Exits And Acquisitions: Key Concepts For Successful Deals

Life Science Leader, August 2010

Merger and Acquisition transactions can be a viable alternative for accomplishing a number of strategic objectives in the context of building and realizing value for emerging growth and middle-market companies (those from start-up to several hundred million dollars in revenue). He takes a high-level view of the buy-side and sell-side processes and a framework for thinking about and planning each.

Exits

In many instances the distinction between selling a company (i.e. an “Exit”) and raising capital is measured by the amount of equity sold and the contractual rights obtained by the buyer.

Shareholders and partners may find a full or partial Exit attractive for many reasons, including:

•diversifying away the risk of having too much personal net worth in a single asset

•minimizing the risk of growth by obtaining a financial or strategic partner

•buying out passive partners and making room in the capital structure for management and employees without dilution to exiting active shareholders.

Several potential solutions exist, including recapitalization, sale to a financial buyer while keeping a minority stake, or an outright sale to a strategic or financial buyer with contractual rights for some level of future performance.

Acquisitions

Acquisitions can meet a number of goals if approached and executed as part of a long-term strategy. Some of the typical reasons executives pursue acquisitions include:

• to accelerate revenue growth

• to enter an adjacent market space

• to expand into a new geography or obtain a physical footprint in a new location

• to access new customers

• to access technology

• to strengthen the pool of talent and capabilities

• to complete or augment a product or service line

• to reduce costs

• to capture market share

• to prevent a competitor from gaining these advantages.

The first phase of a typical acquisition process addresses finding a target company to buy; this begins with the strategic plan that should lay the foundation to determine many of the parameters and the focus of the process. The second phase of the process is to structure the deal, close the transaction, and integrate the business.

The financing strategy to support the acquisition should initially be thought of in the context of the overall acquisition process and be defined as part of the acquisition strategy (phase one), understanding that the process will evolve and is somewhat iterative as knowledge is gained from the marketplace. However, if the deal requires external funding, management must consider a financing strategy, which typically begins with understanding the acquiring or buying company. This involves:

• determining its valuation and financial strength

• establishing financial objectives and benchmarks for vetting possible acquisitions

• determining parameters around how much the buyer can afford

• conducting internal discussions around an ideal or preferred deal structure

• establishing relationships with financing sources and obtaining buy-in regarding the acquirer’s plans

• obtaining evidence for potential sellers of the buyer’s ability to finance and close a deal.

Management should keep in mind the following core concepts as it takes an objective view and embarks on the acquisition process:

•Begin with the end in mind; set clear objectives and benchmarks to gauge attractiveness of potential target companies and particular deals.

•Develop the financing strategy up front, and establish relationships with likely sources of financing.

•Terms are likely more important than absolute valuation.

•Align the financing strategy with the operating/integration plan and deal structure.

•Focus on value creation.

IBM's Transformation--From Survival To Success

Forbes, 7 Jul 2010

Today many companies from automakers, the news media, entertainment industry businesses, banks and other financial institutions are being seriously challenged by market forces, technology shifts and the changing dynamics of a global economy. Some of them are fighting for their very survival.

The author’s company IBM has also been there.

25 years ago, IBM was at the pinnacle of success, having practically invented general-purpose computing for business, helped put a man on the moon, Nobel prizes for their researchers and revenue and market share skyrocketing as customers clamored for their latest products.

But 10 years later they had in 1993 posted what at the time was the biggest loss in the history of corporate America, $8 billion. They had missed a number of key technology shifts and were being abandoned by customers.

It was difficult finding their way back to the but it illustrates that companies on the brink can turn things around if they do what is necessary. The author shares a few lessons they learned from their near-death experience and rebirth.

1. Businesses must be genuinely global. Technological advances and globalization have completely changed the rules about how and where things can and should get done, yet many companies still cling to their old models for operating, duplicating the same functions and organizations in various locations. This leads to layers of complexity, discrepancy and redundancy that produce a significant drag on efficiency and performance.

2. Sometimes companies must fully transform their portfolios. Companies in a crisis need to look at their entire portfolios, rationally and candidly, and figure out what they have that customers want today and what customers will want tomorrow. Then get rid of anything that does not fit the resulting model, and invest in the growth opportunities.

3. Success comes from leadership, not mere survival. The people running some companies may be inclined, at least initially, to resist the tremendous economic, social and technological forces of change they face. We have seen evidence of this approach--and its devastating results--across the range of industries I mentioned at the outset. But the only thing anyone ever accomplished by standing in the way of progress was to get run over. The path to success lies in understanding the relevant trends, figuring out how your strengths and resources can capitalize on them and staking out a leadership position.

The author concludes that she is sharing these experiences and examples as a reminder that changing times can imperil even the most successful companies but if troubled companies are willing to reinvent themselves in ways that will make them viable and relevant in today's global economy they can make their way back to the top.

Banish complacency as it kills business and understand that transformation is a constant and continuous process that can never end. And she says, “embrace the notion that when faced with tough times your goal must be not merely to survive but to succeed, and success comes through leadership”.

Can your business plan survive this stress test

Knowledge@Insead, 20 April 2011

---- by Grace Segran ---

The road to success is littered with the wreckage of strategies gone awry. Here is a six-step stress test for your strategy.

Executives tend to assume that if you put a lot of thought into knowing what to do, then execution is relatively easy, says Huy, whose research focus is on strategy execution. He argues that this is a false assumption as formulating a strategy is only five percent of the task; the remaining 95 percent is about strategic execution, and that’s where most of the strategies fail.

Strategy Execution Stress Test

1. Do you have a viable strategy? The first stress test helps executives think about whether they have a good strategy in the first place. Does the strategy make sense even just on paper? Is it going to create value? Have they got the right customer base? The test draws on a variety of strategy models to help people understand where they are positioned and assess the business value of such strategic positioning.

“There’s no point in moving to the next step of executing it if they realise through the various frameworks that the strategy is already shallow and weak to start with,” Huy says. “In that case, it’s a good learning point and there’s no point in investing your time and company resources much further in executing a bad strategy.”

2. Do you have a comprehensive implementation plan? Executives have been trained to think that once they have a strategy, they should work on having a structure. Once that’s done, the executive feels his work is mostly done and the rest will be relatively easy. “But that’s false security. That’s where they get unpleasant surprises most of the time. The second stress test has a series of indicators that help executives think through,” to develop an implementation plan that includes much more than structure.

3. Do you know the hidden barriers to implementation? You’ve got the right strategy and a lovely project plan. So you are ready to go? Jarrett says, no, because when you are implementing strategy and people are involved, things go awry.

There are a couple of things that they’ve identified from their research that could go awry. First are the hidden cultural impediments that have grown surreptitiously over time in a successful organisation. “IBM failed during the 1990s, partly because its culture became gradually arrogant vis a vis its customers and thus could not respond to the changing needs of the market at the time,” says Jarrett.

“Another hidden trap that we know is that organisations tend to have in and out groups. So there’s the taboo political dimension. I’m not talking just Machiavellian politics; I’m talking about inter-group rivalry, and this can break down the cohesion in the organisation,” he says. “The emotions and the non-rational elements override the spreadsheets. What’s worse is that people don’t know it, deny that they exist, or they don’t see it coming. The third step in the test helps executives identify the barriers in their own business plan.

4. Do you know how to overcome the barriers? Step four focuses on a number of research-based tools that have been developed to help executives overcome the barriers, such as, how to mobilise the emotional energy of people over a long period of time. “That’s something that many executives have not been trained to do,” says Huy. “We would focus people on thinking about the time dimension of execution, such as the timing and pacing. When do you do certain things? Are you going too fast? Is this in the correct sequence? It’s like eating a good French meal. Dessert doesn’t come first; in fact, the same dishes served in the wrong order disrupt the whole dining experience. To make the strategy work, you have to observe the right sequence of actions, the right timing and the right pacing.”

5. Do you have the critical skills? The problem in a world with social media is that everybody thinks they know everything about everything and people tend to draw on social psychology by reading the back of a magazine, says Jarrett. So executives have a sense that they know what needs to be done. “But it’s not just about knowing, it’s also how can you translate abstract knowledge into action. Research suggests that some sixty percent of managers don’t know how to implement change; they don’t have the skills. That’s the piece that we’re really trying to address. That’s why the fifth stress test does a skill audit around the key competencies to make change work.”

6. Do you have a continuous learning system? Having obtained the skills, the sixth step is about replicating and implementing them in the system so that the organization learns collective execution over time. “It’s about getting the executives to fish for themselves and incorporating the skills into the core competencies of the business,” says Huy.