Developing Business and Acquisition Plans ... - ElsevierDirect

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Nov 20, 2013 (3 years and 8 months ago)

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Developing Business and
Acquisition Plans:

Phases 1 & 2 of the
Acquisition Process

If you don’t know where you are going,

any road will get you there.


Alice in Wonderland

Course Layout: M&A & Other
Restructuring Activities

Part IV: Deal
Structuring &
Financing

Part II: M&A
Process

Part I: M&A
Environment

Payment &
Legal
Considerations

Public Company
Valuation

Financial
Modeling
Techniques

M&A Integration

Business &
Acquisition
Plans

Search through
Closing
Activities

Part V:
Alternative
Strategies

Accounting &
Tax
Considerations

Business
Alliances

Divestitures,
Spin
-
Offs &
Carve
-
Outs

Bankruptcy &
Liquidation

Regulatory
Considerations

Motivations for
M&A

Part III: M&A
Valuation &
Modeling

Takeover Tactics
and Defenses

Financing
Strategies

Private
Company

Valuation

Cross
-
Border

Transactions

Current Learning Objectives


Primary learning objectives: To provide students with an
understanding of


a highly practical “planning based” approach to
managing the acquisition process and


the issues associated with each phase of the M&A
process


Secondary learning objectives: To provide students with
an understanding of how to


select the correct strategy from a range of reasonable
alternatives and


develop an acquisition plan

The Acquisition Process


Pre
-
Purchase Decision
Activities






Post
-
Purchase Decision
Activities


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

Phase 1: Business Plan


Industry/market definition (Where have we chosen to
compete?)



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?



Phase 1: Business Plan


Industry/market definition


External analysis (customers, current competitors, potential
entrants, substitute products, and suppliers): Five Forces
Framework


Key objective: Identification of industry trends and whether they
constitute 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 India’s Tata
Motors


Substitute products/technologies for internal combustion engine
include hybrids, all electric car, hydrogen car, etc.


Suppliers include material vendors, lenders, labor, etc.

How will these changes impact my business?


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 identified
in the external analysis?


Do our weaknesses make us vulnerable to the threats
identified 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 cars
better than our competition?


To what extent do our strengths help us satisfy our customers’
needs better than the competition? To what extent do our
weaknesses make us vulnerable to losing customers?

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)


Opportunities/threats (from external and internal analyses)


Summarizing strengths and weaknesses versus
opportunities 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 increase
their online presence

Hypothetical Amazon.com SWOT Matrix

Opportunity
: To be perceived by
internet users as the preferred
online “retail department store”

Threat
: Walmart’s, BestBuy’s,
Costco’s increasing presence on
the internet

Amazon.com’s Strengths

Relative to the opportunity
:



Brand recognition



Convenient online order entry


system



Information technology


infrastructure



Fulfillment infrastructure for


selected products (e.g., books)

Relative to the threat
:



Extensive experience in online


marketing, advertising, and


fulfillment


Amazon.com’s Weaknesses

Relative to the opportunity
:



Inadequate warehousing and


inventory management systems to


support quantum sales growth



Limited experience in


merchandising non
-
core retail


products (e.g., electronics)



Limited financial resources

Relative to the threat
:



Substantially smaller retail sales


volume limits ability to exploit


purchase economies



Limited financial resources



Limited name recognition in


selected markets (e.g., consumer


electronics)



Lack of retail management depth

Strategic Options

Solo venture

Partner

Acquire

Solo venture

Partner

Acquire

Exit business

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)


Opportunities/threats (from external and internal analyses)


Business vision/mission (Defines direction and provides means
of communicating succinctly with key stakeholder groups)


How do we wish to be perceived by key stakeholders?


What quantifiable objectives will be used to determine
progress 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

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)


Opportunities/threats (from external and internal
analyses)


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 and
objectives?

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)


Opportunities/threats (from external and internal analyses)


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

Application

1.
Discuss how you would use information
obtained from the external, internal, and
opportunities/threats identification analyses
conducted during the business planning
process to select an appropriate business
strategy. Be specific.

2.
Discuss how you would select the appropriate
implementation strategy. Be specific.


(Hint: Consider the resources

broadly
defined
--
required/currently available to exploit
potential opportunities and threats.)


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 Suite

incl. Photoshop and Illustrator) and sells customers “perpetual” licenses


Targeted Markets/Spaces
1
: Web designers, online retailers, and media
firms (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 analytical
software by Google and reduced advertising spending due to recession


1
Note markets or “spaces” consist of customers with homogeneous needs

Adobe External Analysis:

Customer “Value Chain”

Create

Deliver

User Engages

Via Interface

Analyze

Optimize

Customer Needs
: To cost
-
effectively create content, display/deliver content, generate web user
activity/transactions, analyze how site utilized, and improve process to increase transactions

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 new
products)




Adobe Internal Analysis


Adobe’s core skills focused on developing
website design software


Sales concentrated on only one segment
of the value chain (i.e., create content)


Limited experience in how to develop a
“subscription
-
based” business
model/strategy

Adobe’s Mission, Business, and
Implementation Strategies



Adobe's vision/mission:

To revolutionize how the world
engages with ideas and information


Business Strategy/Model: To move


From selling customers perpetual software licenses
and increasing revenue by upgrading current clients
and attracting new clients


To a monthly subscription model


Implementation Strategy
1


Acquire a vendor targeted at a different phase of the
customer value chain whose revenues are based on
the subscription model

1
Alternative implementation strategies include solo venture, partnering, or acquisition.


Discussion Questions

1.
Why might Adobe have decided to
acquire Omniture rather than to partner
with Omniture or to build a similar
capability on its own?

2.
What considerations might have made
Omniture an attractive acquisition target
for Adobe?

Application

1.
Discuss how you would use information
obtained from the external, internal, and
opportunities/threats identification analyses
conducted during the business planning
process to select an appropriate business
strategy. Be specific.

2.
Discuss how you would select the appropriate
implementation strategy. Be specific.


(Hint: Consider the resources

broadly
defined
--
required/currently available to exploit
potential opportunities and threats.)


Phase 2: Acquisition Plan (How to
implement the acquisition)


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


How will the acquired firm enable the
acquiring firm to better realize its
vision/mission and business plan objectives?

Examples of Linkages Between Business and Acquisition Plan Objectives

Business Plan Objective

Acquisition Plan Objective

Financial: The firm will


Achieve 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 have


A minimum return on assets of
x
%


A debt/total capital ratio


y%


Unencumbered assets of $z million

Size: The firm will


Be 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 average


Revenue growth of
x
%


Earnings per share growth of
y
%


Operating cash
-
flow growth of
z
%

Growth: The target firm should


Have 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 of
x

million units

Diversification: The firm will reduce earnings variability by
x
%.

Diversification: The target firm’s earnings should be largely


uncorrelated with the acquirer’s 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 the


industry’s 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


industry’s quality leader.

Quality: The target firm’s product defects must be

x

per million


units manufactured.

Service: The firm will be recognized by its customers as the


industry’s service leader.

Warranty record: The target firm’s customer claims per million


units sold should be not greater than
x.

Cost: The firm will be recognized by its customers as the industry’s


low
-
cost provider.

Labor costs: The target firm should be nonunion and not subject to


significant government regulation.

Innovation: The firm will be recognized by its customers as the


industry’s innovation leader.

R&D capabilities: The target firm should have introduced at least
x



new products in the last 18 months.

Phase 2: Acquisition Plan


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


Timetable


Defined by activity completion dates, deliverables
(what is to be achieved), and individual (s)
responsible for satisfying objectives


Example: Daniel Stuckee is to have completed
identifying a list of potential targets by 2/24/20??


Phase 2: Acquisition Plan


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


Timetable


Resource/capability review


Determine maximum size of acquisition in
terms of P/E. sales, cash flow, purchase price,
etc.


Assess internal management capabilities
(Can acquirer continue to manage current
businesses as well as integrate the acquired
firm?)

Phase 2: Acquisition Plan


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


Timetable


Resource/capability review


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


Phase 2: Acquisition Plan


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


Timetable


Resource/capability review


Management preferences


Search plan


Key search criteria include industry/geographic area
and maximum size of acquisition


Relatively few criteria used to avoid limiting list of
potential targets


Phase 2: Acquisition Plan


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


Timetable


Resource/capability review


Management preferences


Search plan


Negotiation strategy


Starts with assessment of the needs of parties involved


Determine proposals to satisfy the highest priority needs of the
parties involved. For example, consider


Using acquirer stock if seller wants a tax free sale


Long
-
term employment contract if seller wants to stay with
the business


Having seller sign a non
-
compete to avoid future competition
with seller





Phase 2: Acquisition Plan


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


Timetable


Resource/capability review


Management preferences


Search plan


Negotiation strategy


Determine initial offer price


Requires buyer to estimate


Minimum purchase price (i.e., standalone or market price for
purchase 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 (often
reflects premium paid on recent similar transactions or the
portion of synergy contributed by the target)


Phase 2: Acquisition Plan


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


Timetable


Resource/capability review


Management preferences


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?


Phase 2: Acquisition Plan


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


Timetable


Resource/capability review


Management preferences


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?



Applications

1.
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 a
purchase 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 pending
litigation facing the seller. The potential impact over the next three years if the firm
were to lose the lawsuits could be as high as $4 million. How can the buyer protect
herself 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 be
completed as rapidly as possible in order to realize the full value of estimated
synergies. Why might the CEO feel this way? What are the risks associated with a
rapid integration of the target firm into the acquirer? What are the risks of a slow
integration 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 her
with three years of signed Federal income tax statements, personal bank
statements, and a net worth statement. Why? Is the CEO being reasonable?
What alternatives does she have if the buyer refuses to provide this information?


Things to remember...


The success of an acquisition is dependent on
the focus, understanding, and discipline inherent
in a thorough and thoughtful business plan


An acquisition is only one of many options
available for implementing a business plan


Once a decision has been made that the
implementation of the firm’s business strategy
requires an acquisition, an acquisition plan is
required.