Identify and discuss the four overarching questions that must be addressed in developing a viable business plan.
Developing Business and Acquisition Plans: Phases 1 & 2 of the Acquisition Process
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If you don’t know where you are going,
any road will get you there.
—Alice in Wonderland
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Exhibit 1: Course Layout: Mergers, Acquisitions, and Other
Restructuring Activities
Part IV: Deal Structuring and Financing
Part II: M&A Process
Part I: M&A Environment
Ch. 11: Payment and Legal Considerations
Ch. 7: Discounted Cash Flow Valuation
Ch. 9: Financial Modeling Basics
Ch. 6: M&A Postclosing Integration
Ch. 4: Business and Acquisition Plans
Ch. 5: Search through Closing Activities
Part V: Alternative Business and Restructuring Strategies
Ch. 12: Accounting & Tax Considerations
Ch. 15: Business Alliances
Ch. 16: Divestitures, Spin-Offs, Split-Offs, and Equity Carve-Outs
Ch. 17: Bankruptcy and Liquidation
Ch. 2: Regulatory Considerations
Ch. 1: Motivations for M&A
Part III: M&A Valuation and Modeling
Ch. 3: Takeover Tactics, Defenses, and Corporate Governance
Ch. 13: Financing the Deal
Ch. 8: Relative Valuation Methodologies
Ch. 18: Cross-Border Transactions
Ch. 14: Applying Financial Models to Deal Structuring
Ch. 10: Private Company Valuation
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
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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
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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?
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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, Zip 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 identified in the external analysis? (Google’s acquisition of Motorola Mobility?)
Do our weaknesses make us vulnerable to the threats identified in the external analysis? (Microsoft’s Bing search engine?)
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?
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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)
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
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Hypothetical Amazon.com SWOT Matrix
Opportunity: To be perceived by internet users as the preferred online “retail department store”
Threat: Walmart’s, BestBuy’s, and 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
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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)
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 by 20XX
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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)
Opportunities/threats (from external and internal analyses)
Business vision/mission
Business Strategies (cost/price, differentiation, focus, or some combination)
Which of these generic business strategies best enables the firm to achieve its vision/mission and objectives?
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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)
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
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Application
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.
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.)
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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?
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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.
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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??
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Application: Nokia Buys Symbian
Nokia, a Finnish phone handset manufacturer, announced in mid-2008 that it had reached an agreement to acquire Symbian, its supplier of smartphone operating system software. At that time, Symbian had 60% market share, but it was losing share rapidly to Apple. Nokia also announced its intention to give away Symbian’s software for free in response to Google’s decision in December 2008 to offer its Android operating system at no cost to handset makers. Nokia was seeking to establish an industry standard based on the Symbian software, using it as a platform for providing online services to smartphone users, such as music and photo sharing.
Nokia seems to have been positioning itself as the premier supplier of online services to the smartphone market by dominating the this market with handsets reliant on the Symbian operating system. Nokia hopes to exploit economies of scale by spreading any fixed cost associated with online services over an expanding customer base. Such fixed expenses could include a requirement by content service providers that Nokia pay a minimum level of royalties in addition to royalties that vary with usage. Similarly, the development cost incurred by service providers can be defrayed by selling into a growing customer base. Nokia’s ultimate success seemed to depend on its ability to convince other handset makers to adopt their software.
What is Nokia’s vision for the future with respect to smartphones?
What are the firm’s business and implementation strategies?
Would you describe this strategy as high or low risk? Explain your answer.
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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?)
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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
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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
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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
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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)
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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?
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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?
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Applications
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?
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.
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?
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?
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?
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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.
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