The document discusses developing a corporate acquisition strategy. It covers M&A trends, rationales for M&As including growth and cost reduction strategies, and considerations for structuring and optimizing value in M&As. It outlines different M&A deal types and a three-stage process for evaluating deals that involves strategy approval, approval to negotiate, and final deal approval. Key risks and pitfalls of M&As include regulatory issues, accounting standards, and differing risk tolerances between acquirer and target companies.

1. DEVELOPING A CORPORATE ACQUISITION STRATEGY Case studies, Concepts, and Debatable Ideas Kenny Ong CNI Holdings Berhad www.myCNI.com.my www.OOBEY.com

2. M&A Trends Rationale for M&As Strategies, Structure, and Optimizing Value in M&As Considerations, Risks and Pitfalls www.myCNI.com.my www.OOBEY.com

3. How to fail without trying The Roadmap to Failure by Fred Wiersema and Mike Treacy Before we start… www.myCNI.com.my www.OOBEY.com

4. The Roadmap to Failure Fred Wiersema and Mike Treacy Performance Time www.myCNI.com.my www.OOBEY.com 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

5. 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 www.myCNI.com.my www.OOBEY.com

6. The Roadmap to Failure Fred Wiersema and Mike Treacy Performance Time www.myCNI.com.my www.OOBEY.com 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

7. 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 www.myCNI.com.my www.OOBEY.com

8. The Roadmap to Failure Fred Wiersema and Mike Treacy Performance Time www.myCNI.com.my www.OOBEY.com 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

9. “ What is the moral of the story?” www.myCNI.com.my www.OOBEY.com

10. What is the Business Model? USP Market Discipline Profit Model www.myCNI.com.my www.OOBEY.com

11. Intro: Market Discipline Mamak stall www.myCNI.com.my www.OOBEY.com

12. Intro: Market Discipline "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 "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 Product Leadership Operational Excellence Customer Intimacy www.myCNI.com.my www.OOBEY.com

13. 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) www.myCNI.com.my www.OOBEY.com

14. 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 5 th 2007 www.myCNI.com.my www.OOBEY.com

15. 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 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 www.myCNI.com.my www.OOBEY.com

16. Strategy: Value Disciplines 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) www.myCNI.com.my www.OOBEY.com

17. Strategy: Value Disciplines 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) www.myCNI.com.my www.OOBEY.com

18. Sample KPIs for Each Discipline Operational Excellence Price Selection Convenience Zero Defects Growth 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 www.myCNI.com.my www.OOBEY.com

19. 1. M&A Trends www.myCNI.com.my www.OOBEY.com

20. M&A Trends Booming Demand Supply/Demand shift to remote, unstable locations Demand shift in Asia Middle East ‘cheap’ energy = diversification Natural resources depleting fast Massive capital required Supply security Scarcity of Talent Global labor market New, low cost players Niche companies in new technologies* Private Equity Restructuring undervalued Conglomerates www.myCNI.com.my www.OOBEY.com

21. M&A Trends Alternative Industries – growth, fragmented* Low R&D, demand for new technologies Credit Crunch Foreign entities Political instabilities De-regularization, Unbundling Record profits, High Prices Antitrust Regulations Cross-border Regulations Traditional MNC consolidation Competition for Assets Rise of Sovereign Funds www.myCNI.com.my www.OOBEY.com

22. 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 www.myCNI.com.my www.OOBEY.com

23. 2. Rationale for M&As www.myCNI.com.my www.OOBEY.com

24. Two Major Rationale for M&As: Cost Reduction Growth

25. Strategies for Growth “ Double-Digit Growth”, Michael Treacy www.myCNI.com.my www.OOBEY.com Base Retention Share Gain Positioning Adjacent Market New Business GROWTH

26. Rationale for M&As: Growth Expansion Consolidate Geographic Distribution Compensate Transformative Portfolio refocus Diversification Easier Tougher www.myCNI.com.my www.OOBEY.com

27. Rationale for M&As: Expansion Expansion Consolidate Geographic Distribution Compensate Gain Scale to compete Integrated Solutions Financial Growth Supply (security, mix) Developing markets High cost of Extra Capacity Private Equity Expanding Sovereign Funds www.myCNI.com.my www.OOBEY.com

28. Rationale for M&As: Expansion Expansion Consolidate Geographic Distribution Compensate De-regularization Demand outstrip supply Revenue Mix – Tax optimization Talent New, Low-cost Entrants Undervalued Big Players Newer Assets www.myCNI.com.my www.OOBEY.com

29. Rationale for M&As: Transformative Transformative Portfolio refocus Diversification New Business Lines Selling/Spin-off non-core Increase product line New customers New technologies* Complementary Business Up-down Supply Chain Patent Convergence anticipation www.myCNI.com.my www.OOBEY.com

30. Rationale for M&As: Cross Sectors www.myCNI.com.my www.OOBEY.com Traditional Alternative Incremental

31. Rationale for M&As: Cross Sectors New Delivery, New Sources, Existing Resources Oil, Gas, Electricity, Coal Biomass, Nuclear, Ethanol, Wind, Solar www.myCNI.com.my www.OOBEY.com Example: Energy Sector Traditional Utility Alternative Energy Incremental Technology

32. 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 www.myCNI.com.my www.OOBEY.com

33. Why do ‘Outsiders’ Acquire or Invest? Return/Profit Risk Management/ Hedging Tax-benefits CSR/Image Diversify revenue Counter-cyclical balance Support ‘Mission’ Exclusive rights Contractual obligation National Agenda Control Supply Chain R&D portfolio Control Management Alternative Cash Flow M&A www.myCNI.com.my www.OOBEY.com

34. 3. Strategies, Structure, and Optimizing Value in M&As www.myCNI.com.my www.OOBEY.com

35. Strategies for Growth “ Double-Digit Growth”, Michael Treacy www.myCNI.com.my www.OOBEY.com Base Retention Share Gain Positioning Adjacent Market New Business GROWTH

36. How Markets determine Growth Strategies (1) Growth Rate www.myCNI.com.my www.OOBEY.com Base Retention Share Gain (Acquisitions) Market Positioning Share Gain Base Retention Strategy Lose customers slower than competitors Create scale economics, squeeze costs Maintain market share in strategic segments Prepare for market decline Competitors focus too much on getting new customers Why? Flat Fast Growth Rate

37. Churn Rate How Markets determine Growth Strategies (2) www.myCNI.com.my www.OOBEY.com Base Retention Share Gain Adjacent Market Share Gain (Acquisitions) Adjacent Markets Strategy Lose customers slower than competitors Customers are always open to the best value and offer Desperate to gain revenue Buying customer base is cheaper than own efforts New products, old customers strategy Why? High Low Churn Rate

38. How Markets determine Growth Strategies (3) Example: Energy Sector www.myCNI.com.my www.OOBEY.com Market Positioning Share Gain (M&A) Base Retention Adjacent Markets (M&A) Fast Growth, Low Churn

39. Create better ‘Value’ proposition Neutralize competitor advantages Buy Market Share outright Price Premium Operating Model Integration Strategy 2: Share Gain www.myCNI.com.my www.OOBEY.com

40. Buying Market Share: Acquisition strategy No evidence of previous company One Kingdom Pre-integration Blueprint Slow Trigger, Fast Bullet www.myCNI.com.my www.OOBEY.com Integration Operating Model Price Premium Buying Market Share Net Cost per Customer < Direct Acquire

41. Buying Market Share: Side notes on Funding www.myCNI.com.my www.OOBEY.com *Adapted from Warren Buffet’s acquisition strategies Cash from Stock sale Issue more stock Cash from Earnings Cash from Borrowings OK, but not preferred Preferable

42. Strategy 4: Invade Adjacent Markets Adjacent Market = Important Similarities and Large Differences in: Cost Structure Competitors Customers Critical Capabilities www.myCNI.com.my www.OOBEY.com

43. Strategy 4: Invade Adjacent Markets www.myCNI.com.my www.OOBEY.com Traditional Alternative Incremental

44. Strategy 4: Invade Adjacent Markets www.myCNI.com.my www.OOBEY.com Example: Energy Sector Traditional Utility Alternative Energy Incremental Technology

45. Strategy 4: Invade Adjacent Markets Upstream Midstream Downstream Distribution Conversion Raw Mat Vendors/Services www.myCNI.com.my www.OOBEY.com

46. 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 Strategy 4: Invade Adjacent Markets www.myCNI.com.my www.OOBEY.com

47. 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 Strategy 4: Invade Adjacent Markets www.myCNI.com.my www.OOBEY.com

48. Make or Buy? It is easier to meet the standards of competition if you buy an existing player Adjacent acquisitions must remain as a separate enterprise Integrate Management Control (systems, technology) Inter-transfer of management talent, knowledge and capability are important Strategy 4: Invade Adjacent Markets www.myCNI.com.my www.OOBEY.com

49. 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 www.myCNI.com.my www.OOBEY.com

50. Linking BSC to M&A Strategy 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 www.myCNI.com.my www.OOBEY.com

51. 4. Considerations, Risks and Pitfalls www.myCNI.com.my www.OOBEY.com

52. 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

53. Types of M&A Deals vs. Considerations Overcapacity Size (Relative) Share Gain (Expansion) Adjacent (Transformative) New Business (Transformative) Small Large “ Running a winning M&A shop”, McKinsey Reduce industry capacity Control Pricing Similar Product Offerings Pay for Cost synergies

54. Types of M&A Deals vs. Considerations Roll-up Size (Relative) Share Gain (Expansion) Adjacent (Transformative) New Business (Transformative) Small Large “ Running a winning M&A shop”, McKinsey Transfer Core Strength to target Pay for lower operating cost of target Increase revenue thru broad strength

55. Types of M&A Deals vs. Considerations Product/ Market Consolidation Size (Relative) Share Gain (Expansion) Adjacent (Transformative) New Business (Transformative) Small Large “ Running a winning M&A shop”, McKinsey Economies of Scale Consolidate back office Expand Market presence Pay for Growth, Channels

56. Types of M&A Deals vs. Considerations Acquire products/ market Size (Relative) Share Gain (Expansion) Adjacent (Transformative) New Business (Transformative) Small Large “ Running a winning M&A shop”, McKinsey Expand market offering Expand Geographic reach Pay for Growth, Channels Revenue synergies

57. Types of M&A Deals vs. Considerations Transformation/ Convergence Size (Relative) Share Gain (Expansion) Adjacent (Transformative) New Business (Transformative) Small Large “ Running a winning M&A shop”, McKinsey Transform Industry Create new Value Proposition Pay for New Markets, New Capabilities

58. Types of M&A Deals vs. 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

59. Three-Stage Process for Evaluating M&A deals 1. Strategy Approval 2. Approval-to- Negotiate 3. Deal Approval Business Dev + Business Unit Worth of Target? Attractiveness of Target vs. Others Target compatible with Strategy? Support from Acquirer? Integration possibilities? “ Running a winning M&A shop”, McKinsey

60. Three-Stage Process for Evaluating M&A deals 1. Strategy Approval 2. Approval-to- Negotiate 3. Deal Approval Price range Initial Due Diligence Vision for incorporation Key Synergies Nonbinding Term Sheet/LOI Negotiation Roadmap Process to Close “ Running a winning M&A shop”, McKinsey

61. Three-Stage Process for Evaluating M&A deals 1. Strategy Approval 2. Approval-to- Negotiate 3. Deal Approval Answering Key Questions Debating Valuations Aiming for Integration Dealing with Execution Risks “ Running a winning M&A shop”, McKinsey

62. Considerations, Risks and Pitfalls Global footprint vs. Local Presence Anti-trust and Regulatory permissions M&A Accounting Standards ‘Fair Value’ definition in financial reporting = ‘Exit’ price Acquirer and Target having different Risk Tolerances Public (or Public-hopeful) companies need to consider EPS after acquisition www.myCNI.com.my www.OOBEY.com

63. Considerations, Risks and Pitfalls Synergies and Improvements need to realized as quickly and efficiently as possible Combined Management capability to deliver improved performance First 100 days post-acquisition blueprint Culture management Staff Poaching from Competitors (and non-competitors) Customer Poaching from Competitors www.myCNI.com.my www.OOBEY.com

64. 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 www.myCNI.com.my www.OOBEY.com

65. 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 www.myCNI.com.my www.OOBEY.com

66. End Note for M&A “ Go where the money is... then marry for love” F. Scott Fitzgerald, Author www.myCNI.com.my www.OOBEY.com

67. Thank You. soft copy of slides: www.totallyunrelatedrandomanddebatable.blogspot.com