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A Companys Strategy-
Making Hierarchy
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Tasks of CorporateStrategy
Moves to achieve diversification
Actions to boost performance of individual businesses
Capturing valuable cross-business synergies toprovide 1 + 1 = 3 effects!
Establishing investmentpriorities and steeringcorporate resources into themost attractive businesses
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Corporate Strategy
Economies of Scale: cost per unitdecreases as volume goes up
and Scope: Same raw material an semi-finished materials and production
processes to make a variety of products.Multi-brand strategies successful at this.
Scope: Also management/overhead
activities
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Corporate Level Rules
First Mover advantage Huge (thoughissues?)
Logic: The right combination of scale andscope economics, marketing anddistribution power, management structure,
and first mover (all intertwined and rely onone another) = corporate strategy.
Few firms can rely on internal sources of
growth alone. (what does this mean?)
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Types of Strategic Fits Cross-business strategic f i tscan exist
anywhere along the value chain
R&D and technology activities
Supply chain activities
Manufacturing activities
Distribution activities
Sales and marketing activities
Managerial and administrative support activities
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One Strategic Option: Single product line
Concentrated Growth
Focus on single product line (ex. Apple,McDonalds, Mack Truck, John Deere)
Must:
1)No major technological advances2)Not product saturated/alternatives for growth3)Competitors difficult to enter market4)Inputs are stable
Why single product line powerful? Why do wesee many firms spin-off in todays global
marketplace?
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Vertical/Horizontal Integration
Vertical: Industry Value Chain (backwardmore profitable than forward)
Horizontal: increase range of productsoffered to current markets or into newgeographic location
(Use of strategic alliances)
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Diversification
How used: new industries, technologies,supplier bases, customer segments,
geographical regions, sources of funds
In Strategy: investing corporate resources
in a number of different product/marketcombinations
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Entering other markets or Diversification
1. What can we do better than any of thecompetitors in our market?
2. What strategic assets are needed to succeed(Implementation)?
3. Leapfrog competitors? (change the rulesWalMart Banking)
4. Hurt our strategic assets if we diversify?
5. If we diversify, will we be a leader or in thepack?
6. Can we learn by diversifying, are we organizedto do so?
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Strategies for Developing New
CapabilitiesAcquire existing company
Internal start-up
Joint ventures/strategic partnerships
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Group Work
Acquire
Develop Internally
JV/SA
1) What are all the variables that must betaken into account when considering eachof these?
2) What are the strengths and weaknesses ofeach?
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A Career
Differentiating between emotion and fact
Understanding goals and benchmarks
Succeeding is vague/but known
How get in the business
How get better
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General Motives for a M&A
Opportunity
Threat or Opportunity
Strategic
Organizational (change agent)
Brand
Is it hard to get a good deal anytime?
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Steps
Strategic Analysis Develop Acquisition Plan
Establish Screening criteria
Generate Deals
Narrow the field
Due Diligence
Documentation
How to Finance/Deal Design
Negotiation / Bidding
Integration
1. Leadership2. Communication
3. Managing4. Key Personnel
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Introduction: Acquisitions
Continues to be one of the most popularGlobal strategies for firms
$2.9 trillion in 2005
$3.4 trillion in 2006In 2007, $4.367 trillionFell $1.1 trillion 2008, volume dropping 15,256
deals in 2007 to 12,018 in 2008
2010 = 2.66 trillion2011 = 2.6 trillion2012 = 2.6 trillion
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Typical research:$500 million plusMeasure of success/performance Often short
term stock price (days before/after)
Secondary data
Must have significant ownership
USA based (Researchers have suggestedcannot publish this type of research in TopJournals otherwise: Grinstein and Hribar, 2004)
Publicly traded: (Although 75 percent of the firmsacquired in the United States between 2000 and2004 were privately held) Capron/Shen, SMJ 2009
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Theoretical reasons for Acquisitions
(Used in the past)Transaction Cost Economics (bounded rationality (incomplete contracts) andopportunism (acting with guile), uncertainty, frequency, asset specificity)
Make or Buy (diadic)Agency Theory (information asymmetry, uncertainty and risk)
TMT (top management team)HubrisRisk AversionCompensationCharacteristics (Age, tenure, global experience, stock option in the money,
etc.)
Board of DirectorsLarge holdings of stock (active)Inside/Outside DirectorsDirector Charcteristics (previous acquisition experience, etc.)
Market for Corporate Control
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Theoretical reasons for Acquisitions
(Contemporary)Institutional Theory (Especially for Global
Acquisitions)
RBV (Resource Based View): ComplementaryResources
Network Theory
Dynamic Capabilities
Knowledge Based View
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Market for Corporate Control
(Agency Theory) and TMTTMT (top management team) of target firms leaves
losing about 2/3, even higher if the acquirer is
a multinationalMarket for corporate control suggests that target
firms underperforming TMT is fired
Synergy literature suggests TMT let go, loweringcosts
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Research also suggests to retain the
TMT after Acquisition
Loss will heighten the level uncertainty affects thecommunication
For integration of complementary human resources
TMT tacit knowledge is the most strategically importantresource
Synergy; expertise needed for post-acquisition integration
TMTs participation in the buy-in, development and
implementation monitoring systems
SO WHICH IS IT? WHY?
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What is a hostile takeover?
Are there many hostile takeovers?
What are the issues with these?
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M&A. Does this exist?
What are other ways instead of acquisition?
Strengths and weaknesses of each.
So why acquire?
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Booz & CompanyDATE
digitalnow.ppt Prepared for client name
Customers
Suppliers
For most industries, competition is intensifyingfrom all of Porterfive forces
Low cost
global rivals
New entrants
Radical new
business models
The Internetchanges
everything
Global race for
raw materials
Suppliers
moving up to
become rivals
Supply-chain
transparency
Regulatory and
other barriers
continue to fall
Consolidation
provides little relief
Rivalry
Customers
wallets are flat
Super-
empowered
customers know
more than ever
Trading downNew media vs. old mediaSubst i tutes
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Every organization also faces intense pressure in terms ofoperational effectiveness and strategic differentiation
Operational effectiveness
means performing similaractivities betterthan rivals
perform them.In contrast,
strategic positioning means
performing differentactivities
from rivals or performing similar
activities in different ways.
E ti ll d i t di ti t t i t
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Executives, pulled in too many directions, say strategies are notclearly defined or likely enough to succeed
Booz & Company survey of 1,800 execs shows they believe
% of
their strategy
will lead to
success
theircompanys
capabilities fully
support their
their company
has a right to win
in all the markets
they have too
many conflicting
priorities
respondents strategy in which it
competes64%
48%
33%
21%
Why is it that with so many available strategy frameworks many
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Why is it that with so many available strategy frameworks manycompanies still struggle with sustained value creation?
AdaptationAct quickly and creativelyin response to events(organizational warning)
Evolution of Strategy
Future
Michael PorterCompetitive Strategy
1980Henry MintzbergThe Rise and Fall ofStrategic Planning
PositionExploit the high ground: createand hold a distinctive position
(market-back strategy)
W. Chan Kim &Rene MauborgneBlue Ocean Strategy
1994 Bruce Henderson
Essays
2005
Many
W. Edwards Deming
Tom Peters &Robert Waterman
In Search of Excellence1982
William Abernathy &Robert Hayes
Managing Our way to
Gary Hamel &C.K. Prahalad
1966 Kenneth AndrewsThe Concept of
Corporate Strategy1971
Few
Out of the Crisis1986
Execution
Ram Charan &Larry Bossidy
Execution2002
Economic Decline
1980
Michael Hammer &James Champy
Competing for the Future
1994
Chris ZookProfit from the Core
2001
Concentration
Align people and processesfor operational excellence(the quality movement)
Reengineering the Corporation1993
Present
Focus on your currentcore business
(private equity)
Strategy in a single slide
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Strategy in a single slideFuture
First and foremost,
CHANGE
First and foremost,
DIFFERENTIATE
Many Few
First and foremost,EXECUTE
First and foremost,
STICK WITH WHATYOU KNOW
Present
The essential strategic choice is
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The essential strategic choice isabout the identity of a firm
From struggling with push-me,
pull- me tensions
Strategic thinking often centers ontensions between long term vs.short term, and many vs. few
Leaders tend to "yin and yang" betweenthese tensions over time in apoint/counter- point fashion
The inescapable truth is that (a)
advantage is transient but (b)
companies are sticky
There is no winner between these
tensions, only a resolution of
them at a higher level
To Seeking the Answers to these sets ofQuestions:
Positioning questions:How are we going to create value for ourcustomers?How do we position ourselves vis a vis
competitors?Where will we play and where not?
Resource questions:What intellectual, financial, tangible, andtangible capabilities and assets can orshould we deploy?Do we build, buy, or rent them?Which matter most?
Market questions:What do we sell, and to whom?Whats our portfolio of offerings--whatbusiness lines, what products, whatservices?
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Coherence confers the right to winThe Power Of Coherence
A coherent company strikes a balance where the right product and service portfolio naturally thrives within
a capabilities system consciously chosen and implemented to support a deliberate way to play
HOW WILL WE
CREATE VALUE FOR
OUR CUSTOMERS/
MEMBERS?
WHAT MUST WE DO
WELL TO DELIVER
THAT VALUE
PROPOSTION?Essential
Advantage
WHAT ARE WE
GOING TO DELIVER
TO WHOM?
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Booz & CompanyDATE
digitalnow.ppt Prepared for client name 9
Why do coherent choices create value?
Effectiveness
Focus and dedication on creating a winning capabilities system in your way to playBarriers for competitors who are less coherent, with less effective capabilities Ongoing improvement engine for the few capabilities that matter
Efficiency
FocusedInvestment
Highlighting of what is non-essential through clarity on way to play Less spend on those capabilities that are non-differentiating Capability scale through focus and often ability to deploy more broadly
Provision of objective for the enterprise the value behind the portfolio Direction of capital and attention to those opportunities that extend a capabilities lead Guide for both organic growth and M&A decisions
Alignment of strategic intent and day-to-day decision making thanks to capabilitieslens
Organization moving in lockstep and executing faster and with more force Talent attraction to organizations that clearly value what they do
Alignment
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Financial CoherentFamiliarGood
Portfolioassembled
for financial
compatibility
Strong
brands or
other
performance
characteristi
cs
Industry or
marketbased know-
how and
management
practices
presumed
similar
Businesseslinked by
capabilities
or common
assets
Coherence Continuum
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32%
28%
Coca-Cola
EBIT Margin2003-2007
24%
20%
16%
Campbells
General Mills
Kraft
Clorox
P&G
Heinz PepsiCo
Kimberly Clark
Wrigleys
12%
8%
ConAgra
Sara Lee
UnileverNestle
Size of bubble: Revenue
4%
0 20 40 60 80 100Capabilities Coherence Score
COHERENCE PAYS
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Capabilities must be mutually reinforcing and integratedinto a system that best supports a chosen way to play
Example: The Pepsi-Frito Lay Capabilities System
Direct-store delivery (DSD)allowing easy testing of newproducts by introducing them ina handful of stores
Continuousinnovation of new
products with storelevel response
information goingdirectly to R&D
Skilful global consumermarketing to rapidly builddemand for initiallysuccessful products
Way to PlayRapid innovation, distribution and marketing to stimulate and meet
customer snacking needs
A starting point: Is our strategy coherent?
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A starting point: Is our strategy coherent?The Coherence Test
Can We State It? Do We Live It?
Way to PlayAre we clear about how we choose to create value for
our members? Are we investing in the capabilities that really matter to
our way to play?
CapabilitiesSystem
Can we articulate the three to six capabilities thatdescribe what we do uniquely better than anyone else?
Have we defined how they work together in a system? Do our strategy documents reflect this?
Do all our service offerings draw on this superiorcapabilities system?
Do our organizational structure and operating modelsupport and leverage it?
Does our performance management system reinforce it?
Product &
Service Fit
Have we specified our product and service sweetspot?
Do we understand how to leverage the capabilitiessystem in new or unexpected arenas?
Do most of the products and services we offer fit withour capabilities system?
Are new products and acquisitions evaluated on thebasis of their fit with the way to play and capabilitiessystem?
Coherence
Can everyone in the organization articulate ourdifferentiating capabilities?
Is our associations leadership reinforcing thesecapabilities?
Do we have a right to win in our chosen field? Do all of our decisions add to our coherence, or do
some of them push us toward incoherence?
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M&A
Follows the coherence test
The reason for M&A
Seeking Frms to answer the questions,and ever changing needs.
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Acquisition of an Existing Company
Most popular app roachto
diversi f icat ion
Advantages
Quicker entry into target market
Easier to hurdle certain entry barriers
Acquiring technological know-how
Establishing supplier relationships
Becoming big enough to match rivalsefficiency and costs
Having to spend large sums onintroductory advertising and promotion
Securing adequate distribution access
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Vertical Integration Strategies
Extenda firms competi t ive scopewithinsame industry
Backwardinto sources of supply
Forwardtoward end-users of final product
Problems going backward or forward? So why?
Internally
Performed
Activities,
Costs, &
Margins
Activities,
Costs, &
Margins of
Suppliers
Buyer/User
Value
Chains
Activities, Costs,
& Margins of
Forward Channel
Allies &
Strategic Partners
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When the CEO of Schick (disposal razers)stated he was going to buy Duracell (batteries)the stock dropped by 15% and I agreed, becausethe CEO said (as is always the norm from an
Agency Theory perspective), he was going to get
synergies. We could not see how, but then in a fewdays knowing his mistake of not enough information,the CEO explained and the stock went up. Wherewere the synergies?
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Related vs. Unrelated Diversification
Related Diversif icat ionInvolves diversifying into
businesses whose value
chains possess
competitively valuablestrategic fits with value
chain(s) of firms present
business(es)
Unrelated Diversif ic at ionInvolves diversifying into
businesses with no
competitively valuable
value chain match-ups orstrategic fits with firms
present business(es)
8-43
Figure 8.2: Related Businesses Possess Related Value
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Chain Activities and Competitively Valuable Strategic Fits
8-44
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Strategic Appeal of Related Diversification
Reap compet it ive advantagebenefitsof
Skills transfer
Lower costsCommon brand name usage
Stronger competitive capabilities
Spreadinvestorr isksover a broaderbase
Preserve strategic un i tyacross
businesses
T f St t i Fit
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Cross -business s trategic f i ts can exist
anywhere along the value chain
R&D and technology activities
Supply chain activities
Manufacturing activities
Distribution activities
Sales and marketing activities
Managerial and administrative support activities
Types of Strategic Fits
Core Concept: Economies of Scope
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Core Concept: Economies of Scopeoften Called Synergies
Stem from cross-business oppo rtuni t ies
to reduce costsArise when costs can be cut by operating two or more
businesses under same corporate umbrellaCost saving oppor tun i t iescan stem from strategic fitsanywhere along the value chainsof differentbusinesses.
Rarely is this successful In long term..
Let us stop and discuss Psychological contract.
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How do you value a firm?
How do you find an acquisition target?
How much do you pay?
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Term Sheet
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Steps
Strategic Analysis
Search
Due Diligence
Negotiation / Bidding
Legal
Deal Design
Integration
1. Leadership
2. Communication3. Managing4. Key Personnel
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Cross Border
Significant
Disruptive: Why?
Time consuming: Why?
Different from domestic: How?
Country specific: Why?
Affects analysis and due diligence
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Cross Border
More likely to be related
(What is related versus unrelated?)
Payment in cash: Why?
Competitor reaction different: Why?
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First Round Document
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Cross Border: Macroeconomy
Issues Fiscal Policy
Monetary Policy
Trade Policy
Intervention Policy
Employment Policies
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Cross Border: Microeconomy
Issues Industry Structure
FDI issues
Infrastructure
Porters Diamond
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Cross Border: Institution Issues
Banks
Financial Markets
Legal
Watchdogs
Education
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Cross Border: Cultural Issues
Business Practices
MoW
Hofstede stuff
Leadership
Entrepreneurship
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Cross Border and Valuation
Inflation
Exchange
Tax rates
Cash transfers
Accounting principles
Political Risk
Vendors
Suppliers
Customers Social Risk (not
to buy foreign)
Corruption
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Due Diligence
Checklist and Global and private
Page 228
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Due Diligence
Can degrade to checking facts
Keep in mind the whole strategic picture
Keep in mind if you have to manage thefirm after purchase
What is the risk?
Does it feel right
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Due diligence
Time pressure
Reluctance to offend
Price versus worth (targets perspective) =conflict
Too brief
Situation always changing
Hidden unknowns
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Due Diligence
Seek patterns
Talk to employees (if possible)
Understand employee mood
Prepare for integration / corporate culture
Been frank whenever possible
Be inquisitive but not invasive
Develop relationship
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Due diligence Major focus
Legal
Accounting
Tax
IT
Risk
Insurance
Warranty
Corporate Culture
Market share / BrandOperations and Supply
ChainEquipmentProperty / Lease
IPFinanceCross BorderHR
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Who wants this deal to get done?1) Publicly traded?2) Private
Or are there any differences?
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TMT (top management team)
Berkshire HathawayManagement in place (they wont supply it,
and Managers must remain significant ownerswho continue to run their companies as they
have done so in the past Large purchases
Consistent earnings
Good returns on little debt
Simple business
WHY?
B k hi H th 2011 A l R t
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On September 16th we acquired Lubrizol, a worldwide producer of additives
and other specialty chemicals. The company has had an outstanding recordsince James Hambrick became CEO in 2004, with pre-tax profits increasingfrom $147 million to $1,085 million. Lubrizol will have many opportunities forbolt-on acquisitions in the specialty chemical field. Indeed, weve alreadyagreed to three, costing $493 million. James is a disciplined buyer and a superboperator. Charlie and I are eager to expand his managerial domain.
Berkshire Hathaway: 2011 Annual Report
Charlie and I measure our performance by the rate of gain in Berkshires per-share intrinsic business value. If our gain over time outstrips the performance ofthe S&P 500, we have earned our paychecks. Ifit doesnt, we are overpaid atany price. We have no way to pinpoint intrinsic value. But we do have a useful,
though considerably understated, proxy for it: per-share book value. Thisyardstick is meaningless at most companies.
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How Accountants like to value
Book value
Liquidation value
Replacement cost (of assets)
Current market value
Discounted cash flow
Multiples
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How to value strategically
After acquisition, target valuation
Synergy
After acquisition, our valuation
Value of intangible (like?)
Value of long term association
Value in combination with otheracquisitions (stream!)
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How measure success?
Stream?
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Which is easier for long-term success:
Buying a small private firmor a Publicly traded firm?
D l D i
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Deal Design
Price is unimportant (is this a surprise?) Do I buy a poorly performing firm and get
a deal?
Trade-offs Whole deal view systems approach
How pay?
How Finance?
Timing
Commitments and follow-up
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Deal Design
Controls
Governance
Decentralization versus Centralization
Internal Power alignments
Synergistic firings / closings
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Deal Design Issues
Feedback and flexibility
Speed and momentum (but beware of the
rush) Simplicity versus complexity (where is the
strength in the deal?)
Initial meetings and reinforcement overtime (why there is one point of majorcontact)
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When to say no an stop?
Winners curse?
Escalation of commitment?
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Integration
Where M&A mostly fails: Why?
Autonomy
Interdependence Control
Speed Important
Flexible
R f M&A F il (60%
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Reasons for M&A Failure (60%
fail to deliver value)ExecutionPoorLeadership
23%
Poor
Integration
21%
Cultures toodifferent
22%
Unclear
Leadership
18%
Wrong Focus 16%
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Major Risks
Approach Risk
Resources focused on transaction and not integrationand its costs
Wrong targets
Handoff Risk
No recognition of the unique source of value
Poor transfer of knowledge to integration team
Execution Risk
Failure to mobilize and capture value
Lack of resources
No accountability for value capture
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Top 12 Best M&A Practices
Approach
1.Focus on Source of value
2.Calculate Maximum price early3.Need superior Due diligence
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Top 12 Best M&A Practices
Execution
1.Address integration early, especially
management and culture.2.Quantify target success
3.Speed in integration
4.Focus on value drivers
5.Small rapid integration teams
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Top 12 Best M&A Practices
Execution (continued):
6.Align Roles and responsibilities and
communicate these7. Retention/Retention/Retention
8. Culture: Humanize the M&A
9. Communicate frequently to allstakeholders in regard to implications andprogress
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Integration
Uncertainty
Employee issues
Change Management Objectives set
Culture needs to change
Value Chain
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Integration
Start at the beginning
Point man / leader
Communication Deadlines
Talent retention plans
Production / Supply Chain Management
Intangible retention
MIS
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Speed Errors
1. Obsessive list making
2. Content free communication
3. Too many planning meetings/committees4. Ignoring hierarchy
5. Too much Emphasis on vision/values
6. Rewarding A, getting B
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Integration Maxims
Publish/Communicate Integration (if at all)plan
Clear targets Integration short
Swift decisions (mostly decentralize)
Involve many employees (both sides)
Common MIS (if possible)
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MRP/LP Email Case
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JV example
Alcatel/Lucent example
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M&A Trends1. Booming Demand
2. Supply/Demand shift toremote, unstable locations
3. Demand shift in Asia
4. Middle East cheapenergy = diversification
5. Natural resourcesdepleting fast
6. Massive capital required
8. Supply security
9. Scarcity of Talent
10. Global labor market
11. New, low cost players
12. Niche companies in newtechnologies*
13. Private Equity
14. Restructuring undervalued
Conglomerates
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M&A Trends15. Low priced firms
16. Antitrust Regulations
17. Cross-borderRegulations
18. Traditional MNCconsolidation
19. Competition for Assets
20. Rise of Sovereign Funds
21. Alternative Industries
growth, fragmented*
22. Low R&D, demand fornew technologies
23. Credit Crunch
24. Foreign entities
25. Political instabilities
26. De-regularization,
Unbundling
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Biggest Trend
Earnings Per Share growth expectations
are way above what companies can
achieve in most territories from organicgrowth alone
John McConomy, US Power and Utilities Transaction Services Leader,
PricewaterhouseCoopers
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Two Major Rationale for M&As:
1. Cost Reduction (how effective?Synergies?)
2. Growth
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Strategies for Growth
1. BaseRetention
2. Share Gain
3. Positioning4. Adjacent
Market
5. NewBusiness
GROWTH
Double-Digit Growth, Michael Treacy
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Rationale for M&As: Growth
Expansion
1.Consolidate
2.Geographic3.Distribution
4.Compensate
Transformative
1.Portfoliorefocus
2.Diversification
Easier Tougher
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Rationale for M&As: Expansion
Expansion
1.Consolidate
2.Geographic
3.Distribution
4.Compensate
1.Gain Scale to compete2. Integrated Solutions
3.Financial Growth
4.Supply (security, mix)
5.Developing markets
6.High cost of Extra Capacity
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Rationale for M&As: Expansion
Expansion
1.Consolidate
2.Geographic
3.Distribution
4.Compensate
9.De-regularization10.Demand outstrip supply
11.Revenue Mix Tax
optimization
12.Talent
13.New, Low-cost Entrants
14.Undervalued Big Players
15.Newer Assets
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Rationale for M&As: Transformative
Transformative
1.Portfoliorefocus
2.Diversification
1. New Business Lines2. Selling/Spin-off non-core
3. Increase product line
4. New customers5. New technologies
6. Complementary Business
7. Up-down Supply Chain8. Patent
9. Convergence anticipation
Rationale for M&As: Cross
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Rationale for M&As: Cross
SectorsTraditional
AlternativeIncremental
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Rationale for M&As: Cross Sectors
TraditionalUtility
Alternative
Energy
Incremental
Technology
New Delivery, New Sources,Existing Resources
Oil, Gas,Electricity, Coal
Biomass, Nuclear,Ethanol, Wind, Solar
Example:Energy Sector
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Why are international acquisitions more difficult?
Possible Outside Acquirers or Investors
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q
InstitutionalFund Managers
Corporations
Sovereign Funds
VCs
NGOs
Non-Profit Org
Financial (Loans)
JV Partners
M&A
Social VCs
Holding Co.
Gov. VCs
Supply Chain
Gov. Partnership
Competitors
Why do Outsiders Acquire or Invest?
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Why do Outsiders Acquire or Invest?
1. Return/Profit2. Risk Management/
Hedging
3. Tax-benefits
4. CSR/Image
5. Diversify revenue
6. Counter-cyclical
balance7. Support Mission
8. Exclusive rights
8. Contractual obligation9. National Agenda
10. Control Supply Chain
11. R&D portfolio
12. Control Management
13.Alternative Cash Flow
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3. Strategies, Structure, and
Optimizing Value in M&As
S i f G h
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Strategies for Growth
1. BaseRetention
2. Share Gain
3. Positioning4. Adjacent
Market
5. NewBusiness
GROWTH
Buying Market Share: Side
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Buying Market Share: Sidenotes on Funding
Preferable OK, but not preferred
1. Cash from Earnings
2. Cash fromBorrowings
1. Cash from Stock sale
2. Issue more stock
Strategy 4: Invade Adjacent
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Strategy 4: Invade AdjacentMarkets
Adjacent Market = Important Similarities andLarge Differences in:
1. Cost Structure2. Competitors
3. Customers
4. Critical Capabilities
Strategy 4: Invade Adjacent
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Strategy 4: Invade AdjacentMarkets
Traditional
AlternativeIncremental
Strategy 4: Invade Adjacent
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Strategy 4: Invade AdjacentMarkets
Upstream Midstream Downstream
DistributionConversionRaw Mat
Vendors/Services
Strategy 4: Invade Adjacent
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Strategy 4: Invade AdjacentMarkets
Is it a promising market?
Best when market is new and not stable
You must time your entry carefullyEntrenched 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
Strategy 4: Invade Adjacent
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Strategy 4: Invade AdjacentMarketsCan you match the Standards of
Competition in this Market?
You do have to meet the quality level that iscommon in the market
Three Standards:- Technology,Relationships, Business-model
You must have 80 percent of the capabilitiesyou need to match competitors Standards
Strategy 4: Invade Adjacent
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Strategy 4: Invade AdjacentMarkets Make or Buy?
1. It is easier to meet the standards ofcompetition if you buy an existing player
2. Adjacent acquisitions must remain as aseparate enterprise
3. Integrate Management Control (systems,technology)
4. Inter-transfer of management talent,knowledge and capability are important
Strategy 5: Acquire new
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Strategy 5: Acquire newBusiness
No core advantage to bring in
Investors mind-set vs. Managers mind-set
Value unlocking via operationalimprovements
Invest in Management/Leadership
Premium = Combined value > stand alone
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Which is easier: Big acquisitions or small firms?
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4. Considerations, Risks
and Pitfalls
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Types of M&A Deals vs. Considerations
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yp
Overcapacity Product/Market
Consolidation
Transformation/Convergence
Roll-up Acquire
products/market
Strategic
Growth Bet
Size
(
Relative)
Share Gain
(Expansion)
Adjacent
(Transformative)
New Business
(Transformative)
Small
Large
Running a winning M&A shop, McKinsey
Types of M&A Deals vs. Considerations
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yp
Overcapacity
Size
(
Relative)
Share Gain
(Expansion)
Adjacent
(Transformative)
New Business
(Transformative)
Small
Large
Running a winning M&A shop, McKinsey
Reduce industrycapacityControl PricingSimilar ProductOfferings
Pay for Cost synergies
Types of M&A Deals vs. Considerations
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yp
Roll-upSize
(
Relative)
Share Gain
(Expansion)
Adjacent
(Transformative)
New Business
(Transformative)
Small
Large
Running a winning M&A shop, McKinsey
Transfer Core Strengthto targetPay for lower operatingcost of targetIncrease revenue thru
broad strength
Types of M&A Deals vs. Considerations
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Product/Market
Consolidation
Size
(
Relative)
Share Gain
(Expansion)
Adjacent
(Transformative)
New Business
(Transformative)
Small
Large
Running a winning M&A shop, McKinsey
Economies ofScaleConsolidateback officeExpand Market
presencePay for Growth,Channels
Types of M&A Deals vs. Considerations
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Acquire
products/market
Size
(
Relative)
Share Gain
(Expansion)
Adjacent
(Transformative)
New Business
(Transformative)
Small
Large
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Expand marketofferingExpandGeographicreachPay for Growth,ChannelsRevenuesynergies
Types of M&A Deals vs. Considerations
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Transformation/Convergence
Size
(
Relative)
Share Gain
(Expansion)
Adjacent
(Transformative)
New Business
(Transformative)
Small
Large
Running a winning M&A shop, McKinsey
Transform IndustryCreate new ValuePropositionPay for New Markets,New Capabilities
Types of M&A Deals vs. Considerations
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Strategic
Growth Bet
Size
(
Relative)
Share Gain
(Expansion)
Adjacent
(Transformative)
New Business
(Transformative)
Small
Large
Adapted: Running a winning M&A shop, McKinsey
Skill transfer into newbusinessPay for High Riskoptions, ability to act innew market space
Three-Stage Process for Evaluating M&A deals
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1. Strategy Approval
2. Approval-to-Negotiate
3. Deal Approval
1. Business Dev +Business Unit
2. Worth of Target?3. Attractiveness of Target
vs. Others
4. Target compatible withStrategy?
5. Support from Acquirer?6. Integration possibilities?
Running a winning M&A shop, McKinsey
Three-Stage Process for Evaluating M&A deals
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1. Strategy Approval
2. Approval-to-Negotiate
3. Deal Approval
1. Price range2. Initial Due Diligence3. Vision for incorporation4. Key Synergies5. Nonbinding Term
Sheet/LOI6. Negotiation Roadmap7. Process to Close
Running a winning M&A shop, McKinsey
Three-Stage Process for Evaluating M&A deals
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1. Strategy Approval
2. Approval-to-Negotiate
3. Deal Approval
1. Answering KeyQuestions
2. Debating Valuations3. Aiming for Integration4. Dealing with Execution
Risks
Running a winning M&A shop, McKinsey
Considerations, Risks and Pitfalls
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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
Tolerances6. Public (or Public-hopeful) companies
need to consider EPS after acquisition
Considerations, Risks and
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,Pitfalls7. Synergies and Improvements need to realized
as quickly and efficiently as possible
8. Combined Management capability to deliverimproved 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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Why do Acquisitions fail?
Consideration: Alternative Deals
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to M&AWhen 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, McKinseys Washington, DC
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Consideration: Alternative Deals to M&A
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Consideration: Alternative Deals to M&A
JointVenture
Unite business units
Problem with shared ownership
New Product Lines
Cost Reductions
Share risk, Share Cost in new markets, R&DBuy-out clause
AlliancesReduce non-core or commoditizing parts
Outsourcing, OffshoringHelp supplier gain Scale
Enter Complementary business
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End Note for M&A
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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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Timothy Kiessling, PhDHead of Strategy Department
Associate Professor of Strateg and International B siness
Introduction Strategic M&A