Mand a toolkit make vs buy

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Mand a toolkit make vs buy

  1. 1. M&A TOOLKIT Strategic Fit: Make vs Buy?© 2007-2013 IESIES Development Ltd. All Ltd. Reserved © 2007-2013 Development Rights All Rights Reserved
  2. 2. THE STARTING POINT FOR M&A: A CLEAR STRATEGY © 2007-2013 IES Development Ltd. All Rights Reserved
  3. 3. 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” © 2007-2013 IES Development Ltd. All Rights Reserved
  4. 4. Strategic rationales for acquisitions have to say how theacquisition enhances competitive advantage Michael Porter definition of strategy“How we are going to create and sustain competitive advantage” © 2007-2013 IES Development Ltd. All Rights Reserved
  5. 5. Any acquisition needs to fit the strategic direction of thecompany; 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! © 2007-2013 IES Development Ltd. All Rights Reserved
  6. 6. 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? © 2007-2013 IES Development Ltd. All Rights Reserved
  7. 7. Acquisitions arefundamentally a Make or Buy decision © 2007-2013 IES Development Ltd. All Rights Reserved
  8. 8. Given your business exists to MAKEvalue for shareholders, why would you BUY it instead? © 2007-2013 IES Development Ltd. All Rights Reserved
  9. 9. There can be good reasons to Buy rather than Make yourstrategy1) Making will be more expensive2) It will take too long to Make3) Value mismatch prevents Making4) There are unique assets that prevent Making (e.g. licences, locations, Patents) © 2007-2013 IES Development Ltd. All Rights Reserved
  10. 10. Making can be more expensive than buying for Market Entry CASHFLOW PROJECTION FOR RETAIL MARKET ENTRY ($m)25201510 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? © 2007-2013 IES Development Ltd. All Rights Reserved
  11. 11. There is always a trade-off between greenfield and inorganic market entryAdvantage of Greenfield Advantage of AcquisitionBuild a business that fits our Buy a business that fits the localcompetitive advantage customerWe capture all value created Avoid negative cashflow drain during startupCreate a new value proposition for Buy into an already proven valuethis market propositionExploit our scale, experience and Possibility to acquire new capabilitiescapabilities in other marketsMarket risk: Maybe we can’t build a Deal risk: Maybe we overpay and can’tprofitable business? integrate? © 2007-2013 IES Development Ltd. All Rights Reserved
  12. 12. 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 Ciscos 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
  13. 13. The type of deal will dictate the merger integration approachCISCO 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 © 2007-2013 IES Development Ltd. All Rights Reserved
  14. 14. CISCO buying Linksys is an example of Buying because Value mismatch prevents MakingCISCO 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; innovationBusiness model Configure complex systems to order Mass products to stockSales channel Sell directly to enterprises and value Sell through retailers and added service provider partners distributersManufacturing and Internal OutsourcedEngineeringMost powerful function Engineering MarketingDecision-making Standard processes Speed and agilityGrowth rate 2% >50%Gross margins 70% 30% What is Cisco buying? What integration approach would you recommend? © 2007-2013 IES Development Ltd. All Rights Reserved
  15. 15. 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 © 2007-2013 IES Development Ltd. All Rights Reserved
  16. 16. You have to be alert to avoid abusing these 4 good reasons toBuy 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) © 2007-2013 IES Development Ltd. All Rights Reserved
  17. 17. There are always alternatives to acquisition ALTERNATIVE WAYS TO CAPTURE SYNERGIESRisk/Investment Fullrequired ownership JV Minority stake Alliance/ Partnership Long term contract Short term contract Degree of © 2007-2013 IES Development Ltd. All Rights Reserved Control
  18. 18. Evaluate the alternatives to acquisition before decidingMAKE 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 aDo 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 © 2007-2013 IES Development Ltd. All Rights Reserved
  19. 19. THE STRATEGIC RATIONALE:WHAT YOU ARE BUYING? © 2007-2013 IES Development Ltd. All Rights Reserved
  20. 20. The Resources-Processes-Values framework is useful for analysing acquisitionsRESOURCE-PROCESSES-VALUES FRAMEWORK Resources Processes ValuesAssets, tangible or How value is created How decisions are madeintangible 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 © 2007-2013 IES Development Ltd. All Rights Reserved
  21. 21. The Resources-Processes-Values framework is useful for analysing acquisitionsRESOURCE-PROCESSES-VALUES FRAMEWORK Resources Processes ValuesRelatively easy to Hard to assess Almost impossibleassess value value to assess valueEasy to change, Hard to change, Almost impossibletransfer and reorganise and to change, transferrationalise rationalise and rationalise © 2007-2013 IES Development Ltd. All Rights Reserved
  22. 22. 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 dealTIP: If your instinct says integration should be careful, with the companykept separate, you are likely to be buying processes and values! © 2007-2013 IES Development Ltd. All Rights Reserved

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