chapter 04 developing business and acq plans

8/2/2019 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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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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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




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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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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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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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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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


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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Timetable


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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objectives) Timetable



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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objectives)

Timetable Resource/capability review


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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Timetable



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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Plan objectives (support the realization of key business plan objectives)

Timetable Resource/capability review


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.

chapter 04 developing business and acq plans

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