Developing Business and

Acquisition Plans: Phases 1 & 2 of

the Acquisition Process

If you dont know where you are going,

any road will get you there.
Alice in Wonderland

Exhibit 1: Course Layout: Mergers,

Acquisitions, and Other
Restructuring Activities

Part I: M&A
Environment

Part II: M&A Process

Part III: M&A

Valuation and
Modeling

Part IV: Deal

Structuring and
Financing

Part V: Alternative
Business and
Restructuring
Strategies

Ch. 1: Motivations for

M&A

Ch. 4: Business and

Acquisition Plans

Ch. 7: Discounted
Cash Flow Valuation

Ch. 11: Payment and

Legal Considerations

Ch. 15: Business

Alliances

Ch. 2: Regulatory
Considerations

Ch. 5: Search through

Closing Activities

Ch. 8: Relative
Valuation
Methodologies

Ch. 12: Accounting &

Tax Considerations

Ch. 16: Divestitures,

Spin-Offs, Split-Offs,
and Equity Carve-Outs

Ch. 3: Takeover
Tactics, Defenses, and
Corporate Governance

Ch. 6: M&A
Postclosing Integration

Ch. 9: Financial
Modeling Techniques

Ch. 13: Financing the

Deal

Ch. 17: Bankruptcy

and Liquidation

Ch. 10: Private

Company Valuation

Ch. 14: Valuing

Highly Leveraged
Transactions

Ch. 18: 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

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 Indias Tata Motors
Substitute products/technologies for internal combustion engine
include hybrids, all electric car, hydrogen car, Zip Cars, etc.

Suppliers include material vendors, lenders, labor, etc.

Discussion Question: What are the factors that might promote the growth
of hybrid/electric car technologies and those that might retard growth?

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? (Googles acquisition of Motorola Mobility?)

Do our weaknesses make us vulnerable to the threats identified in

the external analysis? (Microsofts Bing search engine?)
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.coms Strengths

Amazon.coms 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: Walmarts, BestBuys, and

Costcos 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 by
20xx

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/price, differentiation, focus,
or some combination)
Which of these generic business strategies best
enables the 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 resourcesbroadly
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 entry into new markets resulting in $z
by 20??
Possess excess annual production capacity of x million units

Diversification: The firm will reduce earnings variability by x%.

Diversification: The target firms earnings should be largely

uncorrelated with the acquirers 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

industrys 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

industrys quality leader.

Quality: The target firms product defects must be x per million

units manufactured.

Service: The firm will be recognized by its customers as the

industrys service leader.

Warranty record: The target firms customer claims per million

units sold should be not greater than x.

Cost: The firm will be recognized by its customers as the industrys

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

industrys 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??

Application: Nokia Buys Symbian

Nokia, a Finnish phone handset manufacturer, announced in mid-2008 that it had
reached an agreement to acquire Symbian, its supplier of smartphone operating
system software. At that time, Symbian had 60% market share, but it was losing
share rapidly to Apple. Nokia also announced its intention to give away Symbian's
software for free in response to Googles decision in December 2008 to offer its
Android operating system at no cost to handset makers. Nokia was seeking to
establish an industry standard based on the Symbian software, using it as a
platform for providing online services to smartphone users, such as music and
photo sharing.
Nokia seems to have been positioning itself as the premier supplier of online
services to the smartphone market by dominating the this market with handsets
reliant on the Symbian operating system. Nokia hopes to exploit economies of
scale by spreading any fixed cost associated with online services over an
expanding customer base. Such fixed expenses could include a requirement by
content service providers that Nokia pay a minimum level of royalties in addition to
royalties that vary with usage. Similarly, the development cost incurred by service
providers can be defrayed by selling into a growing customer base. Nokias ultimate
success seemed to depend on its ability to convince other handset makers to adopt
their software.
1.
What is Nokias vision for the future with respect to smartphones?
2.
What are the firms business and implementation strategies?
3.
Would you describe this strategy as high or low risk? Explain your answer.

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

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?

Quick Quiz
All of the following represent commonly found
components of a well-constructed business plan
except for
a.
Mission statement
b.
Strategy
c.
Acquisition plan
d.
Objectives
e.
Tactical or implementation plans

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 firms business strategy
requires an acquisition, an acquisition plan is
required.