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Slide 1: DEVELOPING A CORPORATE ACQUISITION STRATEGY Case studies, Concepts, and Debatable Ideas Kenny Ong CNI Holdings Berhad www.myCNI.com.my www.OOBEY.com
Slide 2: 1. M&A Trends 2. Rationale for M&As 3. Strategies, Structure, and Optimizing Value in M&As 4. Considerations, Risks and Pitfalls www.myCNI.com.my www.OOBEY.com
Slide 3: Before we start… • How to fail without trying The Roadmap to Failure by Fred Wiersema and Mike Treacy www.myCNI.com.my www.OOBEY.com
Slide 4: The Roadmap to Failure Fred Wiersema and Mike Treacy Downpresure of Unclear Strategy The Moment of Truth Performance X ic T ac t -hoc Ad Today’s performance Doom Projections s Performance Freefall Tomorrow’s actual performance Clear Sailing www.myCNI.com.my Denial & Defense Overdue Failure www.OOBEY.com Time
Slide 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
Slide 6: The Roadmap to Failure Fred Wiersema and Mike Treacy Downpresure of Unclear Strategy The Moment of Truth Performance X ic T ac t -hoc Ad Today’s performance Doom Projections s Performance Freefall Tomorrow’s actual performance Clear Sailing www.myCNI.com.my Denial & Defense Overdue Failure www.OOBEY.com Time
Slide 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 messups 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
Slide 8: The Roadmap to Failure Fred Wiersema and Mike Treacy Downpresure of Unclear Strategy The Moment of Truth Performance X ic T ac t -hoc Ad Today’s performance Doom Projections s Performance Freefall Tomorrow’s actual performance Clear Sailing www.myCNI.com.my Denial & Defense Overdue Failure www.OOBEY.com Time
Slide 9: “What is the moral of the story?” www.myCNI.com.my www.OOBEY.com
Slide 10: What is the Business Model? USP Profit Model Market Discipline www.myCNI.com.my www.OOBEY.com
Slide 11: Intro: Market Discipline • Mamak stall www.myCNI.com.my www.OOBEY.com
Slide 12: Intro: Market Discipline Product Leadership "They are the most innovative" "Constantly renewing and creative" "Always on the leading edge" Customer Intimacy "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 www.OOBEY.com "A great deal!" Operational Excellence Excellent/attractive price Minimal acquisition cost and hassle Lowest overall cost of ownership "A no-hassles firm" Convenience and speed Reliable product and service www.myCNI.com.my
Slide 13: Strategy: Disciplines, Priorities, and KPIs Product Leadership (best product) Operational Excellence (low cost producer) Customer Intimacy (best total solution) Ref: The Discipline of Market www.myCNI.com.my Leaders, Michael Treacy & Fred Wiersema; 1995 www.OOBEY.com
Slide 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 Make what customers want • “Fast Food” • Prowls market for new products • Tests new products for Cooking Times • Monitored field tests *Adapted from: Businessweek , Februrary 5th 2007 www.myCNI.com.my www.OOBEY.com
Slide 15: 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' • www.myCNI.com.my Product Leadership • New, state of the art products or services Risk takers Meet volatile customer needs Fast concept-tocounter Never satisfied obsolete own and competitors' products Learning organization 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.OOBEY.com • • • • •
Slide 16: Strategy: Value Disciplines Product Leadership (best product) Operational Excellence (low cost producer) Customer Intimacy (best total solution) Ref: The Discipline of Market www.myCNI.com.my Leaders, Michael Treacy & Fred Wiersema; 1995 www.OOBEY.com
Slide 17: Strategy: Value Disciplines Product Leadership (best product) Operational Excellence (low cost producer) Customer Intimacy (best total solution) Ref: The Discipline of Market www.myCNI.com.my Leaders, Michael Treacy & Fred Wiersema; 1995 www.OOBEY.com
Slide 18: Sample KPIs for Each Discipline Operational Excellence • • • • • Price Selection Convenience Zero Defects Growth Product Leadership • • • • • • • Marketing Functionality # of Successes # of Failures Learn from key users Interdisciplinary teams Pipeline Customer Intimacy • • • • • Customer Knowledge Solutions Offered Penetration Customer Data Customer-success focus www.myCNI.com.my www.OOBEY.com
Slide 19: 1. M&A Trends www.myCNI.com.my www.OOBEY.com
Slide 20: 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 1. 2. 3. 4. 5. Supply security Scarcity of Talent Global labor market New, low cost players Niche companies in new technologies* 6. Private Equity 7. Restructuring undervalued Conglomerates www.myCNI.com.my www.OOBEY.com
Slide 21: M&A Trends 1. Record profits, High Prices 2. Antitrust Regulations 3. Cross-border Regulations 4. Traditional MNC consolidation 5. Competition for Assets 6. Rise of Sovereign Funds 1. Alternative Industries – growth, fragmented* 2. Low R&D, demand for new technologies 3. Credit Crunch 4. Foreign entities 5. Political instabilities 6. De-regularization, Unbundling www.myCNI.com.my www.OOBEY.com
Slide 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
Slide 23: 2. Rationale for M&As www.myCNI.com.my www.OOBEY.com
Slide 24: Two Major Rationale for M&As: 1. Cost Reduction 2. Growth
Slide 25: Strategies for Growth “Double-Digit Growth”, Michael Treacy 1.Base Retention 1.New Business GROWTH 1.Share Gain 1.Adjacent Market www.myCNI.com.my 1.Positioning www.OOBEY.com
Slide 26: Rationale for M&As: Growth Expansion 1.Consolidate 2.Geographic 3.Distribution 4.Compensate Easier www.myCNI.com.my Transformative 1.Portfolio refocus 2.Diversification Toughe r www.OOBEY.com
Slide 27: 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 www.myCNI.com.my www.OOBEY.com
Slide 28: Rationale for M&As: Expansion Expansion 1. Consolidate 2. Geographic 3. Distribution 4. Compensate 1. De-regularization 2. Demand outstrip supply 3. Revenue Mix – Tax optimization 4. Talent 5. New, Low-cost Entrants 6. Undervalued Big Players 7. Newer Assets www.myCNI.com.my www.OOBEY.com
Slide 29: 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 www.myCNI.com.my www.OOBEY.com
Slide 30: Rationale for M&As: Cross Sectors Traditional Incremental Alternative www.myCNI.com.my www.OOBEY.com
Slide 31: Rationale for M&As: Cross Sectors Example: Energy Sector Traditional Utility Oil, Gas, Electricity, Coal Incremental Technology New Delivery, New Sources, Existing Resources www.myCNI.com.my Alternative Energy Biomass, Nuclear, Ethanol, Wind, Solar www.OOBEY.com
Slide 32: Possible ‘Outside’ Acquirers or Investors Institutional Fund Managers Corporations Sovereign Funds VCs NGOs Financial (Loans) JV Partners M&A Social VCs Holding Co. Gov. VCs Supply Chain Gov. Partnership Non-Profit Org Competitors www.myCNI.com.my www.OOBEY.com
Slide 33: 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 www.myCNI.com.my 1. Contractual obligation 2. National Agenda 3. Control Supply Chain 4. R&D portfolio 5. Control Management 6. Alternative Cash Flow 7. M&A www.OOBEY.com
Slide 34: 3. Strategies, Structure, and Optimizing Value in M&As www.myCNI.com.my www.OOBEY.com
Slide 35: Strategies for Growth “Double-Digit Growth”, Michael Treacy 1.Base Retention 1.New Business GROWTH 1.Share Gain 1.Adjacent Market www.myCNI.com.my 1.Positioning www.OOBEY.com
Slide 36: How Markets determine Growth Strategies (1) • Growth Rate Growth Strategy Rate Fast 1. Market Positioning 2. Share Gain 3. Base Retention Flat 1. Base Retention 2. Share Gain (Acquisitions) www.myCNI.com.my Why? •Maintain market share in strategic segments •Prepare for market decline •Competitors focus too much on getting new customers •Lose customers slower than competitors •Create scale economics, squeeze costs www.OOBEY.com
Slide 37: How Markets determine Growth Strategies (2) • Churn Rate Churn Rate Low Strategy 1. Share Gain (Acquisitions) 2. Adjacent Markets 1. Base Retention 2. Share Gain 3. Adjacent Market Why? •Buying customer base is cheaper than own efforts •New products, old customers strategy •Lose customers slower than competitors •Customers are always open to the best value and offer •Desperate to gain revenue www.OOBEY.com High www.myCNI.com.my
Slide 38: How Markets determine Growth Strategies (3) •Example: Energy Sector Fast Growth, 1.Market Positioning Low Churn 1.Share Gain (M&A) 1.Base Retention 1.Adjacent Markets (M&A) www.myCNI.com.my www.OOBEY.com
Slide 39: Strategy 2: Share Gain • Create better ‘Value’ proposition • Neutralize competitor advantages • Buy Market Share outright – Price Premium – Operating Model – Integration www.myCNI.com.my www.OOBEY.com
Slide 40: Buying Market Share: Acquisition strategy Price Premium Net Cost per Customer < Direct Acquire Buying Market Share Operating Integration Model One Kingdom Pre-integration Blueprint Slow Trigger, Fast Bullet www.myCNI.com.my www.OOBEY.com No evidence of previous company
Slide 41: Buying Market Share: Side notes on Funding Preferable 1. Cash from Earnings 2. Cash from Borrowings OK, but not preferred 1. Cash from Stock sale 2. Issue more stock *Adapted from Warren Buffet’s acquisition strategies www.myCNI.com.my www.OOBEY.com
Slide 42: Strategy 4: Invade Adjacent Markets Adjacent Market = Important Similarities and Large Differences in: 1. Cost Structure 2. Competitors 3. Customers 4. Critical Capabilities www.myCNI.com.my www.OOBEY.com
Slide 43: Strategy 4: Invade Adjacent Markets Traditional Incremental Alternative www.myCNI.com.my www.OOBEY.com
Slide 44: Strategy 4: Invade Adjacent Markets Example: Energy Sector Traditional Utility Incremental Technology Alternative Energy www.myCNI.com.my www.OOBEY.com
Slide 45: Strategy 4: Invade Adjacent Markets Upstream Raw Mat Midstream Conversion Vendors/Services Downstream Distribution www.myCNI.com.my www.OOBEY.com
Slide 46: Strategy 4: Invade Adjacent Markets • 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 www.myCNI.com.my www.OOBEY.com
Slide 47: Strategy 4: Invade Adjacent 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 www.myCNI.com.my www.OOBEY.com
Slide 48: Strategy 4: Invade Adjacent 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 www.myCNI.com.my www.OOBEY.com
Slide 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
Slide 50: Linking BSC to M&A Strategy Financial Revenue Growth Productivity Market Value Customers Base Retention Share Gain Positioning Adjacent Market New Business Internal Process Operational Excellence Learning & Growth Competencies www.myCNI.com.my Information Systems Product Leadership Customer Intimacy Investment Strategy Motivation, empowerment, alignment www.OOBEY.com
Slide 51: 4. Considerations, Risks and Pitfalls www.myCNI.com.my www.OOBEY.com
Slide 52: Types of M&A Deals vs. Considerations Large Size (Relative) Overcapacity Transformation/ Product/ Convergence Market Consolidation Acquire products/ market Strategic Growth Bet Roll-up Small Share Gain (Expansion) Adjacent New Business (Transformative) (Transformative) “Running a winning M&A shop”, McKinsey
Slide 53: Types of M&A Deals vs. Considerations Large Size (Relative) Overcapacity •Reduce industry capacity •Control Pricing •Similar Product Offerings •Pay for Cost synergies Small Share Gain (Expansion) Adjacent New Business (Transformative) (Transformative) “Running a winning M&A shop”, McKinsey
Slide 54: Types of M&A Deals vs. Considerations Large Size (Relative) •Transfer Core Strength to target •Pay for lower operating cost of target •Increase revenue thru broad strength Roll-up Small Share Gain (Expansion) Adjacent New Business (Transformative) (Transformative) “Running a winning M&A shop”, McKinsey
Slide 55: Types of M&A Deals vs. Considerations Large Size (Relative) •Economies of Scale •Consolidate back office •Expand Market presence •Pay for Growth, Channels Adjacent New Business (Transformative) (Transformative) Product/ Market Consolidation Small Share Gain (Expansion) “Running a winning M&A shop”, McKinsey
Slide 56: Types of M&A Deals vs. Considerations Large Size (Relative) Small •Expand market offering •Expand Geographic Acquire reach products/ •Pay for Growth, market Channels •Revenue Share Gain Adjacent New Business synergies (Expansion) (Transformative) (Transformative) “Running a winning M&A shop”, McKinsey
Slide 57: Types of M&A Deals vs. Considerations Large Size (Relative) •Transform Industry •Create new Value Proposition •Pay for New Markets, New Capabilities Transformation/ Convergence Small Share Gain (Expansion) Adjacent New Business (Transformative) (Transformative) “Running a winning M&A shop”, McKinsey
Slide 58: Types of M&A Deals vs. Considerations Large Size (Relative) •Skill transfer into new business •Pay for High Risk options, ability to act in new market space Strategic Growth Bet Small Share Gain (Expansion) Adjacent New Business (Transformative) (Transformative) Adapted: “Running a winning M&A shop”, McKinsey
Slide 59: Three-Stage Process for Evaluating M&A deals 1. Strategy 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? “Running a winning M&A shop”, McKinsey 2. Approval-toNegotiate 3. Deal Approval
Slide 60: Three-Stage Process for Evaluating M&A deals 1. Strategy 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 “Running a winning M&A shop”, McKinsey 2. Approval-toNegotiate 3. Deal Approval
Slide 61: Three-Stage Process for Evaluating M&A deals 1. Strategy Approval 1. Answering Key Questions 2. Debating Valuations 3. Aiming for Integration 4. Dealing with Execution Risks “Running a winning M&A shop”, McKinsey 2. Approval-toNegotiate 3. Deal Approval
Slide 62: Considerations, Risks and Pitfalls 1. 2. 3. 4. Global footprint vs. Local Presence Anti-trust and Regulatory permissions M&A Accounting Standards ‘Fair Value’ definition in financial reporting = ‘Exit’ price 1. Acquirer and Target having different Risk Tolerances 1. Public (or Public-hopeful) companies need to consider EPS after acquisition www.myCNI.com.my www.OOBEY.com
Slide 63: Considerations, Risks and Pitfalls 1. Synergies and Improvements need to realized as quickly and efficiently as possible 2. Combined Management capability to deliver improved performance 3. First 100 days post-acquisition blueprint 4. Culture management 1. Staff Poaching from Competitors (and noncompetitors) 2. Customer Poaching from Competitors www.myCNI.com.my www.OOBEY.com
Slide 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
Slide 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
Slide 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
Slide 67: Thank You. soft copy of slides: www.totallyunrelatedrandomanddebatable. blogspot.com