Business &

Acquisition Plans
 The Acquisition Process

• We can think of M&As as a process culminating in

the transfer of control of the target to the acquirer.
• For the purpose of exposition, this process can be
split into two broad groups, consisting of 10 phases
altogether.
 The Acquisition Process

• Pre-purchase activities.
• Phase 1: Business Plan
• Phase 2: Acquisition Plan
• Phase 3: Search
• Phase 4: Screen
• Phase 5: Valuation and First Contact
• Phase 6: Negotiation
 The Acquisition Process

• Post-purchase Activities
• Phase 7: Integration Plan
• Phase 8: Closing
• Phase 9: Integration
• Phase 10: Evaluation
 The Business Plan
• The acquisition process begins with the development of a sound
business plan.
• This involves the following activities:
• External or environmental analysis
• Internal analysis
• Mission statement
• Setting objectives
• Business strategy selection
• Implementation strategy selection
• Establishing strategic controls
 External Analysis

• The goal is to identify opportunities and threats.

• Identifying opportunities
• Define the firm’s business and identify the market, i.e., current
and potential customers.
• Evaluate different markets and/or market segments for
attractiveness and potential opportunities.
• Criteria include size, growth rate, price sensitivity, profitability,
entry/exit barriers, regulation.
• A market attractiveness matrix can be a useful tool for
summarizing this analysis
 External Analysis

• Identifying competitive threats

• Intensity of competition among existing firms
• Potential for new entrants
• Potential for substitute products
• Bargaining power of customers
• Bargaining power of suppliers
• Government regulations
 Internal Analysis

• The goal is to determine the firm’s strengths

and weaknesses.
• Important questions to ask:
• How can our strengths be used to gain strategic
advantage in the chosen market?
• Can our strengths be easily duplicated by
competitors?
• Can our weaknesses be exploited by competitors?
 Internal Analysis

• Areas to analyze include:

• Brand (perception/reputation, customer loyalty)
• Employees (skills, cost structure, labor relations)
• Management (skills, experience, breadth,
succession plans)
• Production processes/technology
• Intellectual property.
 Mission Statement

• This summarizes results of the external and internal analyses:

• Where and how the firm has chosen to compete.
• Basic operating beliefs
• Management values
• Example: Ford
• “People working together as a lean, global enterprise to make
people’s lives better through automotive and mobility leadership.”
• Catchy statement: “Great Products | Strong Business | Better World.”
 Setting Objectives

• Objectives are what the firm seeks to accomplish within

a specific time.
• Must be measurable and have a time limit for achievement.
• Examples include:
• Revenue growth rates
• Financial return rates
• Market share
• New products and/or markets
• Workforce and/or asset growth rates.
 Business Strategy Selection

• A firm’s business strategy is its chosen approach

for achieving its objectives within the stipulated
time.
• Four basic strategies:
• Price or cost leadership
• Firm seeks to be the lowest cost producer in its market,
e.g., through efficient production facilities, tight control of
overhead expenses, and elimination of marginally
profitable customers.
 Business Strategy Selection

• Product differentiation
• Firms seeks to offer a unique product, distinguished by, for
example, quality, branding, technological features, and
alternative distribution channels.
• Focus or niche strategy
• Firm focuses on a single market, competing primarily on the
basis of an in-depth knowledge of the niche market.
• Hybrid strategies
• Involves some combination of the above basic strategies.
 Implementation Strategy
Selection
• The implementation strategy is the firm’s choice of
the best means to execute its chosen business strategy.
• Five basic choices:
• Solo venture
• Partnering (e.g., alliances, joint venture)
• Mergers and acquisitions
• Minority investments
• Swap assets
 Implementation Strategy
Selection
• Selection criteria include:
• Degree of control
• Varies from total for solo venture to minimal with a minority investment or
being a minority partner
• Degree of risk
• Varies from total for solo venture to minimal for a minority investment
partnerships in which risk is shared.
• Degree of speed
• May be fastest for an acquisition and slowest for a solo venture
• Cash requirements
• May be highest for an acquisition and lowest for a minority investment or
partnership
 Strategic Controls

• Strategic controls are designed to ensure strategies work

according to plan.
• Consist of incentive and monitoring systems.
• Incentive systems motivate employees to accomplish
objectives
• Examples: bonuses, profit sharing, stock options
• Monitoring systems track employee performance to ensure
compliance with objectives.
• Examples: performance reviews
 Acquisition Plans

• Develop an acquisition plan if an M&A is the

appropriate implementation strategy.
• The plan consists of the following elements:
• Plan objectives
• Resource availability
• Capabilities and expertise
• Management preferences
• Plan time-table
 Acquisition Plan Objectives

• Acquisition plan objectives provide targets that the

company intends to achieve through an acquisition.
• Rights to specific products, patents, copyrights, or brands
• Growth opportunities
• New distribution channels
• Additional production capacity
• R&D capabilities
• Access to proprietary technologies, processes, and skills
 Resources and Capabilities
• Define resource availability
• Determine the maximum amount of financial resources to devote to an
acquisition.
• Could be in terms of dollar amounts or relative to some variables such as
revenue and/or total assets.
• Evaluate capabilities, i.e., internal acquisition expertise
• Ability to find an appropriate target
• Valuation expertise
• Personnel to make first contact
• Negotiating skills of management team
• Legal expertise
 Management Preferences
• These form boundaries and/or limitations within which the
acquisition team operates
• Roles and responsibilities for the acquisition team
• Acceptable methods for finding acquisition candidates
• Acceptable sources of financing
• Preferences for an asset or stock purchase and form of payment
• Level of tolerance for goodwill
• Openness to partial rather than full ownership
• Willingness to launch a hostile takeover
• Desire for related or unrelated acquisitions
 Acquisition Plan Time-table

• This a schedule of the key events that must take

place in the acquisition process.
• Each event should have:
• Beginning and ending dates
• Estimated costs
• Milestones along the way
• Person responsible for ensuring that each milestone is
achieved
 Acquisition Plan Time-table
• Potential items on an acquisition plan time-table include:
• Identify potential targets and choose eventual candidate
• Develop preliminary valuation for chosen target
• Initiate first contact with target
• Conduct negotiation with target
• Due diligence
• Refine valuation
• Deal structuring
• Develop financing plan
• Develop integration plan
• Conduct closing and post-closing review
Implementing Mergers
& Acquisitions

Search, Screen, and Select Targets

 The Search Process

• The goal is to be as inclusive as possible.

• Therefore, search criteria tend to be fairly broad but should
be consistent with the firm’s business and acquisition plans
• Can be stated in terms of industry (or sub-industry),
location, and maximum/minimum value (sales, assets, or
employees).
• Computerized databases and directory services such as
Disclosure, Dun & Bradstreet, Compustat, and Bloomberg
can be helpful.
 The Search Process

• If confidentiality is not an issue, a firm may

advertise its interest in acquiring a particular type
of firm in the business press.
• The business press also often carry advertisements
from sellers seeking potential buyers.
• The search process can be contracted out to brokers
and/or finders.
 Brokers and Finders in Search

• A broker has a fiduciary responsibility to either the

seller (target) or buyer (bidder).
• A finder introduces both parties without representing
either party.
• Fee structures are normally negotiated and may
include a basic fee, a closing fee, and an
“extraordinary” fee (e.g., fees paid if closing is
delayed due to antitrust review, a hostile takeover,
etc.)
 Screening Potential Targets

• This is a refinement of the search process.

• It involves an increase in the number of
selection criteria to reduce the list of
potential candidates.
• The goal is to be exclusive.
 Screening Potential Targets

• Additional criteria could include:

• Specific market segments and/or product lines
• Operating profitability
• Market share
• Degree of leverage
• Specific intellectual properties
• Cultural compatibility
• At the end of the screening process, the firm should have identified
a handful of potential targets, ranked in order of preference.