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How to Build a M&A Strategy

DevelopmentCorporate

DevelopmentCorporate

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
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What is an M&A Strategy?


Roadmap for your firms
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 companys strategic
business plan into a set of drivers and
requirements that your M&A strategy
will address
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Business Plan Drivers


Extract key information from your firms strategic business plan
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?

Acquisition strategies are derived


from strategic business plans. You
need to have your basic strategic
plan in place first before you can
develop an effective M&A strategy
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What markets do you want to be in?


Plan
Demand Planning
Apparel Assortment Planning
Planogram Planning
Floor Planning
Space Planning
Spend Management
Procurement
Reverse Auctions
Order Management
Supply Chain Network design
Supply Chain Optimization

Make
Manufacturing Planning
Manufacturing Scheduling
Inventory Management
Inbound Logistics
Production Control
Quality Control
Outbound Logistics
Cost Accounting
Supplier Payments
Supplier Performance Mgmt
Warehouse Management
Product Lifecycle Management
Product Data Management

Supply Chain Related Markets


Distribute
Sell
Inbound Logistics
Sales Forecasting
Inventory Management
Shelf Assortment
Carrier Capacity Management
Price Management
Fleet Management
Trade & Promotion Mgmt
Outbound Logistics
Point of Sale
Store Replenishment
Markdown Management
Vendor Managed Inventory
E-Commerce
Warehouse Replenishment
Consumer Credit & Payments
Transportation Procurement
Advertising Management
Freight Audit & Payment
Labor Management
Global Trade Management
Loss Prevention
Supplier Payments

Service
Returns / Exchanges
Warranty Service
Field Service
Loyalty Programs

Horizontal / Enabling Technologies


EDI Translators

Bar Coding

RFID

SOA

EDI VAN

Order Life Cycle Management

CPFR

BPM

CRM
Application Development /
Deployment

EDI - Enterprise-scale
Outsourcing
Data Synchronization - Private
Catalogue
Data Synchronization - GDSN
Data Pool

ERP

Warehouse Management

Supplier Collaboration Portals

EAI

Electronic Payments

Web Forms

B2B Integration

Content Management
Systems Infrastructure &
Management

POS - Analytics

Supply Chain Analytics

Adapters

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

1. Understand the structure, size, growth, and trends of existing markets


2. Identify markets/market segments your firm wishes to enter via M&A
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What share do you want of each market?


Once youve identified the markets you want to participate
in, you need to determine what your target market share is
You need to be honest. All tech companies claim to be the
leading provider of XYZ solution
The reality is that product/service revenues determine market
share
Your relative position in the market determines what strategies
& tactics will yield best results
Review Geoffrey Moores Gorillas, Chimps, & Monkeys concepts
in his book The Gorilla Game

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What products/technologies does your roadmap require?

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 your
teams vision of the market requirements
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What geographies do you want to operate in?


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 or
build presence via agents, resellers, partners, etc.

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What types of people, skills, & experiences do


you need?
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
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What financial targets do you wish to achieve?


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 and
services will contribute to 20% of the growth target
and the rest will come via mergers & acquisitions

Financial targets tend to


be the primary drivers of
M&A strategies.

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Do you need to pre-empt your competitors?


Is there a need to deny a competitor the
opportunity to acquire a specific company?
What is the relative value of a competitor not
owning a specific company

If competitor A buys
acquisition candidate D
before we do, were
screwed

Rarely does one single acquisition change the


dynamics of an overall market
There are generally other companies that could
fill the strategic requirements

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How much risk are you willing to take?


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?

Risk/reward is best examined in


context of a specific acquisition
Are you willing to enter totally new markets that
candidate, unless your execs,
your business has no position in today?
board, & investors have specific
Are you willing to invest in international geographies hard/fast risk management policies
outside of your current geographic footprint?
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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?


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 its
value
How much new equity can you raise?
How much new debt can you raise? (hint 2x restructured
EBITDA is about all thats available these days)

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Understand the Hurdles


CFOs, Board of Directors, Investors, Debt Holders all
have criteria by which they evaluate potential acquisitions

You need to understand these criteria since they will


definitely impact the types of acquisition candidates you
can pursue
Some example criteria include:
Valuation multiples (We never pay more than 2x
trailing twelve months revenues or 4x restructured
EBITDA)
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

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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


Identify acquisition candidates by:
Market research (Gartner, AMR, IDC)
Public stock research / analysts
Competitor sections of public company 10-Ks
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

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Researching Private Companies


Researching public companies is easy 10-Ks,
Proxy Statements, Investor presentations contain
the bulk of the info you need
Some ideas for researching private companies:
Private
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 companys enterprise value.
Check out
How to Calculate the Enterprise Value of Private Companies
How to Calculate the Enterprise Value of Your Private Company

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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


Preliminary valuation models provide you with
key metrics to help understand the costs and
return potential of a specific acquisition
At this point in the process, these models are high
level and preliminary in nature. They are intended to
provide you with an indication of potential costs and
value. Definitive analysis of acquisition opportunities
occur after the initial strategy has been developed and
approved.
Most organizations have a preferred format for presenting
preliminary valuation. Get a copy of a model from past deals
and 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
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Sample Quick Valuation Analysis


Sample analysis of ERP
Company QAD
Used to illustrate the
costs and multiples
associated with a deal
Can be developed very
quickly with limited info
This organization places
value on revenue &
EBITDA multiples. Your
organization may have
different metrics (EPS
Growth, Cash Flow, etc.)

QAD as of 9/10/09
Enterprise Value
Equity Value
Cash
Debt
Enterprise Value

113.3
(40.6)
16.9
89.6

Premium

Price
Shares Out
Market Cap
less cash
plus debt
Total Enterprise Value
plus: Fees & Expenses*
Gross Purchase Price
Standalone Multiples
TEV / LTM EBITDA
TEV / LTM Revenue

EBITDA/Rev
4.9
233.4

Gross PP / LTM EBITDA


Gross PP / LTM Revenue
PF Contribution Multiples
TEV / PF 20% EBITDA Margin @ LTM Rev
TEV / PF 25% EBITDA Margin
TEV / PF 30% EBITDA Margin

4.9
233.4
EBITDA/Rev
46.7
58.4
81.7

Fees & Expenses


Legal & Accounting
Debt Costs
Restructuring
Total
Gross Purchase Price Funding Requirements
20% Restructured EBITDA Case: Debt @ 2.00x
Required Equity:

0%

20%

33%

3.68
30.8
113.3
(36.6)
16.9
93.6
14.9
108.5

4.42
30.8
136.0
(36.6)
16.9
116.3
14.9
131.2

4.89
30.8
150.7
(36.6)
16.9
131.0
14.9
145.9

19.1x
0.4x

23.7x
0.5x

26.7x
0.6x

22.1x
0.5x

26.8x
0.6x

29.8x
0.6x

2.0x
1.6x
1.1x

2.5x
2.0x
1.4x

2.8x
2.2x
1.6x

1.0
1.9
12.0
14.9
93.4
15.2

93.4
37.8

93.4
52.6

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Sample Returns Analysis

Model estimates incremental exit valuation of


combining MyCo & QAD
Valuation is based on EBITDA multiple your firm
may choose different metrics
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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
Exit Impact
$500M+

The sample matrix on the right looks at two


dimensions
Acquirability the relative price required
to win acquisition as measured by
restructured EBITDA multiples
Exit Impact the dollar impact to the
companys valuation in 3 years
Once again, you need to develop/use metrics that
make sense for your business. EBITDA and Revenue
multiples are just two of dozens of potential metrics
that could be used.

Company A
Company D
Company G
Company C

Acquirability

Rating/Ranking of acquisition candidates


lets you understand the relative impacts
of specific acqusitions

$250M+
<10X
RR EBITDA

4-6X
RR EBITDA

1-2X
RR EBITDA

Company E
Company B

Company F
$0M

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6. Review & Approve Acquisition


Strategy
Socialize acquisition strategy and
receive feedback/concurrence from
key stakeholders
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Review & Approval


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 final
strategy package
Review/revise strategy each quarter. Do
a major update in conjunction with annual
strategic 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

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Whats Next
This is the first in a series of presentations on Merger & Acquisition basics.
The remaining posts in this series will cover:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

How to Build an Exit Strategy


How to Build an Acquisition Pipeline
How to Divest a Business
How to Analyze an Acquisition Candidate
How to Pitch an Acquisition to a Board of Directors, Private Equity Firm, or a VC
How to Work with Private Equity, Venture Capital, & Investment Bankers
The Art of the Initial Management Meeting
Operational Due Diligence or What the Lawyers & Accountants Cant Tell You
Acquisition Integration Planning the Sterling Software Way
Acquisition Cultural Integration. Horror Stories & Best Practices

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DevelopmentCorporate
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

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