How To Build A M&A Strategy

DevelopmentCorporate

How to Build a M&A Strategy



Contents

• What is an M&A Strategy

• Strategy Development Process Overview

• Determine Business Plan Drivers

• Determine Acquisition Financing Constraints

• Develop Acquisition Candidate Lists

• Build Preliminary Valuation / Return Models

• Rate / Rank Acquisition Candidates

• Review / Approve Acquisition Strategy

• DevelopmentCorporate Overview

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What is an M&A Strategy?• Roadmap for your firm’s

corporate development efforts

• Translates strategic business plan into a list of target acquisition candidates

• Provides a framework for evaluating acquisition candidates

• Enables management team, board of directors, and investors to get on the same page

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M&A Strategy Process• Determine Business Plan Drivers

– How can your strategic business plan be accelerated or more successful via M&A?

• Determine Acquisition Financing Constraints– How can you fund acquisitions?

What returns must be achieved? Who approves funding?

• Develop Acquisition Candidate List– What specific private and public

companies are you interested in acquiring?

• Build Preliminary Valuation Models– What are the initial estimates of

acquisition cost? What returns could be produced?

• Rate/Rank Acquisition Candidates– How do various acquisition

candidates rank in terms of impact to business and feasibility of closing acquisition?

• Review & Approve Acquisition Strategy– Do all of the critical stakeholders

(executive team, board, & investors) agree with strategy and priorities?

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1. Determine Business Plan Drivers

Translate your company’s strategic business plan into a set of drivers and requirements that your M&A strategy

will address

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Business Plan Drivers

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1. What markets do you want to be in?

2. What share do you want of each market?

3. What products/technologies does your roadmap require?

4. What geographies do you want to operate in?

5. What types of people, skills, & experiences do you need?

6. What financial targets do you wish to achieve?

7. Do you need to pre-empt your competitors?

8. How much risk are you willing to take?

Extract key information from your firm’s strategic business plan

Acquisition strategies are derivedfrom strategic business plans. Youneed to have your basic strategicplan in place first before you candevelop an effective M&A strategy


What markets do you want to be in?

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Plan Make Distribute Sell Service

Demand Planning Manufacturing Planning Inbound Logistics Sales Forecasting Returns / Exchanges

Apparel Assortment Planning Manufacturing Scheduling Inventory Management Shelf Assortment Warranty Service

Planogram Planning Inventory Management Carrier Capacity Management Price Management Field Service

Floor Planning Inbound Logistics Fleet Management Trade & Promotion Mgmt Loyalty Programs

Space Planning Production Control Outbound Logistics Point of Sale

Spend Management Quality Control Store Replenishment Markdown Management

Procurement Outbound Logistics Vendor Managed Inventory E-Commerce

Reverse Auctions Cost Accounting Warehouse Replenishment Consumer Credit & Payments

Order Management Supplier Payments Transportation Procurement Advertising Management

Supply Chain Network design Supplier Performance Mgmt Freight Audit & Payment Labor Management

Supply Chain Optimization Warehouse Management Global Trade Management Loss Prevention

Product Lifecycle Management Supplier Payments

Product Data Management

EDI Translators Bar Coding RFID SOA ERP

EDI VAN Order Life Cycle Management CPFR BPM CRM

EDI - Enterprise-scale

OutsourcingWarehouse Management Supplier Collaboration Portals EAI

Application Development /

DeploymentData Synchronization - Private

CatalogueElectronic Payments Web Forms B2B Integration Content Management

Data Synchronization - GDSN

Data PoolPOS - Analytics Supply Chain Analytics Adapters

Systems Infrastructure &

Management

AS2 Communications POS - Transaction Systems Supply Chain Visibility Business Intelligence

Mass File Transfer Scan-based Trading Trading Partner Mgmt Security

= solid growth

= flat to low growth

= flat to declining growth

Horizontal / Enabling Technologies

Supply Chain Related Markets

1. Understand the structure, size, growth, and trends of existing markets2. Identify markets/market segments your firm wishes to enter via M&A


What share do you want of each market?

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• Once you’ve identified the markets you want to participatein, you need to determine what your target market share is

• You need to be honest. All tech companies claim to “be theleading provider of XYZ solution”

• The reality is that product/service revenues determine marketshare

• Your relative position in the market determines what strategies& tactics will yield best results

• Review Geoffrey Moore’s Gorillas, Chimps, & Monkeys conceptsin his book “The Gorilla Game”


What products/technologies does your roadmap require?

9

Build

Buy

• Identify specific products or technologies that your strategic product roadmap requires

• Determine timeline when solution has to be available to achieve market share targets

• Honestly assess the time, costs, resources, and risks associated with build options

• Recognize that ‘buy option’ may not yield a solution that is 100% match with yourteam’s vision of the market requirements


What geographies do you want to operate in?

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• Determine your current geographic footprint

• Identify major geographies you want to expand to:• Europe• Middle East• Asia• South America

• Determine the relative sequence you would prefer(Europe first, Asia second)

• Determine preference for either direct operations orbuild presence via agents, resellers, partners, etc.


What types of people, skills, & experiences do you need?

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• Based on your market, product/service/technology, and geographic requirements you should identify what types of human capital needs you have that could be addressed by M&A

• For example:• Specific technologies like AJAX, social media APIs,

non-relational databases, MapReduce, Hadoop, etc.

• Language skills (German, French, Arabic, Japanese, Chinese)for local customer service support, localized UIs, etc.

• Indirect channel marketing and sales skills• Social media platforms and execution


What financial targets do you wish to achieve?

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• 1, 3, & 5 year targets for:• Revenue• Revenue Mix (License, Maint, SaaS, etc.)• Gross Margins• Operating Profit• EBITDA• Valuation (Enterprise Value / Market Cap)

• Determine split between organic versus M&A growth• “We are a $65 million business today. By the end

of 2012 we will have annual revenues in excess of$225 million. We expect that existing products andservices will contribute to 20% of the growth targetand the rest will come via mergers & acquisitions

Financial targets tend to be the primary drivers ofM&A strategies.


Do you need to pre-empt your competitors?

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If competitor A buysacquisition candidate D

before we do, we’rescrewed

• Is there a need to deny a competitor theopportunity to acquire a specific company?

• What is the relative value of a competitor notowning a specific company

• Rarely does one single acquisition change thedynamics of an overall market

• There are generally other companies that couldfill the strategic requirements


How much risk are you willing to take?

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• What is your risk profile -- conservative, moderate,or aggressive?

• How much financial risk are you willing to take?• 5% of combined company revenues?• 50% of combined company revenues?

• Are you willing to invest in pre-revenue products /technologies?

• Are you willing to enter totally new markets thatyour business has no position in today?

• Are you willing to invest in international geographiesoutside of your current geographic footprint?

Risk/reward is best examined incontext of a specific acquisition

candidate, unless your execs,board, & investors have specific

hard/fast risk management policies


2. Determine Acquisition Financing Constraints

Determine the constraints associated with financial resources to support

acquisitions

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How Big is Your War Chest?

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• Acquisitions can be funded multiple ways: cash, public and private equity, debt, earn outs, minority investments, PIPEs, etc.

• You need to understand the size of your ‘war chest’ before you can finalize your strategy

• How much surplus cash and untapped credit facilities are available?

• How much untapped equity is available and what is it’svalue

• How much new equity can you raise?• How much new debt can you raise? (hint 2x restructured

EBITDA is about all that’s available these days)


Understand the Hurdles

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• CFOs, Board of Directors, Investors, Debt Holders allhave criteria by which they evaluate potential acquisitions

• You need to understand these criteria since they will definitely impact the types of acquisition candidates youcan pursue

• Some example criteria include: • Valuation multiples (“We never pay more than 2x

trailing twelve months revenues or 4x restructuredEBITDA”)

• ROI Hurdles (“We expect a low risk 5X return on invested capital in less than 5 years”)

• Debt Terms (We never do more than 4X coverage ratios,convertible debt deals, or covenant-heavy deals)

It is not unusual for

various stakeholders

to disagree on M&A

approval criteria. It is

better to learn about

the requirements

before you pitch your

first deal


3. Develop Acquisition Candidate List

Identify the specific public and private companies that you are

interested in acquiring

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Build Your Initial List

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• Identify acquisition candidates by:• Market research (Gartner, AMR, IDC)• Public stock research / analysts• Competitor sections of public company 10-K’s• Recommendations from employees• Referrals from investment bankers, attorneys,

board members, investors• Develop summary profile for each company

• Target markets• Key products/services• Revenues• Profitability• Enterprise Value• Geographic footprint


Researching Private Companies

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• Researching public companies is easy – 10-Ks, Proxy Statements, Investor presentations containthe bulk of the info you need

• Some ideas for researching private companies:• Industry analyst reports (Gartner, AMR, IDC, etc.)• Interviews with analysts and journalists who have

covered the company• Interview former employees / sales people • Deep Google searches and analysis• Develop an estimate of company’s enterprise value.

Check out • How to Calculate the Enterprise Value of Private Companies• How to Calculate the Enterprise Value of Your Private Company

Private

http://www.developmentcorporate.com/2009/03/07/how-to-calculate-the-enterprise-value-of-private-companies/

http://www.developmentcorporate.com/2009/08/08/how-to-calculate-the-enterprise-value-of-your-private-company/


4. Build Preliminary Valuation Models

What are the initial estimates of acquisition cost? What returns could

be produced?

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Preliminary Valuation Models

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• Preliminary valuation models provide you withkey metrics to help understand the costs and return potential of a specific acquisition

• At this point in the process, these models are highlevel and preliminary in nature. They are intended toprovide you with an indication of potential costs andvalue. Definitive analysis of acquisition opportunitiesoccur after the initial strategy has been developed andapproved.

• Most organizations have a preferred format for presentingpreliminary valuation. Get a copy of a model from past dealsand use it as your template. Each executive team, board, investors, or debt holders have key metrics that matter to them.

• A sample valuation and return models are presented on the next pages


Sample Quick Valuation Analysis

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QAD as of 9/10/09

Enterprise Value

Equity Value 113.3

Cash (40.6)

Debt 16.9

Enterprise Value 89.6

Premium 0% 20% 33%

Price 3.68 4.42 4.89

Shares Out 30.8 30.8 30.8

Market Cap 113.3 136.0 150.7

less cash (36.6) (36.6) (36.6)

plus debt 16.9 16.9 16.9

Total Enterprise Value 93.6 116.3 131.0

plus: Fees & Expenses* 14.9 14.9 14.9

Gross Purchase Price 108.5 131.2 145.9

Standalone Multiples EBITDA/Rev

TEV / LTM EBITDA 4.9 19.1x 23.7x 26.7x

TEV / LTM Revenue 233.4 0.4x 0.5x 0.6x

Gross PP / LTM EBITDA 4.9 22.1x 26.8x 29.8x

Gross PP / LTM Revenue 233.4 0.5x 0.6x 0.6x

PF Contribution Multiples EBITDA/Rev

TEV / PF 20% EBITDA Margin @ LTM Rev 46.7 2.0x 2.5x 2.8x

TEV / PF 25% EBITDA Margin 58.4 1.6x 2.0x 2.2x

TEV / PF 30% EBITDA Margin 81.7 1.1x 1.4x 1.6x

Fees & Expenses

Legal & Accounting 1.0

Debt Costs 1.9

Restructuring 12.0

Total 14.9

Gross Purchase Price Funding Requirements

20% Restructured EBITDA Case: Debt @ 2.00x 93.4 93.4 93.4

Required Equity: 15.2 37.8 52.6

• Sample analysis of ERPCompany QAD

• Used to illustrate thecosts and multiples associated with a deal

• Can be developed veryquickly with limited info

• This organization placesvalue on revenue & EBITDA multiples. Yourorganization may havedifferent metrics (EPSGrowth, Cash Flow, etc.)


Sample Returns Analysis

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• Model estimates incremental exit valuation of combining ‘MyCo’ & QAD

• Valuation is based on EBITDA multiple – your firm may choose different metrics


5. Rate/Rank Acquisitions

How do various acquisition candidates rank in terms of impact to

business and feasibility of closing acquisition?

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Strategic Matrix

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Exit Impact

$500M+

$250M+

$0M

Acq

uir

ab

ility

<10X

RR EBITDA4-6X

RR EBITDA1-2X

RR EBITDA

Company A

Company B

Company C

Company D

Company E

Company F

Company G

• Rating/Ranking of acquisition candidateslets you understand the relative impactsof specific acqusitions

• The sample matrix on the right looks at twodimensions

• Acquirability – the relative price requiredto win acquisition as measured by restructured EBITDA multiples

• Exit Impact – the dollar impact to the company’s valuation in 3 years

• Once again, you need to develop/use metrics thatmake sense for your business. EBITDA and Revenuemultiples are just two of dozens of potential metricsthat could be used.


6. Review & Approve Acquisition Strategy

Socialize acquisition strategy and receive feedback/concurrence from

key stakeholders

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Review & Approval

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• Prepare summary briefing of strategy(See table of contents on right)

• Schedule and deliver briefings to:• Executive team• Board of Directors• Key investors/debt holders

• Consolidate feedback and produce finalstrategy package

• Review/revise strategy each quarter. Doa major update in conjunction with annualstrategic planning

Acquisition Strategy Presentation• Executive Summary• Acquisition Strategy Drivers

• Target Markets & Market Share• Products/Technologies• Geography• People / Skills• Financial Targets• Competitive Pre-Emption• Risk

• Funding Constraints / Metrics• Acquisition Candidate List• Preliminary Valuation / Return Models• Strategic Matrix


What’s Next

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This is the first in a series of presentations on Merger & Acquisition basics.The remaining posts in this series will cover:

1. How to Build an Exit Strategy2. How to Build an Acquisition Pipeline3. How to Divest a Business4. How to Analyze an Acquisition Candidate5. How to Pitch an Acquisition to a Board of Directors, Private Equity Firm, or a VC6. How to Work with Private Equity, Venture Capital, & Investment Bankers7. The Art of the Initial Management Meeting8. Operational Due Diligence or What the Lawyers & Accountants Can’t Tell You9. Acquisition Integration Planning the Sterling Software Way10. Acquisition Cultural Integration. Horror Stories & Best Practices



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DevelopmentCorporate is a strategic corporate development advisory firm for enterprise and mid-market technology companies. We assist management teams, board of directors, and investors in updating their merger, acquisition, and divestiture strategies and then we provide tactical support for the implementation of those strategies. We also provide support for strategic initiatives such market assessments, competitive intelligence updates, product/service portfolio analysis, etc. Finally, we have significant experience in guiding large scale organizations through corporate restructurings to either take advantage of new market opportunities or respond to changes in market conditions.

www.developmentcorporate.com

http://www.developmentcorporate.com/

How To Build A M&A Strategy

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