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DEVELOPING A CORPORATE

ACQUISITION STRATEGY
Case studies, Concepts, and Debatable Ideas

Kenny Ong
CNI Holdings Berhad

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1. M&A Trends
2. Rationale for M&As
3. Strategies, Structure, and Optimizing Value in
M&As
4. Considerations, Risks and Pitfalls

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Before we start…

• How to fail without trying

The Roadmap to Failure


by Fred Wiersema and Mike Treacy

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The Roadmap to Failure
Fred Wiersema and Mike Treacy

The Moment of
Downpresure of
Truth
Unclear Strategy

X
Performance

ctic s
c Ta
- ho
Ad Performance
Freefall
Today’s
performance

Doom Tomorrow’s
Projections actual
performance

Clear Sailing Denial & Defense Overdue Failure

Time
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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

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The Roadmap to Failure
Fred Wiersema and Mike Treacy

The Moment of
Downpresure of
Truth
Unclear Strategy

X
Performance

ctic s
c Ta
- ho
Ad Performance
Freefall
Today’s
performance

Doom Tomorrow’s
Projections actual
performance

Clear Sailing Denial & Defense Overdue Failure

Time
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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
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The Roadmap to Failure
Fred Wiersema and Mike Treacy

The Moment of
Downpresure of
Truth
Unclear Strategy

X
Performance

ctic s
c Ta
- ho
Ad Performance
Freefall
Today’s
performance

Doom Tomorrow’s
Projections actual
performance

Clear Sailing Denial & Defense Overdue Failure

Time
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“What is the moral of
the story?”

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What is the Business
Model?

USP

Market
Profit Model
Discipline

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Intro: Market Discipline

• Mamak stall

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Intro: Market Discipline

Product "They are the most innovative"


Leadership "Constantly renewing and creative"
"Always on the leading edge"

Customer
Operational Intimacy
Excellence "Exactly what I need"
"A great deal!"
Customized products
Excellent/attractive price
Personalized communications
Minimal acquisition cost and "They're very responsive"
hassle
Preferential service and
Lowest overall cost of flexibility
ownership Recommends what I need
"A no-hassles firm" "I'm very loyal to them"
Convenience and speed Helps us to be a success
Reliable product and
service
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Strategy: Disciplines,
Priorities, and KPIs
Product Leadership
(best product)

Operational Excellence Customer Intimacy


(low cost producer) (best total solution)

Ref: The Discipline of Market Leaders, Michael Treacy & Fred Wiersema; 1995
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The McPlaybook*

Make it easy to eat Make it easy to prepare


• 50% drive-thru • High Turnover
• Meals held in one • Tasks simple to learn
hand & repeat

Make it quick Make what customers want


• “Fast Food” • Prowls market for new
• Tests new products products
for Cooking Times • Monitored field tests
*Adapted from: Businessweek , Februrary 5th 2007

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Strategy: Disciplines,
Priorities, and KPIs
Operational
Operational Product
ProductLeadership
Leadership Customer
CustomerIntimacy
Intimacy
Excellence
Excellence •• New,
New,state
stateof
ofthe
the •• Management
Managementbyby
•• Competitive
Competitiveprice
price art
artproducts
productsoror Fact
Fact
•• Error services
services
Errorfree,
free,reliable
reliable •• Easy
Easyto
todo do
•• Risk
Risktakers
takers business
businesswith
with
•• Fast
Fast(on
(ondemand)
demand)
•• Meet
Meetvolatile
volatile •• Have
Haveitityour
yourway
way
•• Simple
Simple customer
customerneeds
needs (customization)
(customization)
•• Responsive
Responsive •• Fast
Fastconcept-to-
concept-to- •• Market
Marketsegments
segments
•• Consistent
Consistent counter
counter of
ofone
one
information
informationfor
forall
all •• Never
Neversatisfied
satisfied-- •• Proactive,
Proactive,flexible
flexible
•• Transactional
Transactional obsolete
obsoleteown
ownand
and •• Relationship
Relationshipandand
competitors'
competitors'
•• 'Once
'Onceand
andDone'
Done' consultative
consultative
products
products selling
selling
•• Learning
Learning •• Cross
Crossselling
selling
organization
organization
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Strategy: Value Disciplines

Product Leadership
(best product)

Operational Excellence Customer Intimacy


(low cost producer) (best total solution)

Ref: The Discipline of Market Leaders, Michael Treacy & Fred Wiersema; 1995
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Strategy: Value Disciplines

Product Leadership
(best product)

Operational Excellence Customer Intimacy


(low cost producer) (best total solution)

Ref: The Discipline of Market Leaders, Michael Treacy & Fred Wiersema; 1995
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Sample KPIs for Each
Discipline

Operational
Operational Product
ProductLeadership
Leadership Customer
CustomerIntimacy
Intimacy
Excellence
Excellence
•• Marketing
Marketing
•• Price •• Functionality
Functionality •• Customer
Price Customer
•• Selection •• ##ofofSuccesses
Successes Knowledge
Selection Knowledge
•• Convenience •• ##ofofFailures •• Solutions
Convenience Failures SolutionsOffered
Offered
•• Zero
ZeroDefects
Defects •• Learn
Learnfrom
fromkey
keyusers
users •• Penetration
Penetration
•• Growth •• Interdisciplinary
Interdisciplinaryteams •• Customer
Growth teams CustomerData
Data
•• Pipeline
Pipeline •• Customer-success
Customer-success
focus
focus

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1. M&A Trends

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M&A Trends

1. Booming Demand 8. Supply security


2. Supply/Demand shift to 9. Scarcity of Talent
remote, unstable 10. Global labor market
locations 11. New, low cost players
3. Demand shift in Asia 12. Niche companies in new
4. Middle East ‘cheap’ technologies*
energy = diversification 13. Private Equity
5. Natural resources 14. Restructuring
depleting fast undervalued
6. Massive capital required Conglomerates

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M&A Trends

15. Record profits, High 21. Alternative Industries –


Prices growth, fragmented*
16. Antitrust Regulations 22. Low R&D, demand for
17. Cross-border new technologies
Regulations 23. Credit Crunch
18. Traditional MNC 24. Foreign entities
consolidation 25. Political instabilities
19. Competition for Assets 26. De-regularization,
20. Rise of Sovereign Funds Unbundling

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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

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2. Rationale for M&As

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Two Major Rationale for
M&As:

1. Cost Reduction
2. Growth
Strategies for Growth

“Double-Digit Growth”, Michael Treacy

1.Base Retention

5.New Business 2.Share Gain

GROWTH

4.Adjacent Market 3.Positioning

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Rationale for M&As: Growth

Expansion Transformative
1.Consolidate 1.Portfolio
refocus
2.Geographic
2.Diversification
3.Distribution
4.Compensate

Easier Toughe
r
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Rationale for M&As:
Expansion

Expansion 1. Gain Scale to compete

1. Consolidate 2. Integrated Solutions

2. Geographic 3. Financial Growth

3. Distribution 4. Supply (security, mix)

4. Compensate 5. Developing markets


6. High cost of Extra Capacity
7. Private Equity
8. Expanding Sovereign Funds
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Rationale for M&As:
Expansion

Expansion 9. De-regularization

1. Consolidate 10.Demand outstrip supply

2. Geographic 11.Revenue Mix – Tax


optimization
3. Distribution
12.Talent
4. Compensate
13.New, Low-cost Entrants
14.Undervalued Big Players
15.Newer Assets
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Rationale for M&As:
Transformative
1. New Business Lines
Transformative
2. Selling/Spin-off non-core
1. Portfolio
refocus 3. Increase product line
4. New customers
2. Diversification
5. New technologies*
6. Complementary Business
7. Up-down Supply Chain
8. Patent
9. Convergence anticipation
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Rationale for M&As: Cross
Sectors

Traditional

Incremental Alternative

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Rationale for M&As: Cross
Sectors

Example: Traditional Utility


Energy Sector Oil, Gas,
Electricity, Coal

Incremental Alternative
Technology Energy
Biomass, Nuclear,
New Delivery, New Sources,
Ethanol, Wind, Solar
Existing Resources

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Possible ‘Outside’ Acquirers
or Investors
Institutional
Fund Managers Financial (Loans) Gov. VCs

Corporations JV Partners Supply Chain

Sovereign Funds M&A Gov. Partnership

VCs Social VCs Non-Profit Org

NGOs Holding Co. Competitors

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Why do ‘Outsiders’ Acquire
or Invest?
1. Return/Profit 8. Contractual
2. Risk Management/ obligation
Hedging 9. National Agenda
3. Tax-benefits
10.Control Supply Chain
4. CSR/Image
11.R&D portfolio
5. Diversify revenue
12.Control Management
6. Counter-cyclical
balance 13.Alternative Cash
7. Support ‘Mission’ Flow
8. Exclusive rights 14.M&A

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3. Strategies, Structure, and
Optimizing Value in M&As

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Strategies for Growth

“Double-Digit Growth”, Michael Treacy

1.Base Retention

5.New Business 2.Share Gain

GROWTH

4.Adjacent Market 3.Positioning

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

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How Markets determine
Growth Strategies (2)
• Churn Rate
Churn Strategy Why?
Rate
Low 1. Share Gain •Buying customer base is cheaper
(Acquisitions) than own efforts
2. Adjacent •New products, old customers
Markets strategy

High 1. Base •Lose customers slower than


Retention competitors
2. Share Gain •Customers are always open to the
3. Adjacent best value and offer
Market •Desperate to gain revenue
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How Markets determine
Growth Strategies (3)

•Example: Energy Sector


Fast Growth, 1.Market Positioning
Low Churn 2.Share Gain (M&A)
3.Base Retention
4.Adjacent Markets (M&A)

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Strategy 2: Share Gain

• Create better ‘Value’ proposition

• Neutralize competitor advantages

• Buy Market Share outright


– Price Premium
– Operating Model
– Integration

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Buying Market Share:
Acquisition strategy
Net Cost per
Price Customer <
Premium Direct Acquire

Buying
Market
Share Operating
Integration
Model
One Kingdom No evidence of
Pre-integration Blueprint previous company

Slow Trigger, Fast Bullet


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Buying Market Share: Side
notes on Funding

Preferable OK, but not preferred

1. Cash from Earnings 1. Cash from Stock sale


2. Cash from Borrowings 2. Issue more stock

*Adapted from Warren Buffet’s acquisition strategies

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Strategy 4: Invade Adjacent
Markets
Adjacent Market = Important Similarities and
Large Differences in:
1. Cost Structure
2. Competitors
3. Customers
4. Critical Capabilities

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Strategy 4: Invade Adjacent
Markets

Traditional

Incremental Alternative

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Strategy 4: Invade Adjacent
Markets
Example: Traditional Utility
Energy Sector

Incremental Alternative
Technology Energy

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Strategy 4: Invade Adjacent
Markets

Upstream Midstream Downstream

Raw Mat Conversion Distribution

Vendors/Services

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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

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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

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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

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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

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Linking BSC to M&A
Strategy
Financial
Revenue Growth Productivity Market Value

Customers

Base Share Gain Positioning Adjacent New


Retention Market Business

Internal
Process
Operational Product Customer Investment
Excellence Leadership Intimacy Strategy

Learning & Growth

Competencies Information Motivation,


Systems empowerment,
alignment
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4. Considerations, Risks and Pitfalls

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Types of M&A Deals vs.
Considerations
Large Transformation/
Overcapacity Product/
Market Convergence
(Relative)

Consolidation
Size

Roll-up Acquire Strategic


products/ Growth Bet
Small market

Share Gain Adjacent New Business


(Expansion) (Transformative) (Transformative)
“Running a winning M&A shop”, McKinsey
Types of M&A Deals vs.
Considerations
Large •Reduce industry
Overcapacity
capacity
(Relative)

•Control Pricing
Size

•Similar Product
Offerings
•Pay for Cost synergies
Small

Share Gain Adjacent New Business


(Expansion) (Transformative) (Transformative)
“Running a winning M&A shop”, McKinsey
Types of M&A Deals vs.
Considerations
Large •Transfer Core Strength
to target
(Relative)

•Pay for lower operating


Size

cost of target
Roll-up •Increase revenue thru
broad strength
Small

Share Gain Adjacent New Business


(Expansion) (Transformative) (Transformative)
“Running a winning M&A shop”, McKinsey
Types of M&A Deals vs.
Considerations
Large •Economies of
Product/
Market Scale
(Relative)

Consolidation •Consolidate
Size

back office
•Expand Market
presence
Small •Pay for Growth,
Channels
Share Gain Adjacent New Business
(Expansion) (Transformative) (Transformative)
“Running a winning M&A shop”, McKinsey
Types of M&A Deals vs.
Considerations
Large •Expand market
offering
(Relative)

•Expand
Size

Geographic
reach Acquire
•Pay for Growth, products/
Small Channels market
•Revenue
Share Gain
synergies Adjacent New Business
(Expansion) (Transformative) (Transformative)
“Running a winning M&A shop”, McKinsey
Types of M&A Deals vs.
Considerations
Large •Transform Industry Transformation/
•Create new Value Convergence
(Relative)

Proposition
Size

•Pay for New Markets,


New Capabilities

Small

Share Gain Adjacent New Business


(Expansion) (Transformative) (Transformative)
“Running a winning M&A shop”, McKinsey
Types of M&A Deals vs.
Considerations
Large •Skill transfer into new
business
(Relative)

•Pay for High Risk


Size

options, ability to act in


Strategic
new market space
Growth Bet
Small

Share Gain Adjacent New Business


(Expansion) (Transformative) (Transformative)
Adapted: “Running a winning M&A shop”, McKinsey
Three-Stage Process for
Evaluating M&A deals
1. Business Dev +
1. Strategy Approval Business Unit
2. Worth of Target?
3. Attractiveness of Target
vs. Others
2. Approval-to- 4. Target compatible with
Negotiate Strategy?
5. Support from Acquirer?
6. Integration possibilities?

3. Deal Approval “Running a winning M&A shop”, McKinsey


Three-Stage Process for
Evaluating M&A deals

1. Price range
1. Strategy Approval
2. Initial Due Diligence
3. Vision for incorporation
4. Key Synergies
5. Nonbinding Term
2. Approval-to-
Sheet/LOI
Negotiate 6. Negotiation Roadmap
7. Process to Close

“Running a winning M&A shop”, McKinsey


3. Deal Approval
Three-Stage Process for
Evaluating M&A deals

1. Strategy Approval

1. Answering Key
2. Approval-to- Questions
2. Debating Valuations
Negotiate
3. Aiming for Integration
4. Dealing with Execution
Risks
3. Deal Approval “Running a winning M&A shop”, McKinsey
Considerations, Risks and
Pitfalls
1. Global footprint vs. Local Presence
2. Anti-trust and Regulatory permissions
3. M&A Accounting Standards
4. ‘Fair Value’ definition in financial reporting =
‘Exit’ price
5. Acquirer and Target having different Risk
Tolerances
6. Public (or Public-hopeful) companies need to
consider EPS after acquisition

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Considerations, Risks and
Pitfalls
7. Synergies and Improvements need to realized
as quickly and efficiently as possible
8. Combined Management capability to deliver
improved performance
9. First 100 days post-acquisition blueprint
10. Culture management
11. Staff Poaching from Competitors (and non-
competitors)
12. Customer Poaching from Competitors

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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

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Consideration: Alternative
Deals to M&A
Unite business units
Joint
Problem with shared ownership
Venture
New Product Lines
Cost Reductions
Share risk, Share Cost in new markets, R&D
Buy-out clause

Reduce non-core or commoditizing parts


Alliances
Outsourcing, Offshoring
Help supplier gain Scale
Enter Complementary business

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End Note for M&A

“Go where the money is...


then marry for love”
F. Scott Fitzgerald, Author

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Thank You.

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