M&A Toolkit: Strategic Fit and Make vs Buy Decisions

M&A TOOLKIT

Strategic Fit:

Make vs Buy?

© 2007-2013 IESIES Development Ltd. All Ltd. Reserved
© 2007-2013 Development Rights All Rights Reserved

THE STARTING POINT
FOR M&A:
A CLEAR STRATEGY

© 2007-2013 IES Development Ltd. All Rights Reserved

There are many “strategic” justifications for acquisitions……..

“Our strategic rationale for this acquisition is to
diversify our business”

“Our strategic rationale for this acquisition is to increase
market share in an attractive market”

“This acquisition is a great complimentary fit; we have
almost no overlap in products and markets”

“This acquisition is a great fit; we have almost complete
overlap in products and markets”

Strategic rationales for acquisitions have to say how the
acquisition enhances competitive advantage

Michael Porter definition of strategy

“How we are going to create and sustain competitive
advantage”


Any acquisition needs to fit the strategic direction of the
company; opportunistic deals are more likely to fail
Strategy is a CHOICE about your company’s future……

•WHAT we are going to sell

•To WHOM

•WHERE we will sell it

HOW we will satisfy these customers
better than competitors….
(VALUE PROPOSITION)

…..and make money doing it!

There are a number of possible actions you could take to achieve
your strategy

•Enter new markets

•Develop new product/service lines

•Attack new customer segments

•Enter new businesses

•Build new capabilities
Can these be achieved through acquisition? Always?

Can these be achieved organically? Always?

Acquisitions are
fundamentally a
Make or Buy
decision


Given your business exists to MAKE
value for shareholders, why would you
BUY it instead?


There can be good reasons to Buy rather than Make your
strategy

1) Making will be more expensive

2) It will take too long to Make

3) Value mismatch prevents Making

4) There are unique assets that prevent Making
(e.g. licences, locations, Patents)


Making can be more expensive than buying for Market Entry

CASHFLOW PROJECTION FOR RETAIL MARKET ENTRY ($m)
25
20
15
10
5
0
A.S.Watson buying Spectre
-5
(30 stores in Russia)
-10 enabled us to start at this point
in the curve
-15
-20
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

What are the pros and cons of acquisition vs
greenfield market entry?

There is always a trade-off between greenfield and inorganic
market entry

Advantage of Greenfield Advantage of Acquisition

Build a business that fits our Buy a business that fits the local
competitive advantage customer
We capture all value created Avoid negative cashflow drain during
startup
Create a new value proposition for Buy into an already proven value
this market proposition
Exploit our scale, experience and Possibility to acquire new capabilities
capabilities in other markets
Market risk: Maybe we can’t build a Deal risk: Maybe we overpay and can’t
profitable business? integrate?


CISCO buying start-up technology is an example of Buying
because Making will cause them to miss a market “window”
CISCO’S TECHNOLOGY ACQUISITION APPROACH

“Since 1993, Cisco has acquired more than 120 companies, from small startups to large, well-
established firms such as Linksys, Scientific Atlanta, and WebEx.”

“By scooping up smaller companies in the early stages, Cisco can capture technology and move into a
new market much earlier than its competition”

“Acquisitions are considered only after management has looked at the internal R&D budget to see if
in-house development is feasible. If not, management looks to current partners to see if teaming with
one of them could accomplish the objective. If these two options do not provide sufficient time-to-
market returns, Cisco considers funding a company or acquiring a company for quick entry into a
market.”

“Cisco is acquiring Sipura Technology, a leader in consumer and small office / home office (SOHO) VoIP
technology and a key technology provider for Linksys' line of VoIP networking devices……[this
acquisition] follows Cisco's core strategy of using acquisitions to build new technologies and speed
time-to-market for its products.”

Source: Cisco website © 2007-2013 IES Development Ltd. All Rights Reserved

The type of deal will dictate the merger integration approach

CISCO TECHNOLOGY ACQUISITION INTEGRATION APPROACH
For these type of acquisitions, what is Cisco buying?
Resources?
Processes?
Or Values?

For deals buying Resources (engineers, products and technology),
what is an appropriate integration approach?

"We had it [integration] down to a science. If we closed a deal on Wednesday, the next
Monday the company would be fully integrated, with a brand-new Cisco infrastructure.“

Tim Merrifield, Director of IT Acquisition Integration

CISCO buying Linksys is an example of Buying because Value
mismatch prevents Making
CISCO TARGETING HOME NETWORKING OPPORTUNITY
Cisco believed there was a major opportunity in home networking.
However, it did not fit with Cisco’s existing business model and values

Corporate Networking (B2B) Home Networking (B2C)
Key Success Factors Full solution; key a/c management Branding; innovation
Business model Configure complex systems to order Mass products to stock
Sales channel Sell directly to enterprises and value Sell through retailers and
added service provider partners distributers
Manufacturing and Internal Outsourced
Engineering
Most powerful function Engineering Marketing
Decision-making Standard processes Speed and agility
Growth rate 2% >50%
Gross margins 70% 30%

What is Cisco buying? What integration approach would you recommend?

Value mismatch prevents Making:
CISCO buying Linksys
CISCO’s INTEGRATION APPROACH FOR LINKSYS

• The executive team decided to keep Linksys as a separate division, breaking with Cisco’s previous
integration model:
oNo integration in sales force
oNo integration in marketing
oNo integration in product development
• Resources (Cisco engineers) added to Linksys without disrupting value-creating processes and values
• Cost savings from integration in back-office (Many business processes, such as legal and fiscal
calendars, and accounting practices, that would have to be integrated no matter how different the
businesses were)
oIT
oFinance
oHR


You have to be alert to avoid abusing these 4 good reasons to
Buy rather than Make your strategy

•Making will be more expensive

•It will take too long to Make

•Value mismatch prevents Making

•There are unique assets that prevent Making
(e.g. licences, locations, Patents)


There are always alternatives to acquisition

ALTERNATIVE WAYS TO CAPTURE SYNERGIES
Risk/Investment Full
required
ownership
JV
Minority
stake
Alliance/
Partnership

Long term
contract
Short term
contract
Degree of
© 2007-2013 IES Development Ltd. All Rights Reserved Control

Evaluate the alternatives to acquisition before deciding
MAKE vs BUY FLOWCHART
Is an
Rethink N acquisition Y Acquisition
Start
strategy feasible/
JV
viable?
Y
Y

Do we need Can we Do we need a
Do we have time N N write a formal
control of all key N
and resources/ assets/processes simple governance/
values to build /resources? contract? equity
on our own? structure?

Y
Y N
Contract Alliance/
Organic Build Partnership

THE STRATEGIC
RATIONALE:
WHAT YOU ARE
BUYING?


The Resources-Processes-Values framework is useful for
analysing acquisitions
RESOURCE-PROCESSES-VALUES FRAMEWORK

Resources Processes Values

Assets, tangible or How value is created How decisions are made
intangible e.g.: e.g.:
e.g.:
•Performance mgt •Customers vs
•Products •Strategy Employees
•People •Account management •Margin vs Growth
•Technology •Brand planning •Quality vs Cost
•Plants •New product devt. •Centralisation vs
•Brands •Customer insight decentralised
•Research •Entrepreneurial vs
Planned

The Resources-Processes-Values framework is useful for
analysing acquisitions
RESOURCE-PROCESSES-VALUES FRAMEWORK

Resources Processes Values

Relatively easy to Hard to assess Almost impossible
assess value value to assess value

Easy to change, Hard to change, Almost impossible
transfer and reorganise and to change, transfer
rationalise rationalise and rationalise


When you are analysing a deal, push hard to consider the
processes and values that are being bought

Make a bold choice!

Every deal buys resources – products, customers, brands, assets,
market share, people

However, these are measures of past value - looking in the rear
view mirror - not future value

More often, it is Processes or Values that are
critical to the value creation in the deal

TIP: If your instinct says integration should be careful, with the company
kept separate, you are likely to be buying processes and values!

M&A Toolkit: Strategic Fit and Make vs Buy Decisions

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