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M&A strategy and rational


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M&A School/ZEO University

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M&A strategy and rational

  1. 1. M&A Process Overview 18 FEB 2017
  2. 2. RECOMMENDED COURSE LITERATURE The Art of M&A Strategy by Kenneth Smith Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rozenbau Value Negotiation by Horacio Falcao
  3. 3. Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rozenbau Chapters on M&A (6 and 7) The Big Idea: The New M&A Playbook Article RECOMMENDED COURSE LITERATURE
  4. 4. M&A Process Overview
  5. 5. M&A PROCESS OVERVIEW Throughout the M&A school, we will cover all the stages of the M&A process, buy-side and sell-side Strategy Target Screening Transaction Execution Validation Execution Integration Strategy M&A rationales Buy or sell? Criteria development Target ID Long-list Communication Short list Merger benefit potential Market valuation Deal strategy Strategic due diligence Internal valuation Market Context Tactical evaluation Investor relation Financial structure Org. structure Financing Financial due diligence Legal due diligence Documentation Strategic Technology Operations Financial Legal Organization Can we use M&A to enhance our strategic position? Select suitable candidate that meet our criteria Justify the price and access the risk Access the market before and after M&A Determine the terms of the transaction Full assessment of the target and the potential risks Extract synergies and maximize deal value
  6. 6. FINANCIAL INVESTORS VS STRATEGIC ACQUIRERS Strategic acquirer, such as a big company / a corporation, typically seeks to acquire 100% (exceptions apply) Financial investors, such as Private Equity funds can also buy out companies (i.e. 25-50-75-100%) 100% sale to a Financial Investors vs. a Corporation have great differences in rationales and M&A process Driven more by expectation of financial returns, than strategic rationales Have less synergy to extract More sensitive to valuation based on EBITDA Bound by an investment horizon upon which need to sell Expect higher returns Strategic rationales might be absent at all Instead, but will have an Investment Thesis on why this is a good company to buy Look at synergy and strategic rationales Strategic fit is more important than EBITDA multiple; financial terms, however, do matter Have access to cheaper capital Have an indefinite investment horizon Can reorganize the company and integrate it with their organization fully including financials (P&L)
  7. 7. M&A Strategic Rationales
  8. 8. BUY OR BUILD? You are an entrepreneur who has built a successful and profitable tech business, or a CEO of a large public tech company with “unlimited” resources. 
 Why buy, let’s build it from scratch? Your ideas of why it is a good idea to build: • • • • Your ideas of why it is a good idea to buy: • • • •
  9. 9. PROS AND CONS OF M&A Advantages and disadvantages of M&A, lets discuss + Advantages • Buy a “missing puzzle” for your strategy to work • Win time • • - Disadvantages • Part of the team might leave • Integration cost • • •
  10. 10. • Cooperation • Technology license • Joint venture • Affiliate partner • OEM deal • Joint distribution • Other forms of getting a strategic advantage without paying cash for the acquisition? ALTERNATIVES TO “BUILDING FROM SCRATCH” AND M&A?
  11. 11. Opportunity cost Entry barriers Technology barrier Network effect Synergy Organizational behavior Investment horizon perspective Cost of capital 
 Negotiations power Special situations Historical analysis vs forward looking statement Investment hypothesis Investment thesis Funnel Information asymmetry Irrational behavior Sell-side and buy-side IMPORTANT CONCEPTS AND VOCABLULARY
  12. 12. Reasons to buy = Synergies Enhancing technology within core product vertical Acquire new product / product line 1 2 3 4 5 6 7 8 9 WHY COMPANIES BUY OTHER COMPANIES?
  13. 13. Supply chain enhancement New breakthrough technology/IP right Team acquisition Acquisition of sales channels Geographic expansion Capture additional market share Your ideas? Reasons to buy = Synergies Enhancing technology within core product vertical Acquire new product / product line 1 2 3 4 5 6 7 8 9 Synergies WHY COMPANIES BUY OTHER COMPANIES?
  14. 14. • Acquisition of the company at the same level of the value chain as the acquirer • Expands geographic reach, product lines, services or distribution channels • Economies of scale and scope Horizontal integration Vertical integration • Purchase of the business at the same level of the value supply chain • Growth opportunities by affording control over key components of the supply chain Risks: • Limited choice of suppliers and innovation once M&A is complete • Management and logistics hurdles • Channel conflict with customers Risks: • Negative revenue synergies • Anti-trust issues Most Tech M&As M&As in Hardware Tech Raw Material Supply Production Distribution End User Supply chain example: + + VERTICAL VS HORIZONTAL INTEGRATIONS
  15. 15. • Headcount reduction • Consolidation of overlapping facilities • Increased purchasing power • Enhanced sales growth • Enhancing or expansion of an existing product/service • More speculative than cost synergies Synergies Cost synergies Revenue synergies Synergies - the sum should be larger than its parts; 1 + 1 = 3. Financial synergies Sales & marketing synergies • Decreased cost of capital • Lowered risks, better cash flow, increased financial margins • Higher margins achieved via increased negotiation capabilities towards suppliers and customers • New channels Efficiency Entry speed Competitive Increased market size Corporate competencies Knowledge and learning curve Resources Consolidation Resource sharing Price pressure Transaction cost Bargaining power Types of gains from synergies SYNERGIES EXPLAINED
  16. 16. Reasons to sell = Risks Fast technological cycles. Today you are the first and richest, tomorrow – bankrupt1 2 3 4 5 6 • Why buy or sell an IT business that is “a cash cow” or is yet “not profitable but has high potential”? WHY COMPANIES GET SOLD?
  17. 17. Reasons to sell = Risks Fast technological cycles. Today you are the first and richest, tomorrow – bankrupt1 2 3 4 5 6 Only small % of companies that raised capital would be successfully acquired or would have an IPO and sustain 20-30 years existence horizon The majority of businesses in a short while stop growing fast, or they peak and then decline / go bankrupt Competitors that raise big VC rounds beat you at marketing. Businesses with strong network effects or ‘winner takes it all’ niches -> kill competition Big companies (i.e. Google, Cisco, SalesForce) start offering a similar product Sales & growth marketing costs might have negative ROI 7 Founders’ motivation changes (launch other businesses, get tired, retire, family circumstances, etc.) • Why buy or sell an IT business that is “a cash cow” or is yet “not profitable but has high potential”? WHY COMPANIES GET SOLD?
  18. 18. IT businesses are owned by individuals = humans Humans = rational or irrational, driven by various motivations or circumstances Exercise: List NON-financial reasons of why founder(s) might sell •launch other businesses •tired to run it •retire •family circumstances • • • • EXERCISE: FOUNDERS’ MOTIVATION
  19. 19. Innovate or die? Many of once successful and profitable businesses went bankrupt Why did those companies fail? Dozens in dotcom boom REASONS TO SELL
  20. 20. Innovate or die? Many of once successful and profitable businesses went bankrupt Why did those companies fail? Dozens in dotcom boom REASONS TO SELL Technology cycles are super fast and often come from an unexpected angle
  21. 21. Cisco’s Acquisitions 1993-2014 Part of Cisco’s development strategy is the acquisition of companies with new products and product lines EXAMPLE 1: ACQUISITION OF A NEW PRODUCT/PRODUCT LINE
  22. 22. • Acquired over 190 companies • Makes over 10 acquisitions per year • Has a team of only 50 M&A professionals globally • Buys mostly small companies, including startups • 6 priority M&A areas: data centers, cloud, big data, security, Internet of Things and its core networking $1.4B $3.7B $293M Cloud security provider Application performance management Internet of Things cloud platform Recent acquisition EXAMPLE 1: ACQUISITION OF A NEW PRODUCT/PRODUCT LINE
  23. 23. Strategic rationale: • Acquire a leader in dippers and soap e-commerce verticals with • Recurring subscription revenue of $300M per year and • Audience of parents that could buy other baby products from Amazon $545M 2013 Case: • Quidsi – a fast-growing e-commerce site with and brands • Quidsi had a growing audience audience of parents and a unique recurring subscription model Similar deals: + + + EXAMPLE 2: ENCHANCING EXPERTISE WITHIN THE VERTICAL
  24. 24. EXAMPLE 3: TECHNOLOGY/IP ACQUISITION Strategic rationale: • GM needed their own solution to keep up with the expanding self-driving market • GM planed to integrate this technology into their original manufacturing process $ 2014 Case: •Cruise Automation Inc., a Silicon Valley company developing autonomous-vehicle technology, allows buyers to convert certain vehicles into self-driving cars + + +
  25. 25. EXAMPLE 4: TEAM (ACQUIHIRES) Strategic rationale: • Acquire an ambitious team with expertise in summation technology used to develop their app. • Yahoo planed to close the startup and use the team to develop new products within Yahoo $30M 2014 Case: •Summly, a stylish reading app, founded by a 18 y.o. founder + a team of 5. Similar deals: +
  26. 26. EXAMPLE 5: SUPPLY CHAIN ENHANCEMENT Strategic rationale: • Control the hardware production/manufacturing of Apples products • Integrated experience (hardware+software) is the core of Apple’s products $ 2013 Case: •Passif Semiconductor - communication chip developer that specializes in low-power designs - technology that could be useful in developing a smartwatch-like wearable device Similar deals: Passif Semiconductor +
  27. 27. EXAMPLE 6: GEOGRAPHIC EXPANSION Strategic rationale: • European market expansion • Easier to acquire a dominant local player rather than competing with them • Strategic move to establish Zomanto’s presence as a leader in the restaurant discovery space in Europe • Same year Zomato acquired leaders in Slovakia and Czech Republic $ jul 2014 Case: • Gastronauci – is a leading Polish restaurant search service • Zomato is a restaurant discovery service operating in 23 countries Similar deals: + + +
  28. 28. EXAMPLE 7: NEW SALES CHANNELS Strategic rationale: • Access relationships with web publishers, advertisers and advertising agencies • Expanding into online advertising display ads market, where DoubleClick is strongest, as Google still generated most of its revenue from search and contextual text ads $3.1B 2007 Case: •DoubleClick provides display ads on websites, software to help those sites maximize ad revenue, helping ad buyers — advertisers and ad agencies — manage and measure the effectiveness of their media, search and other online ads Similar deals: Outsourcing companies+ +
  29. 29. EXAMPLE 8: CAPTURE MARKET SHARE Strategic rationale: •Expand market share in deal-of-the-day market by buying local leaders or 2nd / 3rd runner-ups in the US Case: •Companies above provide similar services of deals fro consumers from local businesses +
  30. 30. EXERCISE: WHY COMPANIES GET ACQUIRED? Come up with 1-2 examples of M&A deals with the following rationales: New product Team Sales channel New geography
  31. 31. ORGANIC VS. NON-ORGANIC GROWTH Organic growth Non organic growth ( including via М&А) • Flexibility in business management • Maximum control • Fast growth • Fast financials improvement (сash flow) • Growth/cost cutting due to synergies • Limited resources for growth • Reaching growth ceiling • VC-funded competitors that grow faster than you • Big upfront expenses to buy a company • Risks associated with M&A • Need for stronger management due to company growth (more staff, more sales volume, more clients) All Ukrainian tech companies + -
  34. 34. M&A RATIONAL FOR OUTSOURCING New delivery geography Vertical expertise New sales geography IP acquisition Top talent acquisition Client acquisition Afortio (First Ukraine delivery for EPAM)+ Instant Information (Cloud deployment capabilities)+ Mecel Populus Suite (purchase of only automotive IP, no team) IntroPro (Media, TV and Entertainment vertical + US sales) + + + Dalian 3CIS (Japan sales + China delivery) Rofous Software (Indian delivery, retail and telecom clients) +
  35. 35. M&A FAILURES Despite $3 trillion spent on acquisitions year year, 70-90% of them fail* Possible causes of high M&A failure rate: 1 2 3 4 5 6 Poor due diligence Acquisition strategy resting on wrong convictions No or weak integration plan post acquisition No or weak synergies or failure to extract them Cultural clash between a buyer and a company being acquired Paying too much 8 Acquiring product / technology that turns to be obsolete after a while *HBS Review: The Big Idea the New M&A Playbook 7 Overly optimistic approach to projections estimations
  36. 36. M&A FAILURES Windows Phone was the wrong bet. Nokia failed to turn around, despite rolling out Nokia Lumia 800. Reason for failure $840M $7B Google sold Motorola to Lenovo for $2.81 billion – a hefty loss on its $12.5 billion investment. $80M Lala was an early pioneer of online music, but due to being too-innovative did not take off at Apple and shut down. Cultural clash $2.6B Poor technology/ customer fit. Nobody at Ebay wanted to talk. No synergies. After four unfulfilling years eBay sold Skype at a loss to private investors for $1.9 billion. $15B No synergies or execution plan. Sold Bebo later for $10M Amount
  37. 37. M&A FAILURES Cultural clashes and incompatible wireless technologies made impossible to extract synergies Reason for failure $165B $36B Mismanagement and the emergence of Facebook $5.7B Bad timing/ execution as connections were much slower for people to watch videos online $530M AOL had market cap of $240B before the acquisition. Today Time Warner’s market cap is around 40b and AOL’s 2b. Cultural clash, bad economy and bad due diligence are the reasons Amount
  38. 38. M&A RATIONALES “CHEAT SHEET” SWOT (Strength Weakness Opportunity Threats) analysis on your company. M&A could come from an angle of: • Strength / Opportunity • Weakness / Threat It is typically easier to build up Strength / Opportunity organically without M&A Hence, Challenges, Weaknesses and Threats of your business are MORE IMPORTANT to look at (is NOT always true, exceptions apply)
  39. 39. Presentation by Mikhail Temper, Kromtech KROMTECH CASE
  40. 40. KROMTECH CASE OBJECTIVES • New products development for Mac OS to attract new customer segments to security/ optimization niches • Development of new products for iOS market • Build-up of iOS user base • Explore new market opportunities in Asia, in particular Japan and China Kromtech’s strategic objectives: • Assess the strategic M&A rationales for Kromtech based on the company’s information and the learned concepts in class Specific expectations & case outputs: • Define the Kromtech opportunities and threats for each strategic rationale • Propose a criteria for selecting M&A objects for each strategic direction • Conduct market analysis, propose most fitting targets, develop a full-cycle M&A strategy for them including integration
  41. 41. KROMTECH CASE CYCLE 1. Strategic rationales development Full-cycle of M&A process on a specific real-life company • Practice the set up a data-room • Learn the art and science behind the post-M&A integration process • Learn why companies get acquired • Learn to develop strategic rationales • Find out how to make market research work for your M&A goals Week 1 Week 5 • Learn how to conduct first interview with the target • Come up with a list of relevant questions for the 1st interview • Conduct such interview • Learn the right questions to ask during the due diligence process • Conduct a due diligence call/meeting with the target Week 3-4 • Select potential targets for acquisition • Learn to craft first contact email • Setup the first call/meeting Week 2 2. Buy-side and sell-side process 3-4. Interview and due diligence (buy- side) 5. Due-diligence (sell- side) and Integration
  42. 42. CLASSWORK; KROMTECH M&A RATIONALE Form 4 random groups with people you do NOT know Imagine you are the founders of Kromtech company Group 1: Who can potentially acquire Kromtech, and why? Group 2: What should Kromtech change in its business strategy to make the company more attractive for a wider range of potential buyers? Group 3: Which types of companies might be interesting for Kromtech to acquire, and why? Group 4: What are the biggest opportunities for Kromtech’s growth or threats that could result in company’s failure? 30 min group discussion 5-10 min presentations Group work
  43. 43. CLASSWORK - GROUP EXERCISE • IT entrepreneur • Kromtech employee • Investment banker / management consultant • Top-manager IT company • Other type of experience/profile of a participant Google sheets file to be created with contracts of each group and its participants (responsible – Yuliya We plan to work in such groups on all homework until the end of the M&A course 2. Form groups of 5-6 people that would ideally include one of the following:
  44. 44. CONTACTS MANAGING PARTNER AVentures Capital SlideShare Yevgen Sysoyev Twitter @YevgenSysoyev Facebook Yevgen Sysoyev YEVGEN SYSOYEV T&D LEAD ZEO Alliance Facebook Юлия Шаврина YULIA SHAVSHINA