Download - Chapter 04 Developing Business and Acq Plans
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Developing Business andAcquisition Plans:
Phases 1 & 2 of theAcquisition Process
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If you dont know where you are going,
any road will get you there.
Alice in Wonderland
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Course Layout: M&A & OtherRestructuring Activities
Part IV: DealStructuring &
Financing
Part II: M&AProcess
Part I: M&AEnvironment
Payment &Legal
Considerations
Public CompanyValuation
FinancialModeling
Techniques
M&A Integration
Business &Acquisition
Plans
Search throughClosing Activities
Part V:AlternativeStrategies
Accounting &Tax
Considerations
BusinessAlliances
Divestitures,Spin-Offs &Carve-Outs
Bankruptcy &Liquidation
RegulatoryConsiderations
Motivations forM&A
Part III: M&AValuation &Modeling
TakeoverTactics andDefenses
FinancingStrategies
PrivateCompanyValuation
Cross-BorderTransactions
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Current Learning Objectives
Primary learning objectives: To provide students with anunderstanding of
a highly practical planning based approach tomanaging the acquisition process and
the issues associated with each phase of the M&Aprocess
Secondary learning objectives: To provide students withan understanding of how to
select the correct strategy from a range of reasonablealternatives and
develop an acquisition plan
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The Acquisition Process
Pre-Purchase DecisionActivities
Post-Purchase DecisionActivities
Phase 1: Business Plan
Phase 2: Acquisition Plan
Phase 3: Search
Phase 4: Screen
Phase 5: First Contact Phase 6: Negotiation
Phase 7: Integration Plan
Phase 8: Closing
Phase 9: Integration Phase 10: Evaluation
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Phase 1: Business Plan
Industry/market definition (Where have we chosen tocompete?)
Example: Automotive industry (a collection of
markets) Passenger car market by size and by
geographic area
Truck market by size and geographic area
After-market
Why is it important to start by
defining the target market?
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Phase 1: Business Plan Industry/market definition
External analysis (customers, current competitors, potentialentrants, substitute products, and suppliers): Five ForcesFramework
Key objective: Identification of industry trends and whether theyconstitute opportunities or threats
Example: Automotive industry
What is changing with respect to
Customers by vehicle size and geographic area
Current competitors include Toyota, Daimler, GM, Ford, etc.
Potential entrants include China Cherie and Indias TataMotors
Substitute products/technologies for internal combustion engineinclude hybrids, all electric car, hydrogen car, etc.
Suppliers include material vendors, lenders, labor, etc.
How will these changes impact my business?
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Phase 1: Business Plan Industry/market definition External analysis (customers, current competitors, potential
entrants, substitute products, and suppliers) Internal analysis (strengths and weaknesses as compared to the
competition) Key questions:
Do our strengths enable us to pursue opportunities identifiedin the external analysis?
Do our weaknesses make us vulnerable to the threatsidentified in the external analysis?
Example: Automotive industry If our targeted customer values fuel efficiency, do our
strengths enable us to produce high quality fuel efficient carsbetter than our competition?
To what extent do our strengths help us satisfy our customersneeds better than the competition? To what extent do ourweaknesses make us vulnerable to losing customers?
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Phase 1: Business Plan
Industry/market definition
External analysis (customers, current competitors, potentialentrants, substitute products, and suppliers)
Internal analysis (strengths and weaknesses as compared tothe competition)
Opportunities/threats (from external and internal analyses)
Summarizing strengths and weaknesses versusopportunities and threats using a SWOT matrix
Example: Amazon.com
Opportunity is to be perceived as the preferred online
retail department store Threat is that Walmart, Best Buy, and Costco increasetheir online presence
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Hypothetical Amazon.com SWOT Matrix
Opportunity: To be perceived byinternet users as the preferred onlineretail department store
Threat: Walmarts, BestBuys,Costcos increasing presence on theinternet
Amazon.coms Strengths Relative to the opportunity: Brand recognition Convenient online order entrysystem
Information technologyinfrastructure
Fulfillment infrastructure for
selected products (e.g., books)
Relative to the threat: Extensive experience in onlinemarketing, advertising, andfulfillment
Amazon.coms Weaknesses Relative to the opportunity: Inadequate warehousing andinventory management systems tosupport quantum sales growth
Limited experience inmerchandising non-core retail
products (e.g., electronics) Limited financial resources
Relative to the threat: Substantially smaller retail salesvolume limits ability to exploitpurchase economies
Limited financial resources Limited name recognition in
selected markets (e.g., consumerelectronics)
Lack of retail management depth
Strategic Options Solo venturePartner
Acquire
Solo venturePartner
AcquireExit business
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Phase 1: Business Plan Industry/market definition
External analysis (customers, current competitors, potentialentrants, substitute products, and suppliers)
Internal analysis (strengths and weaknesses as compared tothe competition)
Opportunities/threats (from external and internal analyses)
Business vision/mission (Defines direction and provides meansof communicating succinctly with key stakeholder groups)
How do we wish to be perceived by key stakeholders?
What quantifiable objectives will be used to determineprogress in achieving vision/mission? (e.g., market share,
customer surveys indicating how we are perceived, etc.) Hypothetical Example: Amazon.com wishes to be perceived
by consumers as the preferred online department store
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Phase 1: Business Plan
Industry/market definition
External analysis (customers, current competitors,potential entrants, substitute products, and suppliers)
Internal analysis (strengths and weaknesses ascompared to the competition)
Opportunities/threats (from external and internalanalyses)
Business vision/mission
Business Strategies (cost, differentiation, focus, or
some combination) Which of these generic business strategies best
enables to firm to achieve its vision/mission andobjectives?
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Phase 1: Business Plan
Industry/market definition
External analysis (customers, current competitors, potentialentrants, substitute products, and suppliers)
Internal analysis (strengths and weaknesses as compared tothe competition)
Opportunities/threats (from external and internal analyses)
Business vision/mission Business Strategies (cost, differentiation, focus, or some
combination)
Implementation strategy (selected from a range of options)
Solo ventures or go it alone
Merger or acquisition
Alliances (including JVs, partnerships, and licensing)
Minority investments and
Asset swaps
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Application
1. Discuss how you would use informationobtained from the external, internal, andopportunities/threats identification analysesconducted during the business planning
process to select an appropriate businessstrategy. Be specific.
2. Discuss how you would select the appropriateimplementation strategy. Be specific.
(Hint: Consider the resourcesbroadlydefined--required/currently available to exploitpotential opportunities and threats.)
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Adobe Acquires Omniture Case Study On 9/14/09, Adobe announced the acquisition of Omniture for $1.8 billion in
cash
Adobe: Makes web design tools (e.g., Acrobat, Flash, and Creative Suiteincl. Photoshop and Illustrator) and sells customers perpetual licenses
Targeted Markets/Spaces1: Web designers, online retailers, and mediafirms (e.g., News Corp)
Omniture: Makes software capable of tracking how users utilize web sites
(e.g., tracking page views); users pay monthly fees to subscribe to service Targeted Markets/Spaces: Online retailers, advertisers, and media firms
At $3 billion in annual revenue, Adobe 10 times larger than Omniture
Both firms losing revenue
Adobe faced difficulty in upgrading existing clients and adding new
clients due to recession Omniture revenue erosion reflected introduction of free analyticalsoftware by Google and reduced advertising spending due to recession
1Note markets or spaces consist of customers with homogeneous needs
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Adobe External Analysis:Customer Value Chain
Create Deliver User EngagesVia Interface
Analyze
Optimize
Customer Needs: To cost-effectively create content, display/deliver content, generate web useractivity/transactions, analyze how site utilized, and improve process to increase transactions
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Adobe External Analysis Continued
Key Trends:
Renting software online
Customers buying multiple software capabilities
from a single vendor to ensure compatibility Business model/strategy based on perpetual
licensing of software highly cyclical (i.e.,
customers can postpone upgrades to newproducts)
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Adobe Internal Analysis
Adobes core skills focused on developingwebsite design software
Sales concentrated on only one segmentof the value chain (i.e., create content)
Limited experience in how to develop asubscription-based businessmodel/strategy
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Adobes Mission, Business, andImplementation Strategies
Adobe's vision/mission:To revolutionize how the worldengages with ideas and information Business Strategy/Model: To move
From selling customers perpetual software licenses
and increasing revenue by upgrading current clientsand attracting new clients
To a monthly subscription model
Implementation Strategy1
Acquire a vendor targeted at a different phase of thecustomer value chain whose revenues are based onthe subscription model
1Alternative implementation strategies include solo venture, partnering, or acquisition.
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Discussion Questions
1. Why might Adobe have decided toacquire Omniture rather than to partnerwith Omniture or to build a similar
capability on its own?2. What considerations might have made
Omniture an attractive acquisition target
for Adobe?
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Application
1. Discuss how you would use informationobtained from the external, internal, andopportunities/threats identification analysesconducted during the business planning
process to select an appropriate businessstrategy. Be specific.
2. Discuss how you would select the appropriateimplementation strategy. Be specific.
(Hint: Consider the resourcesbroadlydefined--required/currently available to exploitpotential opportunities and threats.)
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Phase 2: Acquisition Plan (How toimplement the acquisition)
Plan objectives (support the realization of keybusiness plan objectives)
How will the acquired firm enable theacquiring firm to better realize itsvision/mission and business plan objectives?
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Examples of Linkages Between Business and Acquisition Plan Objectives
Business Plan Objective Acquisition Plan Objective
Financial: The firm willAchieve rates of return that will equal or exceed its cost of
equity or capital by 20??Maintain a debt/total capital ratio of x%
Financial returns: The target firm should haveA minimum return on assets ofx%A debt/total capital ratio y%Unencumbered assets of $z million
Size: The firm willBe the number one or two market share leader by 20??Achieve revenue of $x million by 20??
Size: The target firm should be at least $x million in revenue
Growth: The firm will achieve through 20?? annual averageRevenue growth ofx%Earnings per share growth ofy%Operating cash-flow growth ofz%
Growth: The target firm shouldHave annual revenue, earnings, and operating cash-flow
growth of at least x%, y%, an z%Provide new products and markets of x% by 20??Possess excess annual production capacity ofx million units
Diversification: The firm will reduce earnings variability by x%. Diversification: The target firms earnings should be largelyuncorrelated with the acquirers earnings.
Flexibility: Achieve flexibility in manufacturing and design. Flexibility: Target should use flexible manufacturing techniques.
Technology: The firm will be recognized by its customers as theindustrys technology leader.
Technology: The target firm should possess important patents,copyrights, and other forms of intellectual property.
Quality: The firm will be recognized by its customers as the
industrys quality leader.
Quality: The target firms product defects must be
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Phase 2: Acquisition Plan
Plan objectives (support the realization of key businessplan objectives)
Timetable
Defined by activity completion dates, deliverables(what is to be achieved), and individual (s) responsiblefor satisfying objectives
Example: Daniel Stuckee is to have completedidentifying a list of potential targets by 2/24/20??
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Phase 2: Acquisition Plan
Plan objectives (support the realization of keybusiness plan objectives)
Timetable
Resource/capability review
Determine maximum size of acquisition interms of P/E. sales, cash flow, purchase price,etc.
Assess internal management capabilities (Can
acquirer continue to manage currentbusinesses as well as integrate the acquiredfirm?)
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Phase 2: Acquisition Plan Plan objectives (support the realization of key business plan
objectives)
Timetable
Resource/capability review
Management preferences (Senior management guidelines to
acquisition team) Examples:
Prefer an asset or a stock purchase
Use cash only
Will consider competitors as potential targets
Want controlling interest
Limit EPS dilution to two years following closing
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Phase 2: Acquisition Plan
Plan objectives (support the realization of key businessplan objectives)
Timetable
Resource/capability review
Management preferences
Search plan
Key search criteria include industry/geographic area
and maximum size of acquisition Relatively few criteria used to avoid limiting list ofpotential targets
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Phase 2: Acquisition Plan Plan objectives (support the realization of key business plan
objectives) Timetable
Resource/capability review
Management preferences
Search plan
Negotiation strategy Starts with assessment of the needs of parties involved
Determine proposals to satisfy the highest priority needs of theparties involved. For example, consider
Using acquirer stock if seller wants a tax free sale
Long-term employment contract if seller wants to stay withthe business
Having seller sign a non-compete to avoid future competitionwith seller
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Phase 2: Acquisition Plan Plan objectives (support the realization of key business plan
objectives)
Timetable Resource/capability review
Management preferences
Search plan
Negotiation strategy Determine initial offer price
Requires buyer to estimate
Minimum purchase price (i.e., standalone or market price forpurchase of shares or liquidation value for asset purchase)
Synergy created by combining acquirer and target firms
Percent of synergy acquirer willing to share with target (oftenreflects premium paid on recent similar transactions or theportion of synergy contributed by the target)
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Phase 2: Acquisition Plan
Plan objectives (support the realization of key businessplan objectives)
Timetable
Resource/capability review
Management preferences
Search plan
Negotiation strategy
Determine initial offer price
Financing plan (acid test)
How will you pay for acquisition?
Will someone lend you the money?
Will acquirer shareholders tolerate EPS dilution?
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Phase 2: Acquisition Plan
Plan objectives (support the realization of key business plan objectives)
Timetable Resource/capability review
Management preferences
Search plan
Negotiation strategy
Determine initial offer price
Financing plan Integration plan
Objective: Combine businesses as rapidly as practical
What projects offer the greatest likelihood of realizing synergy?
What must be done to retain key people?
What investments must be made to keep businesses operational? What is the appropriate communication plan?
How will the corporate cultures be best integrated?
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Applications1. Identify at least 3 criteria that might be used to select a manufacturing firm as a
potential acquisition candidate? A financial services firm? A high technology firm?
2. Despite weeks of sometimes heated negotiation, the seller continues to insist on apurchase price that is $5 million more than the potential buyer is willing to pay.How can the buyer and seller close the price gap? Be specific.
3. Following due diligence, the buyer is concerned about the outcome of pendinglitigation facing the seller. The potential impact over the next three years if the firmwere to lose the lawsuits could be as high as $4 million. How can the buyer protectherself against this potential liability if she acquires the target firm?
4. The CEO of the acquiring firm insists that the integration of the target firm must becompleted as rapidly as possible in order to realize the full value of estimatedsynergies. Why might the CEO feel this way? What are the risks associated with arapid integration of the target firm into the acquirer? What are the risks of a slowintegration of the target firm into the acquirer?
5. The CEO of a small start-up firm has just been contacted by a potential acquirer,who is offering to buy the firm for a very attractive purchase price. However, the
CEO refuses to provide any data on her firm until the potential buyer provides herwith three years of signed Federal income tax statements, personal bankstatements, and a net worth statement. Why? Is the CEO being reasonable?What alternatives does she have if the buyer refuses to provide this information?
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Things to remember...
The success of an acquisition is dependent onthe focus, understanding, and discipline inherentin a thorough and thoughtful business plan
An acquisition is only one of many optionsavailable for implementing a business plan
Once a decision has been made that theimplementation of the firms business strategy
requires an acquisition, an acquisition plan isrequired.