I.

INTRODUCTION

1.1 Problem Statement and Background

PT Adhi Persada Gedung (PT APG) is a subsdiary of BUMN PT Adhi Karya, Tbk, which
specializes in highrise building construction services. After 6 years since it was founded at the
end of 2013 PT APG wants to carry out a vertical integration strategy by acquiring PT XYZ,
which is engaged in Fabrication and Steel Construction. This is based on the company's desire
to move to grow and ensure that PT XYZ can guarantee the supply of the fabrication / steel
construction needed by PT APG. Following up on this vertical integration strategy by acquiring
(buying) and not building itself (make) based on the relationship with the steel construction
experience itself. Acquisitions take precedence over building (make) because APG companies
consider more specialist skills where they cannot be quickly fulfilled by PT APG itself if it builds
its own subsidiary or business unit. In addition, PT XYZ which will be acquired has several
advantages compared to several other steel construction companies such as the large and large
workshop assets and is located in a strategic area where the land assets will provide a reflection
of high values in the future (as an alternative if diverted being a property building) as well as
good work experience and experience can even be categorized as the top 10 national steel
specialist contractor.
Business risk is one type of risk that cannot be transferred to other parties. If the company
goes into a particular business, then the company will immediately bear the business risks. In
managing a company, in addition to business risks there are also strategic risks. Strategic risk
is relatively similar to business risk, but there are differences in the duration and importance
of the decision. This strategic risk is not uncommon in practice because this risk measurement
does not yet have a standard measurement methodology. If not managed properly, then this risk
can bring bankruptcy (Rustam, 2017).
The main problem with the condition of steel construction is that the price of steel works
is very difficult to determine its price stability. In this case PT APG applies the upstream
vertical integration strategy with the hope that steel work suppliers can meet the needs of PT
APG, especially in the stability of competitive prices. The discussion of this research is about
how feasible the vertical integration strategy through acquisitions where of course in this case
there will be a large investment to be made by PT APG. The problem formulation in this thesis
is that PT APG wants to ensure the feasibility of a vertical integration strategy by acquiring PT
XYZ. Therefore this research was compiled while giving a second opinion from the academic
side of PT APG's decision to be more convincing in making this strategic decision.

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1.2 Research Purposes
1. To examine whether vertical integration by the company is the right decision.
2. To identify the factors that influence the risk of failure and the success of the vertical
integration decision by acquiring the company PT XYZ.
3. To evaluate the risk of failure that arises in the vertical integration.

II. LITERATURE REVIEW

2.1 Vertical Integration Decision (John Stuckey & David White)
2.1.1 Process and Implementation of the Vertical Restructuring Framework

Figure 2.1 Vertical Restructuring Framework

Resource: Stuckey dan White, 1993

Figure 2.2 Applying the framework

Resource: Stuckey dan White, 1993

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 According to Stuckey and White (1993: 11) that if it is not urgent then do not take
the decision to do vertical integration unless absolutely necessary. Due to this strategy is
too expensive, risky, and difficult to reverse even though sometimes vertically integrate
is needed, but more often than not because companies make mistakes by over-integration.
So the principle of prudence in making this decision needs to be considered.
2.1.2 Value Chain Analysis
In the Value Chain Analysis the company identifies the main activities and
supporting activities that create value for customers (Thompson et al., 2014).

Figure 2.3 Representasi dari Value Chain Perusahaan

Resource: Crafting & Executing Strategy: The Quest for Competitive Advantage, Concepts & Cases
(Thompson et al., 2014)
2.2 Five Forces Porter
Analysis of industrial growth in this study uses the Five Forces model from Porter
(Thompson et al., 2014). In this analysis can be used to determine the factors that can affect
competition in the company's industry. There are 5 (five) main strengths that can be analyzed
in Porter's Five Forces Analysis.
2.3 SWOT Analysis
SWOT analysis is a strategic planning method used to evaluate strengths, weaknesses,
opportunities, and threats in a business. This process involves determining the goals of the
business and identifying internal and external factors that support and are not in achieving
these goals. (Robert W.uncan, 2007: 142).

III. RESEARCH METHOD

3.1. Data Collection Method
1. Primary Data : Dept interview with BoD PT APG and PT XYZ.

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 2. Secondary Data : Several report from outside the company.
3.2. Data Analysis Method
This data analysis was carried out using a descriptive method to obtain a complete
picture of matters relating to the factors that influence the integration strategy chosen by the
company. Based on the concept of strategy formulation and analysis method used, the research
framework can be illustrated in Figure 3.1 below.

Figure 3.1 Thesis Research Framework

IV. RESEARCH RESULT AND DISCUSSION

4.1 Vertikal Restructuring Framework (Stuckey & White)
This vertical restructuring framework is used to analyze the conditions of companies and
related industries to get the output of a vertical integration strategy decision (full or partial) or
not do integration or quasi-integration (long-term contracts).

Figure 4.1 Vertical Restructuring Framework Result

Resource: Dept Interview with BoD of PT APG, 2019

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 Then the results of the analysis states that PT APG should be partially integrated (tapered
integration) or not to buy PT XYZ shares as a whole and in the short term. The author also
underlines the statement from Respondent 1 which states that although there will be a large
Cash Out, it is expected that there will also be additional Cash In from the proceeds from the
sale of PT XYZ goods that support the captive market of PT APG and the ADHI Groups.
4.2 Process for Implementing the Framework (Stuckey & White)
The process of applying this framework is used to analyze the conditions of companies
and related industries to get the best strategic decision output whether vertical integration (full
or partial) or not doing integration or quasi-integration.

Figure 4.2 Summary of Framework Steps

Resource: Dept Interview with BoD PT APG, 2019

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 Figure 4.2 Figure Continued

In this step, the results of research on the analysis of the framework are:
1. The first step, management has understood the industrial chain or business system of
PT XYZ as a company to be acquired as explained by Respondent 1 (APG).
2. The second step, the author can conclude that the APG Management has identified
the company to be acquired at each stage and classifies transactions across all stages.
3. The third step, APG Management has ensured the existing weaknesses of the vertical
market value which is used as one of the motives for optimizing HPP by means of
vertical integration by acquiring PT XYZ, even though there is a risk that the steel
raw material prices are quite fulktuatif.
4. The fourth step, the author can conclude that APG Management is able to predict
changes in the structure of the industry and predict changes in the problem of market
forces due to changes in the structure of the industry well.
5. The fifth step, APG management decides the optimal vertical strategy using normal
criteria (example: NPV, risk, execution). In addition, it can provide security of supply
to PT APG even though it will later cause a large cash out due to the acquisition but
it is considered by additional cash in from the receipt of PT XYZ's operating results
supported by PT APG's captive market and other ADHI groups.
4.3 Value Chain Analysis of PT XYZ
This Value Chain Analysis (figure 4.3) aims to see and identify the competitive advantage
of PT XYZ.

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 Figure 4.3 Value Chain Analysis PT XYZ
Resource: Dept Interview with Respondent 2 and Acqusition Pre-Assessement Report , 2019

4.4 Five Forces Porter Analysis of PT XYZ

In this section, Porter 5 Forces analysis (Figure 4.4) is carried out to obtain PT XYZ's
competitive position in the steel industry, which is as follows:

Figure 4.4 Five Forces Analysis of PT XYZ

Resources: Dept Interview with Director of PT XYZ and Acqusition Pre-Assessement Report by APG

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4.5 Analisis SWOT Integrasi Vertikal (akuisisi PT XYZ)
The SWOT matrix is a tool that greatly helps management to determine alternative
strategies that can be taken by the company, which is broadly divided into 4 types of strategies,
namely: SO Strategy, SW Strategy, WO Strategy and WT Strategy. Following is an overview of
the SWOT Matrix:

Table 4.1 SWOT matrix analysis (PT XYZ acquisition)

Strength(S):
1. Integrity and honesty of the
SWOT ANAYSIS company both in terms of
management and project team
personnel in terms of
MATRIX completing work on time and
with satisfactory quality.
2. Value Engineering, loyality
and aftersales.
Weaknesses(W):
1. Cashflow strength is still
lacking, namely when PT
XYZ is required to have to
provide the best service
sometimes it is used as a
"weapon" by the clients to
be tolerant in terms of
payment accuracy. This
creates distortion in
cashflow

Opportunity(O): Strategy of S-O Strategy of W-O

1. Repeat orders are very wide 1. Maintain integrity and 1. Increase the trust of capital
open because our services to honesty as well as good owners and recruit
clients are quite satisfying both quality work. additional capital owners.
in terms of quality and 2. Perform market penetration, 2. Make work contracts and
completion of work. market development and payment agreements
product development. protected by applicable
2. Projection of the steel industry 3. Develop marketing strategies law.
that will continue to grow through promotion. 3. Sort customers by
considering there are no 4. Improve the quality of predicting the certainty of
threatening substitute machines and production project work.
products. sites

Threaths (T): Strategy of S-T Strategy of W-T

1. Upstream is a fluctuating price 1. Introducing the product 1. Adding investors to be able
of raw materials which is superiority compared to other to compete with companies
sometimes difficult to guess and products intensively. that hold a large portion of
avoid. the market.
2. From the downstream sector is 2. Working together or
the bankruptcy of the client acquiring companies that 2. Make work contracts and
which makes the project stalled have been old customers. payment agreements
which is already half protected by applicable law.
production in serving clients.
3. The competition has
competitive price (thight) in the
steel industry.

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4.6 Mitigation and Evaluation the Risks of Vertical Integration Strategy
Based on the analysis that has been done, the risks that may occur in this vertical
integration decision are as follows:
1. Through Stuckey & White's Vertical Restructuring Framework, it is known that the
adequacy of pseudo-integration arrangements or long-term contracts is considered
insufficient because it cannot bind the price of jobs that tend to fluctuate, and if these
prices can be bound then a substantial advance is required where This will relatively
disrupt the company's cash flow. Then the best decision is to do a partial integration
(tapered integration) where this still contains its own risks that are related to the cash
flow itself where it is not certain that by acquiring PT XYZ, cash in expectations from
XYZ can be as expected by PT APG.
2. Through the application of the Stuckey & White Framework among other things:
a. PT XYZ has a value chain link with PT APG and other ADHI groups because it is
one of the company's HPP elements in terms of steel so that it can support the
production process. In addition, from the data obtained domestically, the
projections of steel construction demand will increase. Infrastructure
development will be more numerous and will certainly be followed by development
around the infrastructure.
b. PT APG's steel construction work carried out by PT XYZ subcontractors is only a
small amount, although later if it is acquired it will provide a large portion for PT
APG and PT XYZ will get additional captive markets from other ADHI groups.
c. PT XYZ can provide security of supply, the potential for cost efficiency to support
PT APG's expansion plans and PT APG can also support PT XYZ in expanding
its market with PT APG and other ADHI groups as Captive Consumer. However,
in this case, in-depth analysis is still needed through the due diligence process.
d. Weaknesses related to steel construction is that enough price fluctuations make
PT APG partners include the risk factor value of steel price increases with a large
enough value. Then the cash flow is not good meaning it is due to late payment
(Cash In) from the Client PT. XYZ The author concludes that the Cash In expected
by APG from its Exisiting market PT XYZ which is expected by PT. APG is at risk
not in accordance with the initial expectations.
Therefore through this research evaluation can be carried out as follows:
1. The advantages of this acquisition are as follows:

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 a. PT APG is considering deciding to acquire PT XYZ to support PT APG's
production where there are elements of steel construction work.
b. PT APG's net profit tends to increase every year with the projected projections of
demand for steel construction which is increasing in the absence of the threat of
steel substitute goods.
2. The disadvantages of this acquisition are as follows:
a. PT APG's steel construction work is carried out by PT XYZ's subcontractors only
a few transactions. In this case it will not have a significant impact on the
performance of PT APG in the near future although this is not a big loss for PT
APG.
b. Fluctuations in raw material prices that are difficult to predict and avoid, this will
disrupt the company's cash flow. This needs to be studied in more depth because
this is a significant risk for PT APG.
c. PT XYZ's cash flow distortion occurs due to customer payment methods and the
lack of strictness of PT XYZ's payment regulations. The author concludes that
there were disagreements from Respondents 1 and 2 where Respondent 1 expected
a lot of Cash In from PT XYZ while information from Respondent 2 (PT XYZ)
placed Cashflow as the main problem.
d. Although Cash Out to acquire PT XYZ is considered to be paid by Cash In from
sales revenue, PT APG still has to consider the very competitive market
competition in obtaining customers given the number of other large steel
companies.

V. CONCLUSION, IMPLICATION AND SUGGESTION

5.1. Conclusion
1. The strategy of vertical integration by acquiring PT XYZ is the right strategy
considering pseudo-integration arrangements or long-term contracts that are deemed
insufficient because they cannot bind the price of jobs that tend to be volatile. The
industry suitability between PT APG and PT XYZ, security of supply and the presence
of a captive market from other ADHI groups are strong reasons to state that this
strategy is the right strategy.
2. Factors that influence the risk of failure over the decision of vertical integration by
acquiring PT XYZ are as follows:

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 a. PT APG's steel construction work is carried out by PT XYZ's subcontractors only
a little.
b. Fluctuations in raw material prices that are difficult to predict and avoid, this will
disrupt the company's cash flow.
c. PT XYZ's cash flow distortion occurs due to customer payment methods and the
lack of strictness of PT XYZ's payment regulations.
d. Although Cash Out to acquire PT XYZ is considered to be paid by Cash In from
the sales revenue of goods, PT APG still has to consider highly competitive market
competition in obtaining customers given the large number of other large steel
companies both domestic and international.
While the factors that supported the success of the vertical integration decision by
acquiring PT XYZ were as follows:
a. Acquiring PT XYZ is expected to be able to support PT APG's production process
where there is an element of the company's HPP in terms of steel.
b. PT APG's net profit tends to increase every year with the projected projections of
demand for steel construction which is increasing in the absence of the threat of
steel substitute goods. This is considered to be beneficial for PT APG, namely as
input or cash in PT APG.
3. Evaluation of the risk mitigation results that have been carried out namely acquiring
PT XYZ is non-urgent considering that PT APG's steel construction work is carried
out by PT XYZ's subcontractors only a few. In addition, the projections or expectations
of cash in for PT XYZ for PT APG are still unclear, even the expected cash in is still
at risk not being achieved even though operating income is sure to increase.
5.2. Implication
1. When PT APG makes a vertical integration decision through the acquisition of PT
XYZ, the following impacts will be:
a. In production activities: Almost all production activities related to steel
construction will be carried out by PT XYZ, this will result in reduced production
costs due to the loss of transaction costs that previously occurred. Then from the
production capacity of PT XYZ which is able to carry out production activities with
a capacity of 100 thousand tons per month (to serve clients outside of PT APG) plus
the service to PT APG here will provide substantial business revenue potential for
PT APG.

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 b. In Financial activities: The potential for increased cash in from the side of PT APG
will be open, of course, PT APG must support and improve the billing system and
contractual arrangements conducted by PT XYZ because it is still a weakness of PT
XYZ.
2. When PT APG takes the decision not to do vertical integration through the acquisition
of PT XYZ, it will have an impact: PT APG will face challenges going forward in the
same way as before. There is no security of supply for steel construction work, but the
company's performance has no significant impact.
5.3. Suggestion
Suggest for PT APG, this study recommends not to acquire PT XYZ for the purpose of
establishing vertical integration in the near future, as seen from the risk factor of PT
XYZ cash flow, which is the operational obstacle of PT XYZ. Confirming that the
estimated cash in (expectations) will be obtained is still not clear considering the
condition of PT XYZ's cash flow is also still distorted due to customer / client payments
even though operating income is definitely increasing. Due diligence needs to be done
first so that it can be studied more closely related to the risk of Cashflow for PT XYZ.
The vertical integration plan undertaken by PT APG by acquiring PT XYZ, according
to the author, isn’t an urgent strategy that must be carried out by PT APG considering
the number of transactions on PT XYZ against PT APG is also still very minimal. By
not making acquisitions in the near future it will not significantly "disrupt" PT APG's
performance.

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 REFERENCES

Harrigan, K. R. (1986). Matching Vertival Integration Strategies to Competitive

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Klein, Benjamin., Murphy, K. M. (1997). Vertical Integration As A Self-Enforcing
Contructual Arrangement. The American Economic Review, pp. 415-420.
Kasali. 2018. JawaPos
Laporan Pre-Assessment Rencana Akuisisi oleh PT APG, 2019
RKAP PT Adhi Persada Gedung , Oktober 2018
Robert W. Bradford, Peter Duncan, and Brian Tarcy. (2007). Simplified Strategic
Palanning: A Nonsense Guide For Busy People Who Want Result Fast. New
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Rustam, B.R., 2017, Manajemen Risiko: Prinsip, Penerapan dan Penelitian, Jakarta:
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Chains. Management Decision, pp. 1131-1144.
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Strategy: The Quest For Competitive Advantage. 20th edition. McGraw-Hill

Education. New York.

Following up on this vertical integration strategy by acquiring (buying) and not building itself
(make) based on the relationship with the steel construction experience itself. Acquisitions take

13
precedence over building (make) because APG companies consider more specialist skills where
they cannot be quickly fulfilled by PT APG itself if it builds its own subsidiary or business unit.
In addition, PT XYZ which will be acquired has several advantages compared to several other
steel construction companies such as the large and large workshop assets and is located in a
strategic area where the land assets will provide a reflection of high values in the future (as an
alternative if diverted being a property building) as well as good work experience and
experience can even be categorized as the top 10 national steel specialist contractors

14