*
Training objectives
Share Bain perspectives on due diligence and portfolio management
Strategy concepts
Objectives
Process
Tools
Provide case examples
Facilitate discussions on patterns of success and failure
*
Agenda
Bain Private Equity background
Strategy Overview
How we think about strategy
Useful concepts (. basis on competition, growth, customer value, …)
Typical analytical tools used in strategy
Strategic Due Diligence
Key issues typically covered
Tools and activities used
Watch-outs
Check lists
Post Acquisition
Blue printing
15 min
3 hours
2 hours
1 hour
*
Bain’s Private Equity business
Critical component of Bain’s global business
>20% of firm’s business
Eight-fold growth since 1997
Vast global network of experience in due diligence and post-acquisition performance improvement
300+ professionals dedicated to serving PE clients in North America, Europe and Asia
500 transaction assignments annually
Advised on 60% of large cap ($1B+) transactions in North America and Europe in last 10 years
4X the next largest firm serving LBO funds
Fully aligned incentives - Bain partners have invested $500M+ in private equity deals and funds over last ten years – superior returns
Very serious commitment to private equity
Clear market leader
*
Bain helps PE funds realize superior returns - and is willing to align its interests with clients to do so
Note: Peer comparison quartile information per Thomson Financial Venture Economics, as of Dec. 2005
*
Bain supports PE funds in each of these areas
Objectives:
Duration:
Bain activities:
Deal
generation
Immediately post-acquisition
Due
diligence
Ongoing
value
addition
Exit
Right investment focus/thesis
Augment deal flow
Better deal decisions
Avoid dogs
Hidden gems
Right pricing
Drive for rapid deal returns
Increased company value
Maximum deal returns
1-4 months
3-12 weeks
1-3 months
3-12 months
1-3 months
Firm/fund strategy and operations
Perform diligence
Market dynamics
Competitive position
Customer franchise
Management strength
Assess performance improvement opportunities
Provide post- acquisition agenda
Develop blueprint
Clear direction
Prioritised initiatives
Quick hits
Key metrics & milestones
Management Workshops
Alignment
Prioritisation
Focused initiatives
Support most leveraged efforts
Growth strategies
Revenue enhancement
Cost/asset reduction
Add-on acquisitions
Organisation development
Strategy “Refresh”
Prepare for exit (position for performance)
Identify optimal exit strategy
Prepare selling documents
‘Reverse’ due diligence
Pre-qualify buyers and customize approach
Profile industries
Screen targets
Devise plan to approach targets
*
Working Together
Call early
Fees not incurred until actual engagement starts
Allows us to get organized on our end, align most appropriate resources
Can often times help you vet key issues
Share your investment thesis
We may have looked at the target before, or very similar deals
We can be a useful sounding board
Helps us focus our work plan and day–to-day analysis
Send as much information as soon as you receive it
We can sort through whether it is relevant for our work
Allows us to focus on incremental work, maximize value of our work
Provide feedback
Is this allowing you to prove/disprove or refine your investment thesis?
Is it providing the right input into your deal model?
*
Agenda
Bain Private Equity background
Strategy Overview
What is strategy
Business unit strategy
Corporate strategy
Strategic Due Diligence
Key issues typically covered
Tools and activities used
Watch-outs
Check lists
Post Acquisition
Blue printing
15 min
3 hours
2 hours
1 hour
*
3 questions to be addressed in this session
Question 1
What is strategy?
Question 2
What percentage of companies can achieve sustained value creation?
Question 3
How to achieve sustained value creation?
*
What is strategy?
Question for the group
*
What is strategy?
“Strategy is: a plan designed to achieve a particular long-term aim… often contrasted with tactics”
Oxford English Dictionary
Bain view:
A strategy is more than just a plan…
Bain definition of strategy
A strategy is a set of proprietary decisions on where to play and how to win
Serve customers better than competitors and/or at lower cost
Leverage capabilities which are unique and differentiated
The quality of the decisions (and the basis on which you make them) defines good vs. bad strategy
*
*
A good strategy must provide a clear path to sustained value creation
Sustained value creation
Long term
returns above
cost of capital
Profitable (top and bottom line) growth
=
=
Earnings growth
15%+
10-15%
5-10%
0-5%
0-5%
5-10%
10-15%
15%+
Revenue growth
Total shareholder return
%
%
%
%
%
%
%
*
Leadership is often defined by scale:
higher profit potential via lower cost
Companies with higher
RMS have higher
accumulated experience
Higher accumulated
experience provides an opportunity for lower costs (given experience curve)
At similar prices the competitor with the lowest cost has the potential for
the highest profits
*
How to compete
Percent of total SVCs:
Dependence on Scale Leadership:
Examples:
Cost position
Differentiation
Control
Often scale leaders in own markets, but generate disproportionate returns through control of a value chain choke point, asset, or customer segment
10%
Companies draw competitive advantage from lower cost position than competitors
Nearly always requires scale leadership in a properly defined market
Exceptions typically build on network economics or supply chain integration
60%
Brand, product or service differentiation
Scale leadership can be leveraged …but where leader is differentiated, followers can benefit by:
Creating leadership in a niche segment OR
“Hitch-hiking” on a leader’s positioning
30%
*
Value chain
Each requires a different set of
strategic tools to deploy effectively
Key
strategic
tools
High road/low road
Relative market share
ROS 5-10%
ROS 0-5%
ROS
>20%
ROS 15-20%
Premium percent of category
RMS-ROS
Relative market share
Return on sales
Experience Curve
Accumulated Experience
Cost per unit
Customer loyalty
Net
Promoter
Score
Revenue
CAGR
+
+
Profit pool
Cost position
Differentiation
Control
*
An experience curve follows
two basic principles
The price of a given unit of value declines predictably as a function of the experience an industry has accumulated in providing that unit of value
The cost to provide a given unit of value should decline as a firm accumulates experience in providing that unit of value
*
Prices and costs decline as an
industry evolves
Little competition
High prices
Declining costs (due to experience)
High margins
Increasing competition
Declining prices (due to increased supply)
Declining costs (due to experience)
Decreasing margins
Decreasing competition
Stable prices, costs and margins
High-cost firms consolidate/exit
Cost
Price
Product development
New entry
Consolidation
High margins
attract entry
*
Carpet industry prices in 1988 were only one sixth of what they were in 1950
*
ROS/RMS compares a business’s actual profitability to its potential profitability
ROS = Return on Sales: a measure of profitability
RMS = Relative Market Share: a company’s position relative to the market leader
ROS/RMS compares the performance of a company and its competitors to the industry norms of expected returns for relative size
Helps identify reasons for client’s underperformance
Too low relative market share given current profitability --> potential to gain market share
Too low profitability given high relative market share --> potential to cut costs and improve profitability
May not work in some industries
Customer retention may drive profitability rather than market share, ., in financial services
Ability to charge a premium may drive profitability, ., in branded goods
*
Accumulated experience drives the ROS/RMS relationship
Higher accumulated experience is positively correlated with RMS
Accumulated Experience
RMS
Higher accumulated experience provides an opportunity for lower costs and higher profits
Accumulated Experience
Cost per unit
RMS is a proxy for accumulated experience. RMS is positively correlated with profitability
RMS
Profitability
*
The relationship between ROS and RMS typically falls within a normative band
High
Low
Low
High
10x
1x
Relative market share
Strategic position/potential profitability
Long-term returns earned
Normative band
*
We use ROS/RMS to help companies achieve full potential along two dimensions
Relative market share
20%
0%
10x
1x
10%
To achieve its full potential, a company must achieve both strategic and operating full potential
Return on sales
2. Improved strategic position
1. Operating improvements
Gain share and improve margin
Profit improvement program (cost reduction/ asset efficiency etc.)
*
Value chain
Each requires a different set of
strategic tools to deploy effectively
Key
strategic
tools
High road/low road
Relative market share
ROS 5-10%
ROS 0-5%
ROS
>20%
ROS 15-20%
Premium percent of category
RMS-ROS
Relative market share
Return on sales
Experience Curve
Accumulated Experience
Cost per unit
Customer loyalty
Net
Promoter
Score
Revenue
CAGR
+
+
Profit pool
Cost position
Differentiation
Control
*
With consumer products, category nature and RMS predict profitability
Predicted Profitability (Return on Sales) based on Nature of Category and Relative Market Share
R² =
Actual Profitability (Return on Sales)
*
*The predicted profitability of each quadrant has been determined empirically
**Typically RMS is drawn using a log scale
Avg. ROS: 15-20%
Avg. ROS: 5-10%
‘Premium’
percent of category
High
Low
Low
High
Relative Market Share**
60%
Mapping brand portfolios by “premium-ness” and RMS creates an insightful tool
A premium brand category should be quite profitable. But in the value category, even brands with high RMS are unlikely to earn attractive returns
Avg. ROS: >20%
Avg. ROS: 0-5%
*
Strategy implications
Average ROS
15-20% >20%
0-5% 5-10%
High Road
Protect and grow the high end
Low Road
Grow the high end and prompt customers to trade up
Dead End
Completely rethink participation or exit
Hitchhiker
Don’t rock the boat
*
"On a scale 0-10, how likely is it that you would recommend this brand to a friend or colleague?"
Net Promoter Score (NPS)
% Promoters
% Detractors
10
9
8
7
6
5
4
3
2
1
0
Passive
Focus on real enthusiasm – “Delight”
Focus on emotional bonding
Source: Bain research, Frederick F. Reichheld’s "The One Number You Need to Grow", HBR Dec 03
Net Promoter Score is a simple measure of customer loyalty
*
NPS correlates well with micro-behavior…
Promoters (9 & 10) act upon their loyalty: They stay longer, buy more and attract new customers
Retention/Defection
Cross/up-selling
Referrals
Source: Bain client example (all vales indexed, Promoter=100%)
INSURANCE CO EXAMPLE
*
…and macro-behavior
Net Promoter score
Credit card companies
Net Promoter score
Net Promoter score
Source: Fred Reichheld, The One Number You Need to Grow; analysis from Bain & Company Boston Sept 2003; Satmetrix Net Promoter data 2001-Q12004, Nilson Report 2000-2004
Supermarkets
Retail
*
Value chain
Each requires a different set of
strategic tools to deploy effectively
Key
strategic
tools
High road/low road
Relative market share
ROS 5-10%
ROS 0-5%
ROS
>20%
ROS 15-20%
Premium percent of category
RMS-ROS
Relative market share
Return on sales
Experience Curve
Accumulated Experience
Cost per unit
Customer loyalty
Net
Promoter
Score
Revenue
CAGR
+
+
Profit pool
Cost position
Differentiation
Control
*
Value Chain analysis provides a systematic method for disaggregating a company or industry into its major discrete activities to understand sources of competitive advantage
Value Chain analysis
Equipment
Design
Install
Operate
Service
Monitor
Successively finer disaggregations of activities can expose differences important to competitive advantage
*
Distribu- tion/
Outbound
Logistics
Service
Value chain scope depends largely on the purpose for which it is being used
Company value chain:
Major activity value chain:
Tech.,
R&D
Purchas- ing/
Inbound
Logistics
Manu-
facturing/
Operations
Marketing &
Sales
Conversion
Final
Assembly
Quality
Assurance
Packaging
Capability analysis
ACFC
Process re-engineering
Cost analysis
System or industry value chain:
Inputs
(Supplier)
Conversion
(Manufacturer)
Distribution
(Distributor/
Retailer)
Consumption
(End-User)
Segmentation
Profit pool
Sample Use
Material
Preparation
*
Profit Pools are the total profits earned at all points along the value chain
. Consumer Photographic Industry Profit Pool (1995)
Total profit= $
“Chokepoints”
Where and how is money being made? How has it changed?
*
Three ways to use profit pools
U-Haul: identified a large untapped source of profit in the low margin truck rental business
Seized first mover advantage
Entered accessory business at a low cost
Reduced prices (and profits) in core truck rental business to attract customers for higher margin accessory business
Identify new
sources of profit
Dell: evaluates which customers to pursue and which channels to target
With direct sales, Dell splits what would be dealer’s profits with itself and customers through lower prices
Regular customer re-segmentation identifies most profitable customers, allowing Dell to react quickly to new profit sources
Develop distribution
strategy
Guide pricing,
product and
operating decisions
Anheuser Bush: recognized industry’s profit pool driven by premium beer
Increased marketing of premium brands
Vertically integrated into can production, thereby raising competitive barriers around the pool by cutting manufacturing and distribution cost
Profit pool analysis may allow you to see things that others miss
*
Agenda
Bain Private Equity background
Strategy Overview
What is strategy
Business unit strategy
Corporate strategy
Strategic Due Diligence
Key issues typically covered
Tools and activities used
Watch-outs
Check lists
Post Acquisition
Blue printing
15 min
3 hours
2 hours
1 hour
*
Most companies aspire to outperform
their market…
Source: Profit From The Core survey of over 2000 companies
…yet only 1 in 10 achieve sustained, profitable growth:
Revenue growth target: 2x market Earnings growth target: 4x market
we call them sustained value creators
*
0
20
40
60
80
100%
Companies
meeting
successive
criteria
(96-06)
Universe
%
of
universe
100
2,183
#
of
companies:
Sustained profitable growth is a 1 in 10 bet
Note: Natural resources industries and exceptions were weeded out at the last screen
Source: PFTC Database, Bain analysis
Sales
criteria
(Sales
CAGR
>%)
32
696
Net
Income
criteria
(Income
CAGR
>%)
24
528
Final
SVC
12
263
*
Almost all sustainable growth companies dominate in their core business
Source: Profit From The Core
*
Principles of sustained value creation
How do you expand into adjacencies with a repeatable formula?
What is the full potential of the core?
When and how will I need to redefine the core?
Focus
Expand
Redefine
Define the core
*
Principles of sustained value creation
Focus
Expand
Redefine
Define the core
How do you expand into adjacencies with a repeatable formula?
What is the full potential of the core?
When and how will I need to redefine the core?
*
Choosing where to win starts with
defining your core business
Current core is the business which accounts for most of your profits today
Future core is business that drives future value
Businesses are a company’s primary sources of revenues defined by the markets in which they compete
Businesses have different levels of relatedness to each other based on cost, customer, channel, capability sharing
Markets are the properly defined economic battlefields, based on cost, customer (needs), channel, and capability sharing, where we compete
This is a subset of the ecosystem: the value chain and related markets
Markets
Businesses
Cores
*
Mis-defining core business can be dangerous
Went bankrupt in 2001
Polaroid defined its core as chemical/paper based processing and missed the broader definition of image capture in the digital age
Company
Core definition mistake
Outcome
Stock price reduced by more than 50% (1998-01)
Gillette viewed its core as checkout purchases and thus diversified into batteries (Duracell) and writing instruments (Parker)
Too narrow
Too broad
*
Principles of sustained value creation
Focus
Expand
Redefine
Define the core
How do you expand into adjacencies with a repeatable formula?
What is the full potential of the core?
When and how will I need to redefine the core?
*
Four sources of full potential in the core
Full potential quantification
Strategy
Portfolio
Growth share
M&A
Merger integration
Core competencies
Business unit
4Cs
Business definition
ROS/RMS
Growth strategy
Benchmarking
E-commerce
Operations
Revenue
High road/low road
Profit pools
Customer segmentation
Customer loyalty
Cost
ROS/RMS
Reengineering
S-curve
E-curve
VMR
BDP/RCP
Organisation
Organisation
Structure
Role of centre
Job descriptions
Organisation effectiveness
Systems
Corporate performance measurement
Investment appraisal
Knowledge management
HR strategy
Incentives
Finance
Working capital reduction
Cash flow
Capital efficiency
Ratio analysis
Investment appraisal
Valuation
Pricing
Balance sheet optimisation
ROA
ROCE
Corporate venturing
*
Starbucks has pursued national scale
1990s
1980s
1970s
Regional players (. Pasqua’s)
National players (. Starbucks)
Independents (. Peet’s)
Small-scale independents
Fragmented market share
Begin using regional scale for brand and cost advantages
Starbucks expands nationally, while saturating regional markets
Significant cost advantages
Predictable high quality customer experience
*
As Starbucks expanded, it continually refined the full potential strategy
Centralised procurement
Strategic supplier relationships
Optimised category management
Streamlined store labour model
Performance management and incentive system
Optimised capital and occupancy costs
Best practice sharing
CORE
Product cost
Store
opera-
tions
Revenue
Refined customer segmentation
Consolidated marketing spend
*
Principles of sustained value creation
Focus
Expand
Redefine
Define the core
How do you expand into adjacencies with a repeatable formula?
What is the full potential of the core?
When and how will I need to redefine the core?
*
Adjacencies definition
Adjacencies are growth opportunities that:
Share economics and capabilities with the core
Reinforce, not diminish, the core
Add value to the core customers
Provide potential for leadership and profitability
*
Current core
New customer segments
Adjacencies broadly fall into six categories
New products/ services
New businesses
Sabre System
New geographies
Global expansion from UK base
New parts of value chain
Logistics, information, service parts
New distribution channels
Delivery to businesses
Cardmember services
*
Bain experience: Economic distance from the core is a key means to evaluate business opportunities
Core
1 step adjacencies
2 step adjacencies
3 step adjacencies
Shared costs
Shared channels
Shared capabilities/ technology
Full Share
Partial Share
No Share
Primary dimensions
Diversification
Shared customers
Shared competitors
*
Each move away from the core reduces the probability of adjacency success
Core
Diversification
<20%
3 steps
20–40%
2 steps
40–50%
1 step
50–70%
70–90%
*
Example impact of distance from the core
Watches
Oil and gas
Drugs
Unrelated diversification
Luxury writing
instruments
(Waterman)
3 steps
Battery business (Duracell)
2 steps
Aftershave lotion
Toiletries
1 step
Women
razors
European entry
Core
Razors and blades
Successful
Unclear
Exited/under-performing
Writing instruments (Parker)
*
Wimbledon equipment (1987)
Equipment
Customer
Backward integration
Forward integration
Footwear
Apparel
Channel
Geography
New business
Golf balls (2001)
Footballs
Basketballs
Bags
Shirts/shorts
Athletic wear
Running shoes
Basketball
Tennis (1982)
Soccer
Golf shoes (1987)
Cycle
Canada
Mexico, Latin America
Europe
Asia
Tennis wear (1985)
Soccer strips
Golf clubs
Nike has relentlessly repeated its
growth formula
2
3
1
*
Wimbledon equipment (1987)
Equipment
Customer
Backward integration
Forward integration
Footwear
Apparel
Channel
Geography
New business
Golf balls (2001)
Footballs
Basketballs
Bags
Shirts/shorts
Athletic wear
Running shoes
Basketball
Tennis (1982)
Soccer
Golf shoes (1987)
Cycle
Canada
Mexico, Latin America
Europe
Asia
Tennis wear (1985)
Soccer strips
Golf clubs
Nike has relentlessly repeated its
growth formula
2
3
1
*
Wimbledon equipment (1987)
Equipment
Customer
Backward integration
Forward integration
Footwear
Apparel
Channel
Geography
New business
Golf balls (2001)
Footballs
Basketballs
Bags
Shirts/shorts
Athletic wear
Running shoes
Basketball
Tennis (1982)
Soccer
Golf shoes (1987)
Cycle
Canada
Mexico, Latin America
Europe
Asia
Tennis wear (1985)
Soccer strips
Golf clubs
Nike has relentlessly repeated its
growth formula
2
3
1
*
Wimbledon equipment (1987)
Equipment
Customer
Backward integration
Forward integration
Footwear
Apparel
Channel
Geography
New business
Golf balls (2001)
Footballs
Basketballs
Bags
Shirts/shorts
Athletic wear
Running shoes
Basketball
Tennis (1982)
Soccer
Golf shoes (1987)
Cycle
Canada
Mexico, Latin America
Europe
Asia
Tennis wear (1985)
Soccer strips
Golf clubs
Nike has relentlessly repeated its
growth formula
2
3
1
*
Nike’s growth formula
2
3
1
Wimbledon equipment (1987)
Equipment
Customer
Backward integration
Forward integration
Footwear
Apparel
Channel
Geography
New business
Golf balls (2001)
Footballs
Basketballs
Bags
Shirts/shorts
Athletic wear
Running shoes
Basketball
Tennis (1982)
Soccer
Golf shoes (1987)
Cycle
Canada
Mexico, Latin America
Europe
Asia
Tennis wear (1985)
Soccer strips
Golf clubs
*
Sold off
2
1
Reebok: inconsistent adjacency moves
3
4
5
6
7
John Frye Boots (1987)
Ellesse USA(1988)
Avia (1987)
Boston Whalers Boats (1989)
Shaq Line (1993)
Footwear
Rockport walking shoe (1988)
Ralph Lauren Footwear
(1996)
Logo Athletics (2000)
Greg Norman Golf clothes (1990)
“The Pump” (1990)
Other shoes
Customer
Backward integration
Forward integration
Soft goods
Channel
Geography
New business
NFL uniforms (2000)
Other products
Weeboks (1986)
Aerobic Shoe (1982)
Tennis (1983)
Basketball (1985)
*
Nike vs. Reebok
38x
*
Principles of sustained value creation
Focus
Expand
Redefine
Define the core
How do you expand into adjacencies with a repeatable formula?
What is the full potential of the core?
When and how will I need to redefine the core?
*
Our redefinition approach builds on three dilemmas
Dilemma #1: When will my growth formula of the past start to approach its limit? How will I know?
CEO dilemmas
Dilemma #2: How should I redefine the core and its strategy? Where will the best ideas come from?
Dilemma #3: How do I make fundamental change while still running the business and delivering results?
*
Dilemma #1: How will I know whether to redefine?
Trigger 1: Industry profit pool shifts
Trigger 2: New model threatens core
Trigger 3: Differentiation no longer works
Home Depot vs. Lowes
Sony vs. Samsung
Newspapers
Music
Dell/Wal-Mart in the 80’s
*
Total profit = $
Total profit = $
All 3 factors can be present and show up in profit pool shift: global photography industry
Operating profit
1995
Film retail
Camera retail
Camera
manufacturing
Film manufacturing
Photofinishing retail
Photofinishing wholesale
Agx paper and chemicals
Photofinishing equipment
Enhanced services
2005
20
10
0
30
40
50%
Segments that did not exist in 1995
Indicates directional change in profit since 1995 (size of arrow indicates magnitude of change)
Film
camera
mfg
D-compact
mfg
Memory
mfg
Digital
camera
retail
Rolled
&
single
use
film
mfg
Film
camera
retail
Rolled
film
retail
Retail
photofinishing
Photofinishing
equipment
Paper
&
Chemicals
Enhanced
services
D-SLR
mfg
Memory
retail
Digital
imaging
software
Online
photofinishing
Photo
printers,
retail
Photo
printers,
mfg
*
Dilemma #2: Hidden customer assets often provide the foundation for redefinition
From supply to demand focus
From financial supermarket to leading credit card issuer
*
Agenda
Bain Private Equity background
Strategy Overview
What is strategy
Business unit strategy
Corporate strategy
Strategic Due Diligence
Key issues typically covered
Tools and activities used
Watch-outs
Check lists
Post Acquisition
Blue printing
15 min
3 hours
2 hours
1 hour
*
Market size (45%)
Market growth (20%)
Market profitability (35%)
Relative market share (45%)
Relative profitability (45%)
CSF/NPS (10%)
Automation market growth 2002-2006
(CAGR in %)
Market attractiveness
Competitive position
Portfolio assessment factbase
*
Portfolio strategy: operating resource allocation decisions
Low
High
Leader in Market
Follower
Leader in defensible niche
Priority 1:
Extend and protect
leadership positions;
drive to full potential
Priority 2:
Sustain leadership positions;
pursue adjacencies
Priority 3:
Selectively develop
roadmap to
leadership
or divest
Divest to help fund priorities
1,2 & 3
Portfolio strategy assessment
Operating resource allocation
Organic growth investments by business
R & D
Salesforce
Marketing/advertising
Channel
Cost/asset optimisation
Supply chain
LCC
SG&A
Market attractiveness
Size
Growth
Profit pools
Concen-tration
*
Portfolio strategy: capital resource allocation decisions
Average EVA (Return on invested capital – cost of capital)
Invested capital ($M)
0
2,000
4,000
6,000
8,000
10,000
12,000
(15%)
(10%)
(5%)
0%
5%
10%
15%
20%
25%
30%
35%
50%
(25%)
Average = %
55%
After:
More capital invested in value-creating businesses, less in value-destroying businesses
Before
*
Portfolio strategy: portfolio divestiture decisions
Operating full potential vs. deployment value
Best parent assessment
Pre-divestiture program
Full potential
Negative synergies
Separation plan
Parking lot approach while waiting for the best time to divest
*
Key takeaways
Decisions on where to play and how to win
Question 1
What is strategy?
Question 2
What percentage of companies can achieve sustained value creation?
Question 3
How to achieve sustained value creation
How do you expand into adjacencies with a repeatable formula?
What is the full potential of the core?
When and how will I need to redefine the core?
Focus
Expand
Redefine
Define the core
*
Agenda
Bain Private Equity background
Strategy Overview
What is strategy
Business unit strategy
Corporate strategy
Strategic Due Diligence
Key issues typically covered
Tools and activities used
Watch-outs
Check lists
Post Acquisition
Blue printing
15 min
3 hours
2 hours
1 hour
*
The deal professional sits at the center of a complex transaction process
Legal
Accounting diligence
Environmental diligence
Asset appraisal
Selling agent/bank
Legal counsel (own, seller’s)
Target’s management
Funding sources/ lenders
PE fund associate/ VP
Business (commercial) due diligence
Industry attractiveness
Competitive situation
Target strength and stability
Exit paths
Business plan
Pending litigation diligence
Legal landmines
Audit
Accounting landmines
Environmental liability
Value of assets
Real estate
PP&E
LBO fund partners/ investment committee
Selling the deal
Auction/transaction process
Data requests/data rooms
Negotiation, transaction contracts
Building relationships
Data requests/interviews
Securing financing
Selling the deal
Focus of Bain’s work
Managing due diligence
Other deal responsibilities
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5 diligence imperatives
4 diligence watch-outs
Due diligence: Overview
Diligence questions lead to investment decisions
Wide range of analytic tools available
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Questions answered through business due diligence drive investment decisions
Investment decision
Industry attractiveness
Competitive position
Business plan & P&L forecast
Exit paths
Strength & stability
Primary focus of diligence effort will vary deal by deal
More industry-focused
More target-specific
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Questions answered through business due diligence drive investment decisions
What is the underlying market growth?
Do participants earn attractive returns?
What key trends will shape the market going forward?
What is the target’s performance relative to the industry?
Growth/share gain
Economic return
How healthy are current customer relationships and base?
What are the true drivers of profit performance?
Product and customer level
How strong is the existing management team and organization?
What is the likely P&L?
Is there a realistic plan in place to realize forecast financial results?
Base case, downside, upside
What are the probabilities and values of various exit pathways?
Strategic or financial buyers
IPO
Industry attractiveness
Competitive position
Business plan & P&L forecast
Exit paths
Strength & stability
Investment decision
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A range of factors conspire to complicate due diligence, and cloud investor judgment
Management motivated to put the best “spin” on information
Resist temptation to “default” to the management plan
Predicting 5-year financial outcomes inherently complex
Avoid “boiling the ocean”
PE investors can learn only so much about an industry/target in the limited time available
Invest heavily in focused independent analysis
Culture and incentives of funds bias investment professionals to make, not avoid, investments
Foster a “truth seeking” culture with a rigorous deal review process
FOCUS is critical given the limited timeframe
Information imbalance
Managing complexity
Bias toward “putting money to work”
Drinking the management ‘Kool-Aid’
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Five due diligence imperatives
Reality check
Find the
hidden gold
Think the
unthinkable
Talk, talk,
talk to
customers
Drive work from own, independent thesis
Thesis-driven work-planning focuses due diligence efforts immensely
No single element of business diligence is more important
Visualize the true downside case
Few great deals are characterized by “more of the same”
Ensure that new actions/ strategies required to reach targets are realistic
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Agenda: Tools and examples
Investment decision
Industry attractiveness
Competitive position
Business plan & P&L forecast
Exit paths
Strength & Stability
1
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Industry attractiveness: Key questions
What are the relevant customer, channel, and product boundaries?
Are these boundaries shifting? If so, what are the implications for industry attractiveness?
What drives returns?
Regional, national, international scale?
Innovation cycles?
Customer loyalty?
Brand?
Other factors?
What is the appropriate business/industry definition?
How large are the available revenue and profit pools and how are they evolving?
What is the market’s competitive structure?
How large is the market (revenue, profit)?
How fast is it growing, and in which segments?
What are the drivers of revenue growth?
What are the drivers of profitability?
How concentrated or fragmented is the market?
Are there significant barriers to entry?
Do buyers or suppliers have significant industry power?
How does this market structure impact participants’ returns?
1
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Agenda: Tools and examples
Investment decision
Industry attractiveness
Business plan & P&L forecast
Exit paths
Strength & Stability
Competitive position
2
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Competitive position: Key questions
How does market share break down by competitor?
Who is gaining/losing share?
What are the drivers of share/gain loss?
What does the competitive landscape look like, and how is it changing over time?
How does target performance compare with competitors?
What is the target’s growth trajectory relative to peers?
How does profitability compare with peers?
What is the target’s relative cost position?
What are the drivers of differential performance?
What are the target’s strengths & weaknesses relative to peers?
What opportunities and threats exist in this competitive environment?
2
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Agenda: Tools and examples
Investment decision
Industry attractiveness
Competitive position
Business plan & P&L forecast
Exit paths
Strength & Stability
3
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Agenda: Tools and examples
Industry attractiveness
Competitive position
Exit paths
Strength & Stability
Business plan & P&L forecast
4
Investment decision
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Agenda
Bain Private Equity background
Strategy Overview
What is strategy
Business unit strategy
Corporate strategy
Strategic Due Diligence
Key issues typically covered
Tools and activities used
Watch-outs
Check lists
Post Acquisition
Blue printing
15 min
3 hours
2 hours
1 hour
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Activism pays off, the earlier the better
Note: Includes all exited deals supported (n=46); analysis completed January 2006 with return data as of mid-2005; industry mean based on 1996-2001 funds; industry mean for Q1 funds is
Source: Bain analysis
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Blueprinting could touch on a broad set of issues and value creation levers
Note: Represents number of projects as tracked by Bain’s Global Experience Center
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Several means to work with management post acquisition
Investment thesis and management plan
Implementation
Blueprint
Initiative
Value creation plan
Initiative
Initiative
Initiative
Initiative
Initiative
Initiative
Management workshop
Interactive, structured 2-day workshop
Bain off-the-shelf quick diagnostic tools
Initiative
Value creation plan
Initiative
Initiative
Initiative
Initiative
Initiative
Focused initiatives
Initiative
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An integrated fact-based view on current performance, potential gaps, and future opportunities
Reconcile management and investor perspectives with objective and deep internal and external fact base
Well-synthesized view of what is known, what is likely, and what will be required for success
A collaborative process that leads to consensus
Among management team members
Between management and board members
A value creation plan toward full potential
A series of initiatives (what it will take)
Calibrated financially
Prioritized (impact, risk, urgency)
With clear ownership
The appropriate phasing based on
Priorities
Interdependencies
Implementation approach (pilots, full roll-out, etc.)
Blueprint: What is it?
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Blueprint: Why do it?
Builds consensus early among the management team and new ownership
Vehicle to test hypotheses and integrate perspectives from different vantage points
Rich fact base and analytic support to address tough issues
Identifies new opportunities and helps evaluate and sequence among many priorities
Provides a quick payback, even in smaller sized deals
Efficient use of outside help where it matters the most (the first 100 days)
Small cost relative to the value improvement being targeted and the economics of getting there faster
Modest investment as compared to other one time costs
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Funds bring Bain in to help focus management on the highest value activities and leverage their time
Bain’s role
Focus management on the most important priorities: external or internal
Facilitate management alignment
Contribute robust analytics
Engage with management in a value-added and minimally intrusive way
Enable management to drive priority initiatives further and faster
Management’s role
Provide insight on potential sources of value
Contribute industry/ business/ internal knowledge
Highlight potential implementation challenges
Lead initiatives
Drive initiatives to create long term sustainable value
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Case example: post-acquisition blueprinting project
A disguised case example was removed due to client sensitivity
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Appendix
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Industry review checklist
Declining or limited growth
Distressed/negatively-trending industry profitability (. commoditization, maturing, globalization, delayering)
Intensely competitive market
Low barriers to entry
Strong/difficult to manage cyclicality
Poor or declining regulatory relations
Product substitution
Isolate sources of company growth
Gather appropriate industry analyst reports, interview analysts, adjust as necessary
Interview target management
Interview target sales staff
Interview industry experts, experience managers to isolate key trends
Build target mix-adjusted industry growth and profitability forecast
Risks to assess
Illustrative activities
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Competitive position review checklist
Insufficient/declining advantage of products and services (. maturing, underinvested)
Insufficient sustainability of advantage (absence of self-re-enforcing scale, intellectual property)
Declining market share
Identify key competitors and attack paths – evaluate with customers, sales staff, industry experts, etc.
Identify sources of advantage of target’s products – evaluate importance and performance with customers, sales staff, etc.
Interview industry analysts – evaluate points of agreement and controversy
Compare target performance with key competitors
Risks to assess
Illustrative activities
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Company review checklist
Excessive profit dependence of few products, regions, etc.
Volatility of profitability – . cyclicality, blockbuster product dependence, etc.
Poorly integrated acquisitions
Inability to accommodate growth – space, controls, systems, access to labor pool, etc.
Workforce inadequacy - poor training, high attrition rate, poor trade relations, etc.
Lacking discipline – overstaffed, overcompensated, etc.
Approaching minimum efficient scale
Isolate sources of profit – test sustainability of advantage
Evaluate historical profit and loss stability – isolate drivers
Evaluate acquisition integration with senior and mid-level management
Inquire about and evaluate investments required to support management plans
Compare financial/operational metrics to key competitors for comparable lines of business
Risks to assess
Illustrative activities
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Customer review checklist
Excessive customer concentration
Low customer loyalty – risk of defection
Low customer lock-in/switching costs
Deteriorating stability of customers
Impact of transaction on retention – particularly if LOB overlap with competitor
Isolate customer concentration and profitability
Interview purchase decision makers at key customers
Interview all significant recent customer defectors – compare rationale with that offered by management
Evaluate impact of transaction on customer retention – incentives, lock-in
Risks to assess
Illustrative activities
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Management/seller dynamics checklist
Risks to assess
Illustrative activities
Management or seller motivation to conceal Target threats/ weaknesses
Ineffective management, appropriateness for post-acquisition plan
Consequences of change of ownership – continuity of contracts, key employee retention, Inadequate succession planning
Difficult exit path
Systematically evaluate key elements of management or seller thesis with customers, staff, industry experts, etc.
Interview key managers – evaluate in context of post-acquisition requirements
Evaluate M&A history of industry
Evaluate potential for strategic buyers
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Critical activities and data sources
Primary Data Gathering
Market
Definition/ sizing
Industry
Trends
Market map & dynamics
Competitor bench-marking
Customer
Analysis
Impact of
Input costs
Cost reduction oppor-tunities
Growth
Oppor-tunities
Management interviews
Secondary Data Gathering
Confidential memorandum
Customer interviews
Competitor interviews
Industry expert interviews
Supplier interviews
Plant/facility visits
Annual report/10-K
Analyst reports (industry/company)
SDC
Literature searches
Market research reports
Trade publications/ associations
Onesource
D & B Filings
Hoovers/Thompson
Internal company data
Analysis
Notes and Tips
All text should be in Title Case
16-20 point font size (best fit)
Box must fit longest line of text throughout and be 1 point in width
Second level bullet same size text as first level (but less line spacing)
Text should appear centred on slide
Note: Net return on capital = capital gain + dividends
Source: Bain Experience Centre
Companies with higher relative market share tend to have more accumulated experience. Higher accumulated experience gives the potential for lower costs and higher profitability
Note: Formula for the centerline in the Normative Band is: ROCE = WACC + x Log RMS (observed, not derived). The normative band is primarily derived
empirically (Bain & Company and PIMS experience) and is supported by the logic of the experience curve. An average ROCE/RMS band can be utilized but varied
if necessary for industries with more or less cross-competitor experience transfer (the average assumes about an 85% cross-sectional experience curve). The
more sharing there is, the shallower will be the band since the advantage of leadership is transferred away to other industry participants. If ROS is to be used as
a scale, the band slope will need to be adjusted for asset intensity. Low asset intensity will have “shallower” bands, high asset intensity will have “steeper” bands
when plotted in ROS terms.
The Portfolio Deployment Matrix allows us to:
map the position of a portfolio of brands;
2) compare actual to predicted profitability; and
3) use this information to actively manage brands and portfolios of brands.
This is from a client example. The Bain team implemented NPS across a worldwide insurance company, and saw correlations of NPS to financial metrics – retention, cross/up-selling, referrals, etc.
Source: Best's, Estimated Retention Rates
This page can be customized to the industry. Typically, we see NPS leaders outperform their industries.
Value chain analysis can help identify opportunities and clarify business boundaries
Opportunities for cost advantage/improve performance
Where to increase competitive differentiation
Distinct boundaries across business (or industry) processes
Clear framework to evaluate and prioritize activities on which to focus
The varying concentrations of profit along the value chain (known as the shape of the profit pool) reflect the competitive dynamics of a business
- Profit concentrations result from the actions and interactions of companies and customers
- Profit pools form in areas where barriers to competition exist
- Profit pools exist in areas that have been overlooked by competitors
Every market has an uneven distribution of profit between product categories, customer groups, geographic regions and/or distribution channels
Profit pools are not stagnant
-As power shifts among the players in an industry (competitors, suppliers, and customers), the structure of the profit pool changes
There are many different sources of profit in any business.
SVC were determined through the following process:
Companies with data available 1994-2004; Sales in excess of $500MM (1994 US$)
Real revenue and profit CAGR > % (1994-2004)
Created shareholder value: Average Total Shareholder Return (1994-2004) greater than Average cost of equity (1994-2004)
Speaker Notes
Source: Profit From The Core database, analysis 1987-1997; Worldscope; One Source; Industry reports, Annual reports: Bain Analysis
Analysis of Sustained value creators from 1987-97 Profit From The Core analysis (total number of companies=305). For those companies where nature of dominance could be ascertained, n=66 (REF:Bain white paper-The Facts About Growth, Essay #1 by Chris Zook and James Allen.
Core defined as the business that creates the majority of the company’s revenues; dominance defined as relative market share of >
“Single core with dominance” includes companies with multiple cores, but clear dominance in only one.
See slide in slide show format
Step 1 – move into new sport footwear
Step 2 – Seek celebrity endorsement of the “hottest” star or team – Jordan was a rookie when he signed with Nike
Step 3 – Leverage endorsement to move into apparel and later into equipment
In the 1994 world cup in USA, both finalists –Brazil and Italy – were endorsing Nike (SD to check)
The varying concentrations of profit along the value chain (known as the shape of the profit pool) reflect the competitive dynamics of a business
- Profit concentrations result from the actions and interactions of companies and customers
- Profit pools form in areas where barriers to competition exist
- Profit pools exist in areas that have been overlooked by competitors
Every market has an uneven distribution of profit between product categories, customer groups, geographic regions and/or distribution channels
Profit pools are not stagnant
-As power shifts among the players in an industry (competitors, suppliers, and customers), the structure of the profit pool changes
There are many different sources of profit in any business.
Source: Bain
