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Published by: Chandni Shrivastava on Feb 25, 2011
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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 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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board. & investors) agree with strategy and priorities? DevelopmentCorporate 4 .M&A Strategy Process • Determine Business Plan Drivers – How can your strategic business plan be accelerated or more successful via M&A? • Build Preliminary Valuation Models – What are the initial estimates of acquisition cost? What returns could be produced? • Determine Acquisition Financing Constraints – How can you fund acquisitions? What returns must be achieved? Who approves funding? • Rate/Rank Acquisition Candidates – How do various acquisition candidates rank in terms of impact to business and feasibility of closing acquisition? • Develop Acquisition Candidate List – What specific private and public companies are you interested in acquiring? • Review & Approve Acquisition Strategy – Do all of the critical stakeholders (executive team.

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 DevelopmentCorporate 5 .

What markets do you want to be in? 2. How much risk are you willing to take? Acquisition strategies are derived from strategic business plans. What financial targets do you wish to achieve? 7. skills.Business Plan Drivers Extract key information from your firm’s strategic business plan 1. What geographies do you want to operate in? 5. You need to have your basic strategic plan in place first before you can develop an effective M&A strategy DevelopmentCorporate 6 . What share do you want of each market? 3. What products/technologies does your roadmap require? 4. What types of people. Do you need to pre-empt your competitors? 8. & experiences do you need? 6.

and trends of existing markets 2.Private Catalogue Data Synchronization . size. growth.Enterprise-scale Outsourcing Data Synchronization . Understand the structure.Transaction Systems Scan-based Trading = solid growth = flat to low growth = flat to declining growth RFID CPFR Supplier Collaboration Portals Web Forms Supply Chain Analytics Supply Chain Visibility Trading Partner Mgmt SOA BPM EAI B2B Integration Adapters Business Intelligence Security ERP CRM Application Development / Deployment Content Management Systems Infrastructure & Management 1.GDSN Data Pool AS2 Communications Mass File Transfer Bar Coding Order Life Cycle Management Warehouse Management Electronic Payments POS . Identify markets/market segments your firm wishes to enter via M&A DevelopmentCorporate 7 .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 EDI VAN EDI .Analytics POS .

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 Moore’s Gorillas.What share do you want of each market? • Once you’ve identified the markets you want to participate in. Chimps. you need to determine what your target market share is • You need to be honest. & Monkeys concepts in his book “The Gorilla Game” DevelopmentCorporate 8 .

and risks associated with build options • Recognize that ‘buy option’ may not yield a solution that is 100% match with your team’s vision of the market requirements DevelopmentCorporate 9 . costs. resources.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.

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. partners. resellers. etc. Asia second) • Determine preference for either direct operations or build presence via agents. DevelopmentCorporate 10 .

non-relational databases. etc. • Indirect channel marketing and sales skills • Social media platforms and execution DevelopmentCorporate 11 . Chinese) for local customer service support. etc. localized UIs.What types of people. skills. product/service/technology. Japanese. Hadoop. Arabic. & experiences do you need? • Based on your market. 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. • Language skills (German. French. MapReduce.

SaaS. & 5 year targets for: • Revenue • Revenue Mix (License.What financial targets do you wish to achieve? • 1. 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. By the end of 2012 we will have annual revenues in excess of $225 million. Maint. 3. 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. DevelopmentCorporate 12 .

we’re screwed DevelopmentCorporate 13 .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 • Rarely does one single acquisition change the dynamics of an overall market • There are generally other companies that could fill the strategic requirements If competitor A buys acquisition candidate D before we do.

How much risk are you willing to take? • What is your risk profile -. 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? DevelopmentCorporate 14 . 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.conservative. unless your execs. moderate.

Determine Acquisition Financing Constraints Determine the constraints associated with financial resources to support acquisitions DevelopmentCorporate 15 .2.

debt. earn outs. minority investments. etc. PIPEs. • 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’s value • 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) DevelopmentCorporate 16 . public and private equity.How Big is Your War Chest? • Acquisitions can be funded multiple ways: cash.

Understand the Hurdles • CFOs. or covenant-heavy deals) It is not unusual for various stakeholders to disagree on M&A approval criteria. Investors. Board of Directors. It is better to learn about the requirements before you pitch your first deal DevelopmentCorporate 17 . convertible debt deals. 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.

Develop Acquisition Candidate List Identify the specific public and private companies that you are interested in acquiring DevelopmentCorporate 18 .3.

board members.Build Your Initial List • 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. investors • Develop summary profile for each company • Target markets • Key products/services • Revenues • Profitability • Enterprise Value • Geographic footprint DevelopmentCorporate 19 .

AMR. 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. Proxy Statements. Investor presentations contain the bulk of the info you need • Some ideas for researching private companies: Private • Industry analyst reports (Gartner.Researching Private Companies • Researching public companies is easy – 10-Ks. IDC. Check out • How to Calculate the Enterprise Value of Private Companies • How to Calculate the Enterprise Value of Your Private Company DevelopmentCorporate 20 .

Build Preliminary Valuation Models What are the initial estimates of acquisition cost? What returns could be produced? DevelopmentCorporate 21 .4.

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. Definitive analysis of acquisition opportunities occur after the initial strategy has been developed and approved. Get a copy of a model from past deals and use it as your template. board. • A sample valuation and return models are presented on the next pages DevelopmentCorporate 22 . They are intended to provide you with an indication of potential costs and value. Each executive team. • Most organizations have a preferred format for presenting preliminary valuation. or debt holders have key metrics that matter to them. investors. these models are high level and preliminary in nature.

7x 0. etc.4x 26.7 58.6x 2.5 4.00x Required Equity: EBITDA/Rev 4.7 1.9 12. Your organization may have different metrics (EPS Growth.5x 2.8x 0.89 30.8 113.9 233.6x 93.2x 1.6) 16.2 93.68 30.8 93.5x 26.9 131.3 (36.8x 0.9 131.4x 22.7 (36.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.9 3.9 93.6) 16.7x 0.1x 0.6x 29.2 4.8 150.42 30.6 0% 20% 33% 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 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 Fees & Expenses Legal & Accounting Debt Costs Restructuring Total Gross Purchase Price Funding Requirements 20% Restructured EBITDA Case: Debt @ 2.9 89.6x 2.0x 1.6 14.6) 16.0 14.4 52.6) 16.6 DevelopmentCorporate 23 .8x 2.3 14.9 145.4 15.9 116.4 4.9 19.3 (40.0x 1.0 1.1x 0.4 37.9 108.) QAD as of 9/10/09 Enterprise Value Equity Value Cash Debt Enterprise Value Premium 113.1x 23.6x 1.9 233.0 (36.4 EBITDA/Rev 46.5x 2.4 81.0 14.8 136. Cash Flow.

Sample Returns Analysis • Model estimates incremental exit valuation of combining ‘MyCo’ & QAD • Valuation is based on EBITDA multiple – your firm may choose different metrics DevelopmentCorporate 24 .

Rate/Rank Acquisitions How do various acquisition candidates rank in terms of impact to business and feasibility of closing acquisition? DevelopmentCorporate 25 .5.

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 $250M+ <10X RR EBITDA 4-6X RR EBITDA 1-2X RR EBITDA Company E Company B Company F $0M DevelopmentCorporate 26 .Strategic Matrix Exit Impact $500M+ • Rating/Ranking of acquisition candidates lets you understand the relative impacts of specific acqusitions • 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 company’s valuation in 3 years • Once again.

Review & Approve Acquisition Strategy Socialize acquisition strategy and receive feedback/concurrence from key stakeholders DevelopmentCorporate 27 .6.

Do a major update in conjunction with annual strategic planning DevelopmentCorporate 28 .Review & Approval • Prepare summary briefing of strategy (See table of contents on right) 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 • 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.

Venture Capital. 2.What’s Next This is the first in a series of presentations on Merger & Acquisition basics. & Investment Bankers The Art of the Initial Management Meeting Operational Due Diligence or What the Lawyers & Accountants Can’t Tell You Acquisition Integration Planning the Sterling Software Way Acquisition Cultural Integration. The remaining posts in this series will cover: 1. 4. 8. 9. 10. Horror Stories & Best Practices DevelopmentCorporate 29 . 7. or a VC How to Work with Private Equity. 5. 3. 6. 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.

DevelopmentCorporate DevelopmentCorporate is a strategic corporate development advisory firm for enterprise and mid-market technology companies. Finally.developmentcorporate. acquisition. competitive intelligence updates.com DevelopmentCorporate 30 . etc. product/service portfolio analysis. www. We also provide support for strategic initiatives such market assessments. We assist management teams. and divestiture strategies and then we provide tactical support for the implementation of those strategies. board of directors. and investors in updating their merger. 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.

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