M&A 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

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 Failure
by Fred Wiersema and Mike Treacy
Before we start…

The Roadmap to Failure
Fred Wiersema and Mike TreacyPerformanc
e
Time
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

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
Operational
Excellence
Customer
Intimacy

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
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 5th
2007

Operational
Excellence
• Competitive price
• Error free,
reliable
• Fast (on
demand)
• Simple
• Responsive
• Consistent
information for
all
• Transactional
• 'Once and Done'
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
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

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: Value Disciplines

Sample KPIs for Each
Discipline
Operational
Excellence
• Price
• Selection
• Convenience
• Zero Defects
• Growth
Operational
Excellence
• Price
• Selection
• Convenience
• Zero Defects
• Growth
Customer Intimacy
• Customer
Knowledge
• Solutions Offered
• Penetration
• Customer Data
• Customer-success
focus
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
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 Toughe
r

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 Funds

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 Assets

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
Alternative
Energy
Incremental
Technology
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
VCs
NGOs
Non-Profit Org
Financial (Loans)
JV Partners
M&A
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

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 Rate
Churn
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
Integration
Operating
Model
Price
Premium
Buying
Market
Share
Net Cost per
Customer <
Direct Acquire
No evidence of
previous company
One Kingdom
Pre-integration Blueprint
Slow Trigger, Fast Bullet

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

Markets
Traditional
AlternativeIncremental

Markets
Traditional Utility
Alternative
Energy
Incremental
Technology
Example:
Energy Sector

Markets
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
Markets

• 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
Markets

• 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
Markets

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
Operational
Excellence
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
Size
(Relative)
Share Gain
(Expansion)
Adjacent
(Transformative)
New Business
(Transformative)
Small
Large
“Running a winning M&A shop”, McKinsey

Considerations
Overcapacity
Size
(Relative)
Share Gain
(Expansion)
Adjacent
(Transformative)
New Business
(Transformative)
Small
Large
•Reduce industry
capacity
•Control Pricing
•Similar Product
Offerings
•Pay for Cost synergies

Considerations
Roll-up
Size
(Relative)
Share Gain
(Expansion)
Adjacent
(Transformative)
New Business
(Transformative)
Small
Large
•Transfer Core Strength
to target
•Pay for lower operating
cost of target
•Increase revenue thru
broad strength

Considerations
Product/
Market
Consolidation
Size
(Relative)
Share Gain
(Expansion)
Adjacent
(Transformative)
New Business
(Transformative)
Small
Large
•Economies of
Scale
•Consolidate
back office
•Expand Market
presence
•Pay for Growth,
Channels

Considerations
Acquire
products/
market
Size
(Relative)
Share Gain
(Expansion)
Adjacent
(Transformative)
New Business
(Transformative)
Small
Large
•Expand market
offering
•Expand
Geographic
reach
•Pay for Growth,
Channels
•Revenue
synergies

Considerations
Transformation/
Convergence
Size
(Relative)
Share Gain
(Expansion)
Adjacent
(Transformative)
New Business
(Transformative)
Small
Large
•Transform Industry
•Create new Value
Proposition
•Pay for New Markets,
New Capabilities

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
1. Business Dev +
Business Unit
2. Worth of Target?
3. Attractiveness of Target
vs. Others
4. Target compatible with
Strategy?
5. Support from Acquirer?
6. Integration possibilities?

2. Approval-to-
Negotiate
3. Deal Approval
1. Price range
2. Initial Due Diligence
3. Vision for incorporation
4. Key Synergies
5. Nonbinding Term
Sheet/LOI
6. Negotiation Roadmap
7. Process to Close

2. Approval-to-
Negotiate
3. Deal Approval
1. Answering Key
Questions
2. Debating Valuations
3. Aiming for Integration
4. Dealing with Execution
Risks

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

M&A Developing a Corporate Acquisition Strategy

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