obtaining a 360 degree view by conducting a thorough due diligence to ensure a successful...

OBTAINING A 360 DEGREE VIEW BY CONDUCTING A THOROUGH DUE DILIGENCE TO ENSURE A SUCCESSFUL ACQUISITIONCase studies, Concepts, and Debatable Ideas

Kenny OngCNI Holdings Berhad

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

http://www.mycni.com.my/

http://www.oobey.com/

• How to fail without trying

The Roadmap to Failureby Fred Wiersema and Mike Treacy

Before we start…




The Roadmap to Failure

Fred Wiersema and Mike TreacyP

erf

orm

ance

Time

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




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






erf

orm

ance

Time

Clear Sailing


Ad-hoc Tactics

Denial & Defense

Doom Projections

Overdue Failure

The Moment of Truth

X


Tomorrow’s actual

performance





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






erf

orm

ance

Time

Clear Sailing


Ad-hoc Tactics

Denial & Defense

Doom Projections

Overdue Failure

The Moment of Truth

X


Tomorrow’s actual

performance





“What is the moral of the story?”




Not Covered…

1. Why M&As Fail

2. Failure Rates of M&As

3. Financial and Legal Due Diligence

4. M&A for Cost Savings Purposes

1. Business Model

2. Strategic Rationales for M&As

3. Working Backwards: Post-Integration Checklists

4. Considerations, Risks and Pitfalls




1. Business Model




What is the Business Model?

USP

Market Discipline

Profit Model

•Google

•Tata Nano


USP

Market Discipline

Profit Model

Business Model: Profit Model

Revenue

Cost

MarginCash Flow

Assets


USP

Market Discipline

Profit Model

Intro: Market Discipline

"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

"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

Product Leadership

OperationalExcellence

CustomerIntimacy

•Air Asia

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)

Strategy: Value Disciplines




Operational Excellence

• Competitive price

• Error free, reliable

• Fast (on demand)

• Simple

• Responsive

• Consistent information for all

• Transactional

• 'Once and Done'


• 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

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

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

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: Value Disciplines




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 5th 2007








Strategy: Disciplines





Strategy: Disciplines

HP well-balanced portfolio, mass customization

Acer super lean cost structure, aggressive pricing

Apple powerful products, premium

pricing, limited range

Still Doing well in 2009-2010


USP

Market Discipline

Profit Model

2. Strategic Rationales for M&As




Not Covered…

1. Why M&As Fail

2. Failure Rates of M&As

3. Financial and Legal Due Diligence

4. M&A for Cost Savings Purposes

Two Major Rationale for M&As:

1. Cost Reduction

2. Growth

Strategies for Growth

1.Base Retention

2.Share Gain

3.Positioning4.Adjacent Market

5.New Business

GROWTH

“Double-Digit Growth”, Michael Treacy




Rationale for M&As: Growth

Expansion

1.Consolidate

2.Geographic

3.Distribution

4.Compensate

Transformative

1.Portfolio refocus

2.Diversification

Easier Tougher




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 Fundswww.myCNI.com.my www.OOBEY.com



Rationale for M&As: Expansion

Expansion

1.Consolidate

2.Geographic

3.Distribution

4.Compensate

9.De-regularization

10.Demand outstrip supply

11.Revenue Mix – Tax optimization

12.Talent

13.New, Low-cost Entrants

14.Undervalued Big Players

15.Newer Assetswww.myCNI.com.my www.OOBEY.com



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




Strategies for Growth

1.Base Retention

2.Share Gain

3.Positioning4.Adjacent Market

5.New Business

GROWTH

“Double-Digit Growth”, Michael Treacy




Buying Market Share: Acquisition strategy

IntegrationOperating

Model

PricePremium

Buying Market Share

Net Cost per Customer < Direct Acquire

No evidence of previous company

One Kingdom

Pre-integration Blueprint

Slow Trigger, Fast Bulletwww.myCNI.com.my www.OOBEY.com



Buying Market Share: Side notes on Funding

Preferable OK, but not preferred

1. Cash from Earnings

2. Cash from Borrowings

1. Cash from Stock sale

2. Issue more stock


*Adapted from Warren Buffet’s acquisition strategies



Strategy 4: Invade Adjacent Markets

Adjacent Market = Important Similarities and Large Differences in:

1. Cost Structure

2. Competitors

3. Customers

4. Critical Capabilities





Traditional

AlternativeIncremental





Traditional Utility

AlternativeEnergy

IncrementalTechnology


Example: Energy Sector




Upstream Midstream Downstream

DistributionConversionRaw Mat

Vendors/Services




• 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





• 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





• 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





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




3. Working Backwards: Post-Integration Checklist




First 100 Days: Conflict Points

1. Leadership style differences

2. Who’s is charge? (Who won?)

3. Organic vs. bureaucratic cultures

4. Open vs. closed communication

5. Decision making speed & style

6. Collegial vs. competitive

7. Structures that don’t match

8. Values incongruence




The First 100 Days

25 50 75 100

Save Star Performers

Revise Strategy/Value Maps

Staffing Plans

Assess HR Value

Re-align Strategy

Coaching/Team Dev

Restructure

Capabilities Audit

Culture Integration





•Central authority, low level of empowerment•High skills at the core of the organization

•Disciplined Teamwork•Process, product- driven•Conformance, 'one size fits all' mindset

• Integrated, low cost transaction systems•The system is the process

•Command and control•Quality management


•Central authority, low level of empowerment•High skills at the core of the organization

•Disciplined Teamwork•Process, product- driven•Conformance, 'one size fits all' mindset

• Integrated, low cost transaction systems•The system is the process

•Command and control•Quality management

Organization, jobs, skills

Management systems

Information and systems

Culture, values,norms

Each Discipline Requires Different Priorities & Resources




Organization, jobs,skills

Management systems



Product Leadership

•Ad hoc, organic and cellular•High skills abound in loose-knit structures

•Concept, future-driven•Experimentation and 'out of the box' mindset

•Person-to-person communications systems•Technologies enabling cooperation

•Rewarding individuals' innovative capacity•Risk and exposure management•Product Life Cycle profitability

Product Leadership

•Ad hoc, organic and cellular•High skills abound in loose-knit structures

•Concept, future-driven•Experimentation and 'out of the box' mindset

•Person-to-person communications systems•Technologies enabling cooperation

•Rewarding individuals' innovative capacity•Risk and exposure management•Product Life Cycle profitability





Organization, jobs,skills

Management systems



Customer Intimacy

•Empowerment close to point of customer contact•High skills in the field and front-line

•Customer-driven•Variation and 'have it your way' mindset

•Strong customer databases, linking internal and external information

•Strong analytical tools

•Customer equity measures like life time value•Satisfaction and share management•Focus on ‘Share of Wallet’

Customer Intimacy

•Empowerment close to point of customer contact•High skills in the field and front-line

•Customer-driven•Variation and 'have it your way' mindset

•Strong customer databases, linking internal and external information

•Strong analytical tools

•Customer equity measures like life time value•Satisfaction and share management•Focus on ‘Share of Wallet’





Post M&A: 4-Wheels Model

Culture

Business

ObjectiveM&A

Strategy

StructureResources

Leadership

Person




Post M&A : Framework

• Joint-Boards• Org Structure• Job Design• C&B• Policies & procedures• Decision making• Transition/Integration Team• Revise structure to strategy• Process alignments

Structure


1. Share Gain

2. Adjacent Market

3. New Business




• Info and Comm Technology

• Integration Cost Centers• Real Estate• Operating Assets• Procurement*• Combined Cost Savings

KPI• Product lines• Geographic Parking:

Services, Production• Customer Problems

Database• R&D

Resources


1. Share Gain

2. Adjacent Market

3. New Business



Special Note: Procurement

• Prices and Terms of current contracts• Supply market dynamics• Tactics for Supply Purchase• Consolidated spending database• Opportunities to save money• Cutting T.C.O.• Manuals on Negotiation Strategies




Activity Grid to optimize resources

Increase (↑)What are features/

activities/services to increase?

Create (+)What are features/

activities/services to introduce?

Reduce (↓) What are features/

activities/services to reduce?

Eliminate (-)What are features/

activities/services to eliminate?





• Tone, Speed, Direction, Principles, Requirements

• Post-M&A Roles & Responsibilities

• Geographic role differences

• Decision making processes

• Employee authorities• Communication*• Culture integration

sessions• Buy-in ‘Key Players’

Leadership


1. Share Gain

2. Adjacent Market

3. New Business




• Integration-era Incentives

• HR Value: Alignment• HR Value: Capabilities• HR Value: Engagement• Star (‘A’) players• Competency mapping• Culture gaps• Employee views on

new entity

Person


1. Share Gain

2. Adjacent Market

3. New Business



HR: Special Considerations

1. Frontline (Sales) is key in post-M&A

2. Targets for Competitors to poach

3. Communication: Roadshows, Repetition, Emphasis

4. Integration-era Incentives:1. Retaining key people

2. Encourage Cooperation

3. Sharing of Knowledge

4. Cross-selling

5. Temporary Management Structure:1. During transition period

2. Cut thru Red Tape

3. On-the-spot Decisions

4. Priority Access to CEOwww.myCNI.com.my www.OOBEY.com

MBO Standards

A Excellent

B Good

C Average

D Poor

E Useless


MBO Standards

A Excellent

B Good

C Average Good

D Poor

E Useless


MBO Standards

A Excellent Excellent

B Good Very Good

C Average Good

D Poor Not Good

E Useless Commit Suicide


MBO Standards

A Excellent Consistently achieved 4 for 3 quarters

B Very Good Higher than planned results

C Good Achieved Planned Results

D Not Good Did not fully meet planned results

E Commit Suicide

Unacceptable performance


What to Pay?

• Pay for Service

• Pay for Job

• Pay for Performance

• Pay for Competency


Performance and Incentives

1. Internal Equity1. Internal Job Rates

2. Performance differentials

2. External Competitiveness1. External Job Rates - Benchmarking

2. Demand & Supply


What’s the Difference?

• Increment

• Bonus

• Promotion


Talent Definition

Group I

(Talent Pool)

Group II

( Potential)

Group III

( Performance)

Group IV

(Counseling)

2 3 4 5

23

45

PE

RF

OR

MA

NC

E

POTENTIAL• Identify


Post M&A: 4-Wheels Model

Culture

Business

ObjectiveM&A

Strategy

StructureResources

Leadership

Person


“In the absence of leadership, the people will listen to

whoever speaks”A.J., from the movie “The American President”


4. Considerations, Risks and Pitfalls


Types of M&A Deals vs. Considerations

Overcapacity Product/ Market Consolidation

Transformation/ Convergence

Roll-up Acquire products/ market

Strategic Growth Bet

Siz

e (R

elat

ive)

Share Gain (Expansion)

Adjacent (Transformative)

New Business (Transformative)

Small

Large

“Running a winning M&A shop”, McKinsey


Overcapacity

Siz

e (R

elat

ive)




Small

Large


•Reduce industry capacity•Control Pricing•Similar Product Offerings•Pay for Cost synergies


Roll-upSiz

e (R

elat

ive)




Small

Large


•Transfer Core Strength to target•Pay for lower operating cost of target•Increase revenue thru broad strength


Product/ Market Consolidation

Siz

e (R

elat

ive)




Small

Large


•Economies of Scale•Consolidate back office•Expand Market presence•Pay for Growth, Channels


Acquire products/ market

Siz

e (R

elat

ive)




Small

Large


•Expand market offering•Expand Geographic reach•Pay for Growth, Channels•Revenue synergies


Transformation/ Convergence

Siz

e (R

elat

ive)




Small

Large


•Transform Industry•Create new Value Proposition•Pay for New Markets, New Capabilities


Strategic Growth Bet

Siz

e (R

elat

ive)




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

Three-Stage Process for Evaluating M&A deals

1. Strategy Approval

2. Approval-to-Negotiate

3. Deal Approval

1. Business Dev + Business Unit

2. Worth of Target?3. Attractiveness of Target

vs. Others4. Target compatible with

Strategy?5. Support from Acquirer?6. Integration possibilities?





3. Deal Approval

1. Price range2. Initial Due Diligence3. Vision for incorporation4. Key Synergies5. Nonbinding Term

Sheet/LOI6. Negotiation Roadmap7. Process to Close





3. Deal Approval

1. Answering Key Questions

2. Debating Valuations3. Aiming for Integration4. Dealing with Execution

Risks


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


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


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


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


End Note for M&A

“Go where the money is... then marry for love”

F. Scott Fitzgerald, Author


Thank You.

soft copy of slides: www.totallyunrelatedrandomanddebatable.

blogspot.com