CFO VISION 2014 Navigate your world November 19 21 Washington, D.C.
M&A: What it takes to be an Advantaged Acquirer Steve Joiner AERS Partner Deloitte & Touche LLP Mark L. Sirower Principal, Monitor Deloitte Deloitte Consulting LLP
M&A: Market overview
Global and U.S. M&A overview Total Global M&A Volume and Value ($ in Billions) Total U.S. M&A Volume and Value ($ in Billions) $Bil 4,000 No. Deals 48,000 $Bil 1,500 No. Deals 12,000 3,000 36,000 1,125 9,000 2,000 24,000 750 6,000 1,000 12,000 375 3,000 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 YTD Enterprise Value ($ Bil) Number of Deals 2014 YTD 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 YTD Enterprise Value ($ Bil) Number of Deals 2014 YTD 0 Source: Thomson Financial 4
Global and U.S. M&A overview Source: Thomson Financial 5
U.S. M&A overview (cont.) 6
M&A summary by region *YTD comparison of the same period across prior years Americas Europe Central Asia/Asia-Pacific (incl. Japan) Africa-Middle East Source: Thomson Reuters Note: Please refer to Appendix for a list of countries included within each region. 7
U.S. M&A activity summary by sector YTD September* *YTD comparison of the same period across prior years Source: Thomson Financial 8
How to be an Advantaged Acquirer
Earning a cost of capital return on Future Growth Value will require significant improvements in XYZ s current operating performance XYZ s current enterprise value (EV) 1 split Key questions to be addressed $67/share Total EV $166.8B Net Debt $12.1B Market Cap $154.7B Enterprise Value 1 $67.7B 40.6% PV Current FV Current Operations (COV) 2 Operations (FGV) 3 Value driven by current assets performing as they are today $99.1B 59.4% Value the market expects from future investment plans With $99B of FGV, XYZ should be able to address several questions on strategy development and M&A: - What are the implied revenue, profitability, and free cash flow growth, or EVA improvements, being factored into the share price? - How can XYZ achieve that growth? - If the current organic growth rate isn t sufficient to satisfy shareholder expectations, what is the role of M&A in satisfying that growth? - Can M&A fill the financial gap and be consistent with long-term objectives for customers, markets, and products? - Will the M&A strategy need to include a portfolio of many small deals or a few large deals? 1 Enterprise Value is calculated as Market Cap (4/28/11) + Net Debt (Current Market Value of Debt - Cash) as of 12/31/10 2 Current Operations Value is calculated as (NOPAT/WACC). NOPAT=Net operating profit after taxes 3 Future Growth Value is calculated as Enterprise Value Current Operations Value, and represents growth in economic operating profit 10
Corporate level growth expectations can be de-averaged to business unit (BU) level and used to highlight gaps and prioritize role of M&A across BUs Management aspirations Business Unit 1 Market expectations Historical performance Current trajectory Business Unit 2 What are your stated operating objectives? Will your current growth trajectory take you there? Business Unit 3 Past Today What are the appropriate milestones to achieve the objectives? Future Performance 11
Advantaged acquirers typically have several important characteristics Senior team (corporate and BU) understands what is likely driving investor expectations. Senior team is well informed on competitive capabilities and capability gaps. Senior team aligned on growth and profit aspirations and strategic priorities. Senior team and corporate development do not outsource strategy to I-bankers. Corporate development activities focused on a portfolio of best-fit opportunities. Senior team understands reasons for past M&A successes and failures. Corporate development plays both challenge and support roles with BUs. Post-merger integration issues are considered in pipeline prioritization. CEO regularly puts M&A strategy on the board agenda. 12
Advantaged Acquirers typically outperform Reactors by focusing on strategic priorities and using integration issues early on to differentiate opportunities Missing link 1: Strategic priorities Missing link 2: Operating model Corporate and business strategy Screening Diligence Valuation Negotiation Transaction Risk Post-merger integration Transition Risk Source: Mark L. Sirower, Becoming a Prepared Acquirer, Corporate Dealmaker, June 2006. 13
Becoming an Advantaged Acquirer is a state change playing to win versus playing not to lose Reactive window shopping Waiting for a sale Someone else s timing Competitive Force fitting capabilities Justifying synergy Educated by the seller Inventory is what s for sale Impulsive Many ideas for growth Deals in isolation Proactive watch list Shopping for value Your timing Preemptive Finding selected capabilities Realizing synergy Educating yourself Inventory is the market Logical and rational Strategic milestones and priorities M&A strategy Knowing what you want puts you in control of your destiny. Source: Mark L. Sirower, Becoming a Prepared Acquirer, Corporate Dealmaker, June 2006. 14
M&A strategy develops prioritized pathways for growth and target screening filters the deal universe(s) in those pathways to generate portfolios of priority candidates Choices 500 200 100 70 20 Corporate and business strategy M&A strategy Target identification, screening, prioritization Diligence, valuation, negotiation Postmerger integration Role of M&A in growth aspirations Strategic milestones Priority pathways Platform vs. add-on deals Geographic imperatives M&A evaluation parameters M&A process, coordination, and control Generate deal universe(s) Develop and refine target criteria Prioritize shortlist Document high-level integration issues Develop early view of valuation and potential synergies Generate scenarios of portfolio options and sequencing Regularly update deal landscape and pipeline 15
In practice, M&A strategy and pipeline development is a dynamic process that is regularly updated based on changing market conditions and ongoing results Strategies (1, 3, 5-year) Understand profit pools within core and adjacent markets Portfolio-based view on selecting where to compete and how to win over next 1, 3, 5 years Prioritization of organic strategies that can drive shareholder value Operating plans (1, 3, 5-year) Specific translation of strategy into financial operating plans via allocation of resources and capital Role of M&A in order to fill portfolio gaps is understood 16 Operating plan performance, disruptive market dynamics, availability of targets, and changing valuations may necessitate need to revisit business strategies Strategic milestones Specific 1, 3, and 5 year milestones are developed and tracked in order to gauge performance relative to strategy execution Market share Margins Market position Economic profit generation New product development Technology or capabilities evolution Strategic priorities Portfolio gaps with respect to product mix, channel access, geographic imperative, customer acquisition, and capabilities required to achieve milestones Operating plan performance gaps around product, channel, customer, and capabilities requirements M&A strategy and pipeline development The role of M&A strategy facilitates strategy in the following ways: Accelerate operating plan performance Enable strategy execution Portfolio investment and expansion Portfolio of transactions versus deals in isolation
Growth Paths Competitors have followed two major growth paths: acquiring assets or establishing sales channels through partnerships Product (Core trucking and infrastructure assets) Segment (New customer, market, or geographic segment) Channel (Creating new demand through expanding access to LTL services) Ship From manufacturer C 1 Service, distribution center LTL value chain Freight forwarding (if necessary) Ship To customer U 2 C U 1 2 C 1 U 2 C 1 U 2 OD 4 OD OD 4 OD 2 OD OD 4 4 2 OD OD 2 3 OD 2 OD 3 OD 3 OD 3 C 10 C C 7 C 7 C 7 C 7 4 C 4 C 4 C 4 C 5 C 5 Sample competitive investment profile (1) C 11 C 14 C 15 C 16 C 16 C 16 C 16 C 6 C 6 C 6 C 6 C 5 C 5 C 20 Example OD Company has tried to achieve growth primarily through consolidating the market; acquiring regional players C-Corp has made acquisitions as well, but has placed emphasis on partnerships to grow its business Additionally, C-Corp has leveraged its logistics business to generate demand for its LTL service and gain access to new channels (e.g. 3PLs) FGH, Inc. s acquisition of W-Corp. gave FGH national, long-haul coverage and entry into the Canadian market C C-Corp M&A Capabilities (Developing value added technologies, new skills and capabilities, etc.) Notes: 1 Time period is July 07 to present Source: FactSet, company websites, Deloitte analysis 17 C 2 Divestiture U 1 OD U OD Company U, Inc. Organic Expansion Partnership # Subscript denotes event i.d. as one event can cover multiple value chain opportunities
Strategic screening and pipeline development emphasize a proactive consideration of attractiveness and plausibility Attractiveness Are the candidates attractive on a stand-alone basis? Target attractiveness How do the targets rank with respect to performance? Market attractiveness How do the targets rank with respect to their presence in priority product and geographic markets? Plausibility Are the candidates likely to create value? Strategic fit How do the targets rank with respect to their fit with strategic objectives and priorities? Operational fit How do the targets rank with respect to fit with current operations and the likely complexities of integrating them? Source: Mark L. Sirower, Becoming a Prepared Acquirer, Corporate Dealmaker, June, 2006. 18
Advantages Acquirers M&A strategy typically tackles valuable hard jobs with distinct benefits Valuable hard jobs Achieve senior team alignment regarding priority pathways for growth Determine the portfolio of deals that the acquirer needs to do over the next 18-36 months Determine what deals the company does not want its competitors to do over the next 18-36 months Develop an effective M&A process with agreed roles, responsibilities, and accountability The potential benefits of being an Advantage Acquirer Develop a better pipeline of priority targets in context of an M&A strategy Save tremendous resources by not focusing on inappropriate deals Acquirer less driven by someone else s (e.g., competitor) timing and rush to close Understand which auctions are most important versus those to be avoided Raise diligence and integration issues before valuation and negotiations begin Landscape education process allows reassessment of growth pathways and alternative transactions Build credibility with the board and efficiently move targets through pipeline Source: Mark L. Sirower, Becoming a Prepared Acquirer, Corporate Dealmaker, June 2006. 19
Contacts Mark Sirower Principal Deloitte Consulting LLP (212) 313-1595 msirower@deloitte.com Steve Joiner AERS Partner Deloitte & Touche LLP (404) 229-2122 sjoiner@deloitte.com
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