Readying Your Organization to Grow Through Acquisition

Gail F. LiebermanRudder Capital LLC

CFO Summit/February 23, 2002

RUDDERCAPITAL

www.ruddercapital.com

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Outline

•Is Growth by Acquisition a Viable Strategy– Organic Growth vs Growth by Acquisition

– Strategic, People, Financial Considerations

•If Yes, Getting Started – Planning Process, Process & Evaluation Tools,

Setting Expectations, Education, Communication

•Establishing Relations with Advisors

•The Pre-Acquisition Process Sourcing Deals, – Deal Teams, Due Diligence Process, Integrity,

Negotiating, Closing

•Day One Plans

•How Finance Can Add Value

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Is Growth by Acquisition Viable for Your Company?

Organic Growth vs Growth by Acquisition

(a.k.a. Build vs. Buy)

•Strategic Considerations

•People Considerations

•Financial Considerations

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Strategic Considerations

BUY BUILD

Benefits • Immediate addition to revenue/profits

• Immediate rounding out distribution and/or product lines

• Lower or more gradual investment

Costs • Premium Valuations

• Upfront Costs

• Slower revenue/profit ramp up

• Startup risk

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People Considerations

• Cultural fit can’t be underestimated

• Assess management acquisition experience

• Be realistic about organization bandwidth

• Acquisitions are a diversion

• Small and large acquisitions take the same amount of time (and cost)

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Financial Considerations

• Valuation, metrics, etc all matter

• Acquisitions can be financed in both bad and good economic times

• Several sources of acquisition funding are available

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Getting Started

• Planning Process

• Process & Evaluation tools

• Expectations

• Education

• Communications

• Advisors

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Integrate into the Planning Process

• Develop achievable acquisition strategies

• Prepare forecasts with and without acquisitions

• List potential targets

• Monitor competitive activity

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Be Prepared with Process & Evaluation Tools

• Start the education process early with respect to

– terminology

– measurement

– process

• Define hurdles and return metrics

• Analytic tools/management reports to evaluate impact on

– Revenues

– Profits

– ROI

• Due diligence checklists

• Process checklists

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Set Expectations by Defining Objectives & Parameters

• Payback by acquisition type

– foldins: 3-5 year returns

– strategic: 5-8 year returns

– business partnering: 1-2 year returns

• Size, revenue/profit/cash characteristics

• ROI

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Educate Management & The Organization

• Terminology

• Expectations

• Communication

• Decision making

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Communicate Often

• Investors

• Board

• Organization

• Press

• Advisors

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Establish Relationship with Advisors Early• Investment Bankers

• Lawyers

• Tax advisors

• PR Firms

• Real Estate Advisors

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The Pre-Acquisition Process

• Sourcing Deals

• Deal Team

• Due Diligence

• Integrity

• Negotiation

• Closing

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Broaden the Charter for Sourcing Deals• Executive/Operating Management

• Vendors

• Board/Investors

• Advisors

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Form a Deal Team

• Acquisition Team Leader

• Operating Management

• Lawyer

• Tax

• Analyst

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Manage the Due Diligence Process

• It’s Not Just About The Numbers

• Culture

• Customers

• Product, Service

• Risks

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Integrity Goes A Long Way

• The stage is set with the first communication

• IOI’s, LOI’s

• Managing expectations on both sides

• Need to know vs confidentiality

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Know Your Negotiating Levers

• Work towards a term sheet before handing off to lawyers

• Structure solves a lot of problems

• The purchase agreement is prime negotiating space

• Consider light mark-up as a competitive edge

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Work Towards Smooth Closing Process

• Work closely with lawyers

• Work out press releases well in advance

• Turn mountains into molehills

• Alert and check fund transfer instructions

• Acknowledge your deal team

• Create an environment of unity

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Day One Plans

• Communications

• The Human Equation

• Integration

• The Paper Trail

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How Finance Can Add Value

Various opportunities for leadership depending on culture of organization, but leading the process and “bringing it all together” is a key value-add

• Communication

• Education

• Turning mountains into molehills

• Feedback

• Evaluation