 Reconciliation of Target’s Forecasts— Adjust forecasts and identify product, customer, and program overlaps. BU Marketing BU FinanceBU Sales Target Data Detailed revenue synergy assumption data collected in due diligence 2 Estimation of Incremental Sales— Solicit frontline sales input to estimate synergies. BU Sales Account Manager Sales Manager RCI synergy capture past performance Forecast Actual 3 Senior Adjustment of Synergy Estimates— Revise estimates based on past ability to execute. BU Head BU GM BU Finance Incremental Value Capture Adjustment Expected Revenue Synergy 30% 60% $9 M $4 M • • • • • • (30%) ($3 M) • • • • • • Total Expected Revenue Synergy $23 M Incremental EBITDA $4 M 40% X Baseline Rate of Value Capture Incremental Value Capture (Synergy) 40% 10% 30% 60% • • • • • • 60%/30% (30%) • • • • • • Sales Opportunity Total Value of Opportunity Only in RCI Plan Program A Customer B $30 M $10 M Only in Target Plan • • • • • • In Both Plans Product C $10 M New to Both Plans • • • • • • Target’s baseline sales forecast is first reconciled to RCI market forecasts… The BU leadership and deal team adjusts forecasts based on past ability to capture revenue synergies. …then each opportunity is assessed for synergy potential and assigned a probability of success by frontline BU salespeople with experience in terrain and close relationships with customers. Expected revenue synergies are included in valuation, which is then presented to executives as a basis for the bid price.
  • 8. 8© 2006 Corporate Executive Board. All Rights Reserved. Revenue Synergies They Can Count On Ability to assign revenue synergy line items to specific individual sales goals… BU Sales Action Planning Rockwell Collins …increases executive confidence in including revenue synergies in its pricing strategy Bidding on Revenue Synergies “What I really like about this process is that the discounting of revenue synergies is done in a rational, thoughtful way. We are more fact-based than we were. We’re closing the confidence gap between revenue and cost synergies. Almost every time now, the expected value of revenue synergies we present to our executives is accepted as a baseline for valuation.” Barry Abzug Senior VP Corporate Development Rockwell Collins An Executable Synergy Capture Plan “Since we implemented the line-item forecasting, we’re finding our integration plans are more concrete, more accountable, and more executable than before. Putting revenue synergy capture in the form of our operating plan makes executives more willing to support higher valuation, as they know we hit our operating plan consistently.” Steve Belland VP, Acquisitions Rockwell Collins Incremental Value Capture Adjustment Expected Revenue Synergy 30% 60% $9 M $4 M • • • • • • (30%) ($3 M) • • • • • • Total Expected Revenue Synergy $23 M Incremental EBITDA $9 M 40% X Baseline Rate of Value Capture Incremental Value Capture (Synergy) 40% 10% 30% 60% • • • • • • 60% (30%) • • • • • • Sales Opportunity Total Value of Opportunity Only in RCI Plan Program A Customer B $30 M $10 M Only in Target Plan • • • • • • In Both Plans Product C $10 M New to Both Plans • • • • • • Revenue Synergy Forecast Product C—Value Capture Action Plan Action Steps Sales Target Owner Due Date 1. 2. 3. 4. Customer B—Value Capture Action Plan Action Steps Sales Target Owner Due Date 1. 2. 3. 4. Program A—Value Capture Action Plan Action Steps Sales Target Owner Due Date 1. 2. 3. 4. $9 M Jess Phil Jane Jane 7/2/06 1/3/07 30/8/07 30/1/08 Source: Rockwell Collins, Inc.; Corporate Strategy Board research.
  • 9. 9© 2006 Corporate Executive Board. All Rights Reserved. Source: Corporate Strategy Board research. Key Propositions To improve executive confidence in revenue synergy assessment, drive line-item-level evaluation by sales force experts, then directly link sales team goals to synergy capture estimates. • Leverage operational planning processes to create line-item-level forecasts of revenue synergies. • Use sales force knowledge to test the individual line-item synergy estimates and assign a probability of capture to improve the forecast’s accuracy. • Adjust sales force assessments of revenue synergies based on past experience in capturing similar sources of value in prior deals. • Embed each line-item revenue synergy assessment into that sales team or individual’s specific operational performance goals to increase probability of capture. Rockwell Collins Summary: Revenue Synergy Line-Item Forecast
  • 10. The Corporate Executive Board Company (UK) Ltd. Victoria House Fourth Floor 37–63 Southampton Row Bloomsbury Square London WC1B 4DR United Kingdom Telephone: +44-(0)20-7632-6000 Fax: +44-(0)20-7632-6001 Corporate Executive Board 2000 Pennsylvania Avenue NW Washington, DC 20006 Telephone: +1-202-777-5000 Fax: +1-202-777-5100 Corporate Strategy Board w w w . c s b . e x e c u t i v e b o a r d . c o m CSB15J3H39

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