A Strategic M&A Screening Process - LEK Consulting

INSPIRINGLEADERS
Official Newsletter of Chartered Management Institute (Hong Kong Branch)
FROM THE CHAIRMAN
The Environment Is
Our Business
limate change is real. The impact is
affecting all of us faster than we
imagine. The financial tsunami
provides us with a historic opportunity to
take decisive actions and a green-led
approach to help combat the economic
downturn and global warming.
It is not just that we are experiencing shorter
winters and hotter summers and having
fewer days with clear blue sky, the climate is
heating up faster than the worst-case
scenario predicted by an international panel
in 2007. Carbon emissions have been
growing at 3.5% per year since 2000, up
sharply from the 0.9% per year in the 1990s.
Greenhouse gas emissions have to come
down by 2030 or sooner if we are to have a
world we recognise. Climate change requires
global and collective efforts from developed
and developing economies (both US and
China included), corporations and
individuals to build a low-carbon economy.
Global climate
change aside, we
have to deal with the
financial crisis. To
combat declining
exports, mainland
China and local
authorities have
championed major
infrastructural
projects as a way to
stimulate market
Dr Edmund Lee - Chairman
developments and create jobs.
Speed of action and quality
solutions are vital. At the same
time, it is important to ensure
infrastructural projects are
energy efficient and
environmentally and climate
friendly. Hong Kong has a good
opportunity to build up a pool of
professionals, upgrade expertise
and work practices across the
board and could even ‘export’
itsexpertise to expedite green
developments in the region.
No more indifference to the issues.
The “business as usual” mentality
will only cripple the world we live it at
a pace beyond our imagination.
As global citizens, we ought to get
acquainted with the gravity of the
situation and join hands to create a
better world for this and future
generations to work and live in.
Market-based measures should
go with implementable
carbon-based standards on fuel
and energy efficiency in homes, offices
and transport. Government investment,
public-private partnership and education
should go hand in hand to develop good
practices and apply technology to
promote energy
efficiency, reduce
greenhouse gas
emissions and foster
carbon capture and
storage. Going
green is more than a
fad and social
responsibility. It is
part of our lives and
good for business.
As we celebrate the 10th Anniversary of CMI-HK
this year, we will continue to identify
development trends and promote sharing of
management knowledge and experience to our
members and friends. Stay tuned and hope you
enjoy reading this issue!
CONTENTS
MARCH 2009
MARCH 2009
FROM THE CHAIRMAN
The Environment Is Our Business
VISION
Business Going Green
PERSPECTIVES
The Changing Chinese Economy
under New Global Economy
- The 21 st century is the century of China
TREND
A World Where Creativity and
Innovation Take the Lead…
INSIGHTS
A Strategic M&A Screening Process
HOT TIPS
Survival Tactics for SMEs
MANAGEMENT
The Psychology of Strategy
QUOTES
CMI-HK NEWS
• Friends of the CMI-HK Club
• News of Members
• Past Events
EDITORIAL BOARD
Dr Edmund Lee, Dr Joe Leung,
Dr George Mok, Dr Cecilia Tsui,
Dr Joseph Tsui, Mr Henry Wong
© Chartered Management Institute (Hong Kong Branch) www.managers.hk
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M
ergers and acquisitions (M&A) is often a critical
component of growth and diversification.
As many valuable deals are overlooked and too
many M&As have failed to live up to expectations,
opportunity prevails for significant process improvement.
Steven Rosner and Helen Chen of L.E.K. Consulting
share with us that by taking steps to implement a proactive
and structured screening system, companies can contribute
significantly to the success of their M&A strategy, save
considerable time, effort and resources, achieve a positive
bottom line results and increase shareholder value.
INSIGHTS
A Strategic M&A Screening Process
Applying a formal
screening methodology involves
developing clear inclusion/exclusion
and prioritisation criteria, building a
comprehensive candidate list, applying
the criteria to narrow the scope of
potential targets and producing
in-depth candidate profiles to enable a
more informed approach to the initial
due diligence stage.
M&A is often a critical component of growth and diversification. In consulting with a broad
range of companies throughout the M&A process, many organisations do not have a
systematic screening process in place to ensure that their M&A efforts support their
corporate growth strategies.
Potential deals are often initiated informally, via a telephone call or a personal conversation
with an investment banker, a business broker, or a business development executive at another
firm. This approach to identifying opportunities is at best described as “ad-hoc”, in which
screening criteria are informal or undefined and are applied inconsistently to potential
opportunities.
Not surprisingly, this can result in sub-optimal outcomes. When sub-par opportunities are
considered, management time may be wasted and unnecessary costs incurred. The “right”
deal may go unexamined.
On the other hand, a proactive, systematic approach to the M&A process, including a
well-defined screening stage, creates substantially greater potential for success. A
comprehensive screening process arms organisations with a structured methodology that
enables fast, effective responses to sound opportunities. Whether for in-licensing products,
acquiring companies, or seeking a merger partner, a proactive screening process is a crucial
step in the M&A process.
The overall M&A process has several major stages (Exhibit 1). Acquisition screening
immediately follows the first stage of strategy development and sets the foundation for the
rest of the process.
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The Benefits of a Proactive M&A Screening Process
The Screening Process
8
4.
5.
Establish
Screening
Criteria
Building
Comprehensive
List
M&A
Strategy
Acquisition
Screening
Prioritize
Comprehensive
List
Target
Investigation
Develop
Profiles
Valuation
Analysis
Post-
Acquisition
Planning
Post-
Acquisition
Integration
A company can derive five key benefits from a proactive approachto the M&A process:
1.
2.
3.
Enhanced strategic consistency
Companies that use a systematic and proactive screening process target their
business development activities at opportunities that help fulfil their business
strategy.
Opportunity prioritisation
A proactive approach enables a company to target the most attractive
companies or products first, increasing the overall likelihood of deal success
and minimising time and effort wasted on less optimal opportunities.
Efficient use of limited resources
The approach ensures resources are consistently focused on the highest priority
opportunities and maximises the return on a company’s time and efforts.
Reduced politics
By adopting a structured approach to acquisition screening – one that is driven by strategic goals, a comprehensive list of
opportunities and clear screening criteria – one can significantly reduce bias and political factors arisen from personal and
professional relationships and individual preferences.
A framework for ongoing analysis
A formal screening process can assist companies in maintaining a clear paper trail of the decision making process, helping
business leaders keep track of opportunities evaluated over time and enabling ongoing analysis in light of developments.
Understanding the Components of an Effective M&A Screening Strategy
There are four essential steps in the M&A acquisition screening process (Exhibit 2).
Step 1 - Establish and Define Screening Criteria
A well designed M&A strategy articulates the organisation’s goals and highlights the factors that make an opportunity
attractive. This drives screening based on inclusion, exclusion, or prioritisation criteria. Inclusion and exclusion criteria are
relatively straightforward. Generally, 50 to 80 percent of prospects can be excluded in the evaluation stage by employing
inclusion or exclusion criteria. Some examples include:
››
››
››
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Geographic Criteria –
“U.S. based headquarters with 90 percentor more of the sales in the U.S.”
Product or Customer Criteria –
“Pharmaceutical products to be prescribed by a cardiologist”
Size Criteria –
“Revenues greater than $20 million”
Capabilities Criteria –
“Companies with low cost manufacturing capabilities in China”
Prioritisation criteria take into account other options.
Some examples include:
• Time or Date –
“10 years of patent protection is better than 5,but how much better?”
• Size –
“$100 to $500 million in sales is best, but $50 million to $100 million is sufficient”
• Product Position –
“Brands or products in number two share position may also be attractive”
Inspiring Leaders © Chartered Management Institute (Hong Kong Branch) www.managers.hk

Step 2 - Build a Comprehensive Candidate List
The initial list should be assembled from multiple sources, such as SIC codes, industry databases, trade associations, mailing
lists and industry journals. When multiple or conflicting opinions exist, a comprehensive list will facilitate consensus-building
and result in more objective decisions.
Step 3 - Prioritise Comprehensive List
Inclusion and exclusion criteria can now be applied to the comprehensive list. Data may come from secondary sources and
primary research. Some clients use a numerical rating system, which give scores to each criterion. Some may allocate
weightings while others may perform the assessment on a qualitative basis.
Step 4 - Develop Profiles
Once the final list of potential targets has been refined, it is critical to develop a profile. Typical profiles may include the
following:
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››
››
››
››
››
Key company information such as history, ownership structure, size, location(s) and
organisational structure
Background and contact information on key company
decision makers
Management team background
Product and patent information
Segment trends, customer and market data
Current business alliances and competitive situation
With these profiles in hand, decision-makers have enough
information to make an initial approach to an M&A target.
L.E.K. Consulting is a global strategy consulting
firm. Steven Rosner is a Vice President in the
firm’s Boston office and Helen Chen a Director in
the firm’s Shanghai office.
Steven Rosner Helen Chen
L.E.K. Case Study: An IT Staffing Company Grows its Business with the Help of Proactive M&A Screening
First, a set of criteria was established for potential targets in terms of the size of the company in revenues,
geographic location(s), capabilities and skill sets offered. Next, a broad target list was created using a variety of
sources, such as member lists from industry trade organisations, to establish a universe of over 900 potential
candidates.
Using the inclusion/exclusion criteria, the list was pared down to 120 companies. The 120 companies were
researched in greater depth to prioritise them into A, B or C tiers.
Ultimately, additional information was gathered on the A tier companies – most of which were privately owned – to
create more detailed profiles. In approaching these candidates, the client let each one know that their organisation
had been carefully chosen from a field of nearly 1,000 candidates.
By demonstrating in-depth knowledge of the target companies, the client made a favourable impression on the
companies’ owners that left them more open to considering and accepting an offer. The client ultimately acquired
several of these companies, adding a new and profitable line of business to its existing operations.
Inspiring Leaders © Chartered Management Institute (Hong Kong Branch) March 09
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