M & A PROCESS
J. Pisani - FORMULATING AN ACQUISITION STRATEGY – THE FIRST STEP IN A SUCCESSFUL ACQUISITION PROCESS

Strategy is driven by the enterprise’s goals and the foremost goal is the need to continuously increase shareholder value.

In most businesses once a service or product is introduced its price goes into decline. Therefore the path to greater shareholder value is usually through cost reduction or growth. Upgrading products and services has us running in place and in my experience, cost reductions quickly accrue to the customer because of competitive pressures, therefore growth becomes an imperative for increasing shareholder value.

Businesses can grow through internal product development and increases in market share (organic growth) or through acquiring other business units. Sustainable growth requires that the profits generated by these efforts not only exceed the cost of capital to be accretive to earnings per share but provide an adequate risk-adjusted rate of return to the shareholder.

While sustainable growth can be achieved organically, as evidenced by Intel, Microsoft and Toyota, global hyper competition forces most companies to consider acquisitive growth as well. Some of the market factors favoring acquisitions are rapid technological change, the customer’s desire to reduce the supplier population to the most efficient and effective, the quest for greater operating leverage, the desire to have a global presence and in recent years the availability of low cost capital.

With all the stars aligned to make acquisitions a viable path to building shareholder value, why do we need a strategy? A good accountant can calculate the net present value of future cash flows given a forecast of sales and tell us if we are sufficiently exceeding the weighted average cost of capital. Alas, the devil is in the details, evidenced by the enormous destruction of shareholder value as a result of the DCX merger. I suspect it was not for the lack of a good accountant.

Yes we are intent on creating profitable growth thru an acquisition but how will that value be created? Only by a clear and focused strategy can we examine the qualitative merits of an acquisition that will drive the quantitative outcome. As we consider alternative acquisitions we should continue to validate and refine the assumptions implicit in our strategy.

A rigorous approach to creating a strategic value proposition is to understand the core capability of the existing business. This process was defined by Hamel and Prahalad in their work on “Core Competence.”

Core competency is the comprehensive definition of a company’s competitive advantage. The full range of capabilities of a company which when integrated and focused by management;

• provides access and leverage in a wide variety of markets or applications

• contributes significantly to sustaining the current market position and share of market

• represents a customer-acknowledged competitive advantage and is difficult for competitors to imitate

• generates an above average return on assets employed.

These are demanding criteria. In most companies only one or two core competencies form the foundation for sustainable profit growth. A meticulous examination of the profitability and ROI of product lines, applications, market segments and customers will reveal those business segments that are yielding superior results. Further analysis will suggest the underlying causality. Our objective is to focus our efforts on realizing the full potential of this core and consider exiting products and business units that are not aligned with the core.

Bain & Company in their study of successful growth companies defined this process in three parts; building market position and strength in the core segment(s) of the business, expanding into logical adjacencies around the core, and if necessary, because of technical or economic risks, redefining the business core.

Sustainable, profitable growth can come from within, but expansion of the core can be accelerated through acquisitions, particularly if we are looking for extensions to our existing competencies such as new geographies, complementary technologies, new process capability, product extensions, or new markets or channels of distributions.

As we progress through our evaluation of potential acquisitions and internal investments, we should be drawn back to this analysis to maintain our focus and clarity of purpose. We can only speculate on what strategic intent drove the DCX merger but what appears to be clear from the result, is that the execution was far superior to the planning.

GGI is committed to helping you achieve your goal of sustainable profitable growth. We are prepared to participate in this process and provide the objective outside opinion necessary to avoid the natural bias and comfort with the status quo.