Developing Business and
Acquisition Plans:
Phases 1 & 2 of the
Acquisition Process
If you don’t know where you are going,
any road will get you there.
—Alice in Wonderland
Course Layout: M&A & Other
Restructuring Activities
Part I: M&A
Environment
Part II: M&A
Process
Part III: M&A
Valuation &
Modeling
Part IV: Deal
Structuring &
Financing
Part V:
Alternative
Strategies
Motivations for
M&A
Business &
Acquisition
Plans
Public Company
Valuation
Payment &
Legal
Considerations
Business
Alliances
Regulatory
Considerations
Search through
Closing
Activities
Private
Company
Valuation
Accounting &
Tax
Considerations
Divestitures,
Spin-Offs &
Carve-Outs
Takeover Tactics
and Defenses
M&A Integration
Financial
Modeling
Techniques
Financing
Strategies
Bankruptcy &
Liquidation
Cross-Border
Transactions
Current Learning Objectives
• Primary learning objectives: To provide students with an
understanding of
– a highly practical “planning based” approach to
managing the acquisition process and
– the issues associated with each phase of the M&A
process
• Secondary learning objectives: To provide students with
an understanding of how to
– select the correct strategy from a range of reasonable
alternatives and
– develop an acquisition plan
The Acquisition Process
• Pre-Purchase Decision
Activities
• Post-Purchase Decision
Activities
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Phase 1: Business Plan
Phase 2: Acquisition Plan
Phase 3: Search
Phase 4: Screen
Phase 5: First Contact
Phase 6: Negotiation
Phase 7: Integration Plan
Phase 8: Closing
Phase 9: Integration
Phase 10: Evaluation
Phase 1: Business Plan
• Industry/market definition (Where have we chosen to
compete?)
– Example: Automotive industry (a collection of
markets)
• Passenger car market by size and by
geographic area
• Truck market by size and geographic area
• After-market
Why is it important to start by defining the target
market?
Phase 1: Business Plan
• Industry/market definition
• External analysis (customers, current competitors, potential
entrants, substitute products, and suppliers): Five Forces
Framework
– Key objective: Identification of industry trends and whether they
constitute opportunities or threats
– Example: Automotive industry
What is changing with respect to
• Customers by vehicle size and geographic area
• Current competitors include Toyota, Daimler, GM, Ford, etc.
• Potential entrants include China’ Cherie and India’s Tata Motors
• Substitute products/technologies for internal combustion engine
include hybrids, all electric car, hydrogen car, etc.
• Suppliers include material vendors, lenders, labor, etc.
How will these changes impact my business?
Phase 1: Business Plan
• Industry/market definition
• External analysis (customers, current competitors, potential
entrants, substitute products, and suppliers)
• Internal analysis (strengths and weaknesses as compared to the
competition)
– Key questions:
• Do our strengths enable us to pursue opportunities identified
in the external analysis?
• Do our weaknesses make us vulnerable to the threats
identified in the external analysis?
– Example: Automotive industry
• If our targeted customer values fuel efficiency, do our
strengths enable us to produce high quality fuel efficient cars
better than our competition?
To what extent do our strengths help us satisfy our customers’
needs better than the competition? To what extent do our
weaknesses make us vulnerable to losing customers?
Phase 1: Business Plan
• Industry/market definition
• External analysis (customers, current competitors, potential
entrants, substitute products, and suppliers)
• Internal analysis (strengths and weaknesses as compared to the
competition)
• Opportunities/threats (from external and internal analyses)
– Summarizing strengths and weaknesses versus
opportunities and threats using a SWOT matrix
– Example: Amazon.com
• Opportunity is to be perceived as the preferred online
retail department store
• Threat is that Walmart, Best Buy, and Costco increase
their online presence
Hypothetical Amazon.com SWOT Matrix
Amazon.com’s Strengths
Amazon.com’s Weaknesses
Strategic Options
Opportunity: To be perceived by
internet users as the preferred
online “retail department store”
Relative to the opportunity:
• Brand recognition
• Convenient online order entry
system
• Information technology
infrastructure
• Fulfillment infrastructure for
selected products (e.g., books)
Relative to the opportunity:
• Inadequate warehousing and
inventory management systems to
support quantum sales growth
• Limited experience in
merchandising non-core retail
products (e.g., electronics)
• Limited financial resources
Solo venture
Partner
Acquire
Threat: Walmart’s, BestBuy’s,
Costco’s increasing presence on
the internet
Relative to the threat:
• Extensive experience in online
marketing, advertising, and
fulfillment
Relative to the threat:
• Substantially smaller retail sales
volume limits ability to exploit
purchase economies
• Limited financial resources
• Limited name recognition in
selected markets (e.g., consumer
electronics)
• Lack of retail management depth
Solo venture
Partner
Acquire
Exit business
Phase 1: Business Plan
• Industry/market definition
• External analysis (customers, current competitors, potential
entrants, substitute products, and suppliers)
• Internal analysis (strengths and weaknesses as compared to the
competition)
• Opportunities/threats (from external and internal analyses)
• Business vision/mission (Defines direction and provides means
of communicating succinctly with key stakeholder groups)
– How do we wish to be perceived by key stakeholders?
– What quantifiable objectives will be used to determine
progress in achieving vision/mission? (e.g., market share,
customer surveys indicating how we are perceived, etc.)
– Hypothetical Example: Amazon.com wishes to be perceived
by consumers as the preferred online department store
Phase 1: Business Plan
• Industry/market definition
• External analysis (customers, current competitors,
potential entrants, substitute products, and suppliers)
• Internal analysis (strengths and weaknesses as
compared to the competition)
• Opportunities/threats (from external and internal
analyses)
• Business vision/mission
• Business Strategies (cost, differentiation, focus, or
some combination)
– Which of these generic business strategies best
enables to firm to achieve its vision/mission and
objectives?
Phase 1: Business Plan
• Industry/market definition
• External analysis (customers, current competitors, potential
entrants, substitute products, and suppliers)
• Internal analysis (strengths and weaknesses as compared to the
competition)
• Opportunities/threats (from external and internal analyses)
• Business vision/mission
• Business Strategies (cost, differentiation, focus, or some
combination)
• Implementation strategy (selected from a range of options)
– Solo ventures or “go it alone”
– Merger or acquisition
– Alliances (including JVs, partnerships, and licensing)
– Minority investments and
– Asset swaps
Application
1. Discuss how you would use information
obtained from the external, internal, and
opportunities/threats identification analyses
conducted during the business planning
process to select an appropriate business
strategy. Be specific.
2. Discuss how you would select the appropriate
implementation strategy. Be specific.
(Hint: Consider the resources—broadly
defined--required/currently available to exploit
potential opportunities and threats.)
Adobe Acquires Omniture Case Study
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On 9/14/09, Adobe announced the acquisition of Omniture for $1.8 billion in
cash
Adobe: Makes web design tools (e.g., Acrobat, Flash, and Creative Suite—
incl. Photoshop and Illustrator) and sells customers “perpetual” licenses
– Targeted Markets/Spaces1: Web designers, online retailers, and media
firms (e.g., News Corp)
Omniture: Makes software capable of tracking how users utilize web sites
(e.g., tracking page views); users pay monthly fees to subscribe to service
– Targeted Markets/Spaces: Online retailers, advertisers, and media firms
At $3 billion in annual revenue, Adobe 10 times larger than Omniture
Both firms losing revenue
– Adobe faced difficulty in upgrading existing clients and adding new
clients due to recession
– Omniture revenue erosion reflected introduction of free analytical
software by Google and reduced advertising spending due to recession
1Note
markets or “spaces” consist of customers with homogeneous needs
Adobe External Analysis:
Customer “Value Chain”
Create
Deliver
User Engages
Via Interface
Analyze
Optimize
Customer Needs: To cost-effectively create content, display/deliver content, generate web user
activity/transactions, analyze how site utilized, and improve process to increase transactions
Adobe External Analysis Continued
Key Trends:
• “Renting” software online
• Customers buying multiple software capabilities
from a single vendor to ensure compatibility
• Business model/strategy based on “perpetual”
licensing of software highly cyclical (i.e.,
customers can postpone upgrades to new
products)
Adobe Internal Analysis
• Adobe’s core skills focused on developing
website design software
• Sales concentrated on only one segment
of the value chain (i.e., create content)
• Limited experience in how to develop a
“subscription-based” business
model/strategy
Adobe’s Mission, Business, and
Implementation Strategies
• Adobe's vision/mission: To revolutionize how the world
engages with ideas and information
• Business Strategy/Model: To move
– From selling customers perpetual software licenses
and increasing revenue by upgrading current clients
and attracting new clients
– To a monthly subscription model
• Implementation Strategy1
– Acquire a vendor targeted at a different phase of the
customer value chain whose revenues are based on
the subscription model
1Alternative
implementation strategies include solo venture, partnering, or acquisition.
Discussion Questions
1. Why might Adobe have decided to
acquire Omniture rather than to partner
with Omniture or to build a similar
capability on its own?
2. What considerations might have made
Omniture an attractive acquisition target
for Adobe?
Application
1. Discuss how you would use information
obtained from the external, internal, and
opportunities/threats identification analyses
conducted during the business planning
process to select an appropriate business
strategy. Be specific.
2. Discuss how you would select the appropriate
implementation strategy. Be specific.
(Hint: Consider the resources—broadly
defined--required/currently available to exploit
potential opportunities and threats.)
Phase 2: Acquisition Plan (How to
implement the acquisition)
• Plan objectives (support the realization of key
business plan objectives)
– How will the acquired firm enable the
acquiring firm to better realize its
vision/mission and business plan objectives?
Examples of Linkages Between Business and Acquisition Plan Objectives
Business Plan Objective
Acquisition Plan Objective
Financial: The firm will
Achieve rates of return that will equal or exceed its cost of
equity or capital by 20??
Maintain a debt/total capital ratio of x%
Financial returns: The target firm should have
A minimum return on assets of x%
A debt/total capital ratio  y%
Unencumbered assets of $z million
Size: The firm will
Be the number one or two market share leader by 20??
Achieve revenue of $x million by 20??
Size: The target firm should be at least $x million in revenue
Growth: The firm will achieve through 20?? annual average
Revenue growth of x%
Earnings per share growth of y%
Operating cash-flow growth of z%
Growth: The target firm should
Have annual revenue, earnings, and operating cash-flow
growth of at least x%, y%, an z%
Provide new products and markets of x% by 20??
Possess excess annual production capacity of x million units
Diversification: The firm will reduce earnings variability by x%.
Diversification: The target firm’s earnings should be largely
uncorrelated with the acquirer’s earnings.
Flexibility: Achieve flexibility in manufacturing and design.
Flexibility: Target should use flexible manufacturing techniques.
Technology: The firm will be recognized by its customers as the
industry’s technology leader.
Technology: The target firm should possess important patents,
copyrights, and other forms of intellectual property.
Quality: The firm will be recognized by its customers as the
industry’s quality leader.
Quality: The target firm’s product defects must be x per million
units manufactured.
Service: The firm will be recognized by its customers as the
industry’s service leader.
Warranty record: The target firm’s customer claims per million
units sold should be not greater than x.
Cost: The firm will be recognized by its customers as the industry’s
low-cost provider.
Labor costs: The target firm should be nonunion and not subject to
significant government regulation.
Innovation: The firm will be recognized by its customers as the
industry’s innovation leader.
R&D capabilities: The target firm should have introduced at least x
new products in the last 18 months.
Phase 2: Acquisition Plan
• Plan objectives (support the realization of key business
plan objectives)
• Timetable
– Defined by activity completion dates, deliverables
(what is to be achieved), and individual (s)
responsible for satisfying objectives
– Example: Daniel Stuckee is to have completed
identifying a list of potential targets by 2/24/20??
Phase 2: Acquisition Plan
• Plan objectives (support the realization of key
business plan objectives)
• Timetable
• Resource/capability review
– Determine maximum size of acquisition in
terms of P/E. sales, cash flow, purchase price,
etc.
– Assess internal management capabilities
(Can acquirer continue to manage current
businesses as well as integrate the acquired
firm?)
Phase 2: Acquisition Plan
• Plan objectives (support the realization of key business plan
objectives)
• Timetable
• Resource/capability review
• Management preferences (Senior management guidelines to
acquisition team)
– Examples:
• Prefer an asset or a stock purchase
• Use cash only
• Will consider competitors as potential targets
• Want controlling interest
• Limit EPS dilution to two years following closing
Phase 2: Acquisition Plan
• Plan objectives (support the realization of key business
plan objectives)
• Timetable
• Resource/capability review
• Management preferences
• Search plan
– Key search criteria include industry/geographic area
and maximum size of acquisition
– Relatively few criteria used to avoid limiting list of
potential targets
Phase 2: Acquisition Plan
• Plan objectives (support the realization of key business plan
objectives)
• Timetable
• Resource/capability review
• Management preferences
• Search plan
• Negotiation strategy
– Starts with assessment of the needs of parties involved
– Determine proposals to satisfy the highest priority needs of the
parties involved. For example, consider
• Using acquirer stock if seller wants a tax free sale
• Long-term employment contract if seller wants to stay with
the business
• Having seller sign a non-compete to avoid future competition
with seller
Phase 2: Acquisition Plan
• Plan objectives (support the realization of key business plan
objectives)
• Timetable
• Resource/capability review
• Management preferences
• Search plan
• Negotiation strategy
• Determine initial offer price
– Requires buyer to estimate
• Minimum purchase price (i.e., standalone or market price for
purchase of shares or liquidation value for asset purchase)
• Synergy created by combining acquirer and target firms
• Percent of synergy acquirer willing to share with target (often
reflects premium paid on recent similar transactions or the
portion of synergy contributed by the target)
Phase 2: Acquisition Plan
• Plan objectives (support the realization of key business
plan objectives)
• Timetable
• Resource/capability review
• Management preferences
• Search plan
• Negotiation strategy
• Determine initial offer price
• Financing plan (“acid test”)
– How will you pay for acquisition?
– Will someone lend you the money?
– Will acquirer shareholders tolerate EPS dilution?
Phase 2: Acquisition Plan
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Plan objectives (support the realization of key business plan objectives)
Timetable
Resource/capability review
Management preferences
Search plan
Negotiation strategy
Determine initial offer price
Financing plan
Integration plan
– Objective: Combine businesses as rapidly as practical
• What projects offer the greatest likelihood of realizing synergy?
• What must be done to retain key people?
• What investments must be made to keep businesses operational?
• What is the appropriate communication plan?
• How will the corporate cultures be best integrated?
Applications
1.
2.
3.
4.
5.
Identify at least 3 criteria that might be used to select a manufacturing firm as a
potential acquisition candidate? A financial services firm? A high technology firm?
Despite weeks of sometimes heated negotiation, the seller continues to insist on a
purchase price that is $5 million more than the potential buyer is willing to pay.
How can the buyer and seller close the “price gap?” Be specific.
Following due diligence, the buyer is concerned about the outcome of pending
litigation facing the seller. The potential impact over the next three years if the firm
were to lose the lawsuits could be as high as $4 million. How can the buyer protect
herself against this potential liability if she acquires the target firm?
The CEO of the acquiring firm insists that the integration of the target firm must be
completed as rapidly as possible in order to realize the full value of estimated
synergies. Why might the CEO feel this way? What are the risks associated with a
rapid integration of the target firm into the acquirer? What are the risks of a slow
integration of the target firm into the acquirer?
The CEO of a small start-up firm has just been contacted by a potential acquirer,
who is offering to buy the firm for a very attractive purchase price. However, the
CEO refuses to provide any data on her firm until the potential buyer provides her
with three years of signed Federal income tax statements, personal bank
statements, and a net worth statement. Why? Is the CEO being reasonable?
What alternatives does she have if the buyer refuses to provide this information?
Things to remember...
• The success of an acquisition is dependent on
the focus, understanding, and discipline inherent
in a thorough and thoughtful business plan
• An acquisition is only one of many options
available for implementing a business plan
• Once a decision has been made that the
implementation of the firm’s business strategy
requires an acquisition, an acquisition plan is
required.