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Strategy and
Target Selection
Presented by Andy Sheats
AGENDA
Strategy and M&A
Target Selection: Case study
International expansion of REA Group
– Company Background
– Which Markets?
– Which Companies?
Tools of the Trade
Why Do Companies Acquire?
Enter new businesses: Diversify
Enter new businesses: Vertical
Enter new businesses: Vertical
Scale
Scale
Enter new businesses
Scale
Scale
Scale
“Some analysts told me to”
Scale
Business vs Corporate Strategy
The Common word in all three … STRATEGY
Scale Enter new businesses
Business Strategy
Buying a business like
mine, to improve our
competitive position and
vanquish our competitors
(eg. “scale” or scarce
resources)
Corporate Strategy
Buying a business that is not like mine,
to
“Link” different sorts of businesses
together creating competitive advantage
in each of them
(e.g. “vertical integration”, or common
sales channel)
Business Strategy
Strategic Planning
IS NOT
STRATEGY
Business Strategy
Your Business Strategy
IS NOT A
SECRET
Business Strategy
Your Business Strategy
IS NOT A
SECRET
What is Business Strategy?
Michael Porter Says its just 2 things
1. Market Selection:
(aka “where you play”)
2. Competitive Advantage
(aka “how you plan to win”)
5 years to win as many “digital-native” customers
as possible
through iSelect sales channel on the basis of
straight-forward products designed to rank well in
comparisons
and then retain them for as long as possible with
really focused online customer service model
Example: health.com.au Strategy
What is Business Strategy?
Michael Porter Says its just 2 ways…
1. Cost Leadership
(Cheaper, more profitable, and/or
able to invest more in differentiation)
2. Differentiation
(Unique things that customers value,
like local contact, better service,
higher quality, … )
What’s M&A got to do with it?
Basically, driving unit economics
(incremental cost/revenue/value in each customer interaction)
Cost Leadership
Use M&A to reduce cost:
• Aggregate scale
• Acquire low-cost assets
• Access unique/scarce
resource or capability
Differentiation
Use M&A to build differentiation:
• Provide more complete
service (or lower transaction
cost for consumer) through
bundling
• Increase product/service
quality through vertical
integration
• …
Agenda
Strategy and M&A
Target selection: Case study
International expansion of REA Group Limited
– Company Background
– Which Markets?
– Which Companies?
Tools of the trade
#1 in Australia – Residential +
Commercial Property
AU Competitive Position
Source: Nielsen Market Intelligence June2010
Realestate.com.au
2.8 M hours
3.3x Domain
67% share
Realestate.com.au
5.7 M UBs
1.9x Domain
49% share
One of the largest and most successful
online real estate “pure-plays”
Source: Nielsen Market Intelligence June 2010
A world leader in sector
~$500 million in revenue, 50% EBIT
~$5.5 billion market cap
~60% owned by News Corp
REA
SEEK Carsales
Fairfax
Long-term growth is driven by
three key questions
1. What else can
REA sell Australian
Real Estate Agents?
• What do they need/want?
• What can REA make
money from?
• How does REA leverage its
current business to do it
better/faster/cheaper than
the other guy?
• How does it improve
competitive position and
economics of our core
business?
• What are the risks?
2. Are there more
opportunities to
monetize
Australian
consumer traffic?
• Can REA make more
simply selling the
advertising space?
• Does it improve customer
experience?
• Build/buy economics and
timing
1. What else can
REA sell Australian
Real Estate Agents?
2. Are there more
opportunities to
monetize
Australian
consumer traffic?
Long-term growth is driven by
three key questions
3. Can REA replicate its Australian success
in other countries? • Which market?
• Entry Strategy
(Buy/build/partner)
• Target selection
Agenda
Strategy and M&A
Target selection: Case study
International expansion of REA Group Limited
– Company Background
– Which Markets?
– Which Companies?
Tools of the trade
Which country has a stronger growth
proposition for REA in 2007?
India
1 Billion people
$56B Real estate sector
Australia
20 Million people
$3B Real estate sector
OR
Using a SCREEN to determine which
countries does REA care about
Screen 1:
Macro Factors Ranking:
Market Potential
Developed
markets
Countries -- Targets
Developing
markets
Countries -- Targets
• Population
• GDP + Growth
• Real estate sector
(size + growth + profit
potential)
• Corruption
• Legal
• Etc.
Screen 2:
Internet Adoption
• Internet
• Broadband
• eReadiness
Screen 3:
Market Maturity
• Online real estate
usage patterns
Market maturity is a major driver of
near-term market attractiveness
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
India MY CN FR US NZ DE UK AU
India MY CN
FR
US
NZ
DE
UK
Australia
Consumer Penetration for Online Real Estate Sites c 2005
“Consumer
Penetration”
(1)
(1) An indicator of consumer penetration is Unique Visitors for the #1 player / population
Which country has a stronger growth
proposition for REA?
India
1 Billion people
$56B Real estate sector
Australia
20 Million people
$3B Real estate sector
OR
Agenda
Strategy and M&A
Target selection: Case study
International expansion of REA Group Limited
– Company Background
– Which Markets?
– Which Companies?
Tools of the trade
“best target” = “best company”
+ “best match”
“The Target” • Financials (revenue,
earnings, growth, etc)
• Completive position
(offset by valuation
expectations)
• Inherent risk (tax, fraud,
customer, reputational,
etc.)
Rollup Strategy Low capabilities
mean lower valuation
and greater value add
400K UVs + 4M UVs = 2x advertising prices Unprofitable #2 + semi-profitable #1 = profitable #1 at scale
“best target” = “best company”
+ “best match”
“The Target” • Financials (revenue,
earnings, growth, etc)
• Completive position
(offset by valuation
expectations)
• Inherent risk (tax, fraud,
customer, reputational,
etc.)
Geo Expansion
High capabilities
Provide a base of
expansion
REA’s tech/model/branding/traffic/capital
+
albabworlds local team/contacts/magazines
Where REA finds them
Business Partners Intermediaries “Fly-Ins”
Target List
Using a SCREEN to target
companies in each market
Screen 1:
Strategic fit Ranking & Profiles
Profile 1
Profile 2
Screen 2:
Financial
Screen 3:
Culture
All targets
Target List
Agenda
Case study overview on “Which Companies”:
Entry to Dubai through Acquisition
Dubai:
2003
Dubai has become the richest urban
population of any area in the world
*Middle East Economic Digest Report
Dubai: Target Selection Process
Interest in country: press, stats, UK experience, fly-through
Desktop research – Market, regulatory, FDI restrictions
First “fly-in”: – Team member goes on “Invest Victoria” sponsored trade mission
– Dubai property expo, Victoria
– Developed 3 best options: Organic, JV w/ RE Company, Majority investment
Second “fly-in”: – REA developed all 3 on parallel tracks, worked through potential Ts and Cs with each
– Built financial model with the one that “felt best” and most likely
– Agreed terms
Prepare company for purchase by reincorporating as a FTZ LLC
DD
Completion
~12 months elapsed time
2003
Dubai: Post-Script
2020?
Agenda
Strategy and M&A
Target selection: Case study
International expansion of REA Group Limited
– Company Background
– Which Markets?
– Which Companies?
Tools of the trade
Tools of the Trade
• Strategic Screening
• Managing the Acquisition Pipeline
Screening Process
Benefits
Why M&A is sort of like being a sales
person
Prospecting Conferences
Networking
Cold-calling
Intermediaries
50+
Developing F2F
Whiteboarding
Selling the REA USP
20+
Qualifying Board interest
Saleability
Strategy alignment
Valuation reality
10-ish
Ts & Cs
2
DD A deal
6 to 12 month “sales cycle”
Need to put 50 to 100 into
the funnel each year
(1 or 2 every week)
1 Need to keep them
moving at a good pace
2
Closing Remarks:
Strategy Drives Successful M&A
• Be really clear on your strategy
– What markets
– How we will win – focus, differentiation or cost
• Be explicit about how M&A improves your chances of this success
• Rigorously screen targets based on your strategy
• Build your information and contacts until the time is right
• You need to very disciplined for a long time
