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L.E.K CONSULTING:

STRATEGIC ALLIANCES-EXPLOITING ECONOMIC

UNCERTAINTY TO CREATE

VALUE

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How to get cost based competitive

advantage?

Cutting operating costs

Concepts like: re-engineering, lean manufacturing,

outsourcing, overhead reduction, purchasing cost

reductions, cycle time reduction gained visibility in

past decade.

Only short term impact, declining returns in long run.

Ex: Outsourcing can turn to competitivedisadvantage (fluctuation in currency, inflation)

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High revenue generation

Strategic operations: Logical step

ahead towards better operations

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Why then Objections??

FEAR

Sharing costs, processes, and product

information with competitors: loss of competitive

advantage.PARADOX

Most of the research, development, and manufacturingdata which used to be considered closely guarded

trade secrets, can now be found quickly (and legally)on the Internet or through other publicly availableresources.

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CNTD..

Leads to extensive, firm-wide transformations,

involving asset swaps and complex ownership

structures.

ACTUALLY

Strategic alliances do not need to be all-or nothing:

tactical or transactional alliance

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STRATEGIC ALLIANCE: SERVE

MULTIPLE OBJECTIVES

Increased efficiency: competitive advantage

Economies of scale, risk diversification, and access

to new markets, distribution channels, and

technologies.

Flexibility to parties and buying power.

Ex: GEMA Alliance

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n catorsw c s ows a vantage n

entering into an appropriate strategic

alliance: need to compete globally and in new markets, but

limited experience and/or resources.

need to compete with low-cost producers, but

limited resources to invest.

mature product facing intense competition,

commoditization, and falling margins.

need to meet the high up-front costs required toenter an attractive market.

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CNTD.

fast-growing business that needs to expand

production, but has limited time.

Overcapacity across a company and industry, and

the resulting need for consolidation.

need for access to new R&D critical to grow a

business

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Factorsmaking an alliance

successful:

Clear and complementary objectives for the partnering

entities.

A strong and mutual cost/benefit proposition.

Careful up-front planning and issue resolution.

Short- and long-term alignment of the partners goals.

Mechanisms for balancing competition and cooperation.

A reasonably high level of trust between the partners.

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CASE STUDY

Red Cell Corp and White Cell Inc.

two largest players in their specialty medical device

together controlling about 60 percent market share.

Red Cell had established a high volume position in

the market, but was reliant upon outside suppliers

for key technologies to deliver its product.

Formed strategic alliance: arms length purchasing

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STRATEGY:

confidential trade secrets would be protected as

part of the process.

Manufacturing/supply relationship developed after

immense success.

Finally went for consolidation of assets.

Cost and scale benefits

LOOK BEYOND TRADITIONAL COST CUTTING

MEASURES.

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USING

SHAREHOLDER VALUE ANALYSISFOR

ACQUISITIONS

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L.E.K. Consulting


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Acquisitions

Company Acquirer Price

King Pharmaceuticals Pfizer $ 3.6 bn

Hutch Vodafone $ 11.1 bn

3 com HP $ 2.7 bn

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Source: http://techcrunch.com-tech-acquisitions

Business standard, 13 october,2010.


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What?

Four acquisition pit falls

U

singS

hareholder value approach for acquisition. Most effective method for buyer & seller

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Why?

Many M&As Fail to Create Shareholder value

W

rong strategy Wrong information

Wrong price

Wrong implementation plan

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Defining Synergies for acquisitions

first Pit Fall

Elimination of duplicate

costs Access to new markets

Economies of scale

Defensive synergies

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Negotiating range

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Cont

Public companies: targets current stock price X the

number of outstanding shares + value of debt

Market expectations-a) to operate as a stand-alone entity- reliable way to

estimate the targets stand-alone value.

b) If company will be acquired, there may be anacquisition premium built into its price.

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Wrong price

Identify recent date when the market first became

aware of the potential for a transaction & the

targets stock price just before that date should be

used to estimate its stand-alone value.

Correct acquisition price- shareholder value

approach- avoids wrong price.

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Wrong information

shareholder value analysis- estimating

a) the target companys value drivers

b) cash flows

c) employing discounted cash flow approach

to calculate value.

High quality value driver analysis avoids wrong

information.

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Synergies to create value

Once synergies are estimated, their expected values

are summed to estimate the total value of synergies.

Interviews with

Key managers,

Extensive analysis.

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Scenario analysis

Identify events impacting the targets value (a

competitor enters or leaves the industry),and then

the probability of their occurrence must be

assessed.

Next ,the impact of each scenario on the target and

synergy value drivers must be estimated, and

shareholder values associated with each scenario

must be calculated.

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Value probability distribution- from calculated

values, which reflects the uncertainty in the targets

value.

Illustrates the range of values the target could

achieve Avoids wrong implementation.

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Synergy Values Between Buyers &

Sellers Shareholders

Depends on bidding environment.

Two bidders- favor's seller.

Best way-identify unique synergies that the buyer can

create with the target using the shareholder value

approach.

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Two bidders


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SVA in M&A

Right Strategy

Right Information

Right Price

Right Implementation Plan


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REFOCUS ON VALUE

- A fresh perspective from MARAKON10/16/2010

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Why value and why now?

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Financial crisis has caused sustainable level of

growth and profitability to decline,

Many businesses that created value when overall

market growth and profitability were high no longer

do.

This has made CEO and their management teams to

rethink their strategic direction, portfolio focus, andresource allocation.


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How companies are responding?

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Stabilizing the ship.

Focusing short term performance but not critical

issues and opportunities that drive long term value..

Reducing corporate overhead and other shared

costs but not realigning the portfolio in response to

change in value creation

Right sizing their operation but not rethinking theirproduct /service offers to customers.

Not optimizing Return on risk


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What is required now?

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Get a grip onvalue

Re focus theportfolio

Rethink the valueyou deliver to

customers

Optimize return

on your company'smost important

resource


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Get a grip on value

Any company can lose sight of where value is

created and destroyed

Proxies such as EBITDA margins, ROC and market

share are imperfect in the best times and can be

misleading when value shifts dramatically.

Businesses need to understand the sources and

drivers of growth, profitability and risk and howthey are changing in the near term and long term.

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Refocus on portfolio

On one hand diversification is valuable in times of

volatility

On the other hand, competitive advantage often

benefits from relatedness and is highly valuable in

difficult times.

Sensible pre- crisis is not longer suitable

Rethink the portfolio vision and get a roadmap forgetting there.

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Rethink the value you deliver to

customers

Customers are changing what they are willing to

pay for, which in turn has reduced the value they

derive from many products and services.

Knock on impact on optimum pricing and cost

strategy.

Understanding the linkage between value

delivered to customers and value derived

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Optimize returns on constraints

Hard constraints capital, credit rating, people,

Soft constraints earnings expectation, dividend

promise.

Understand the return on scarce resources

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How Marakon can help??

Value, goals gap and agenda.

What value should your business aspire to in 3 to 5 years

What is the value gap between the current strategy and

goal? Corporate vision and portfolio roadmap

What is the companys view of the future

What are the major sources of uncertainty?

What themes should guide strategic initiatives?

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Contd..

Business Model redesign.

Where is value being created and destroyed?

What are the critical drivers of value, how are they evolving

and what is the impact on your markets and competitors? Strategic issue Resolution

What is the issue and what is the value-at-stake?

What are the constraints and economic trade-offs that need

to be addressed before alignment can be built?What is the highest value alternative?

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Return on risk: Assessment and Reallocation

What is your risk budget and appetite?

How is your risk budget, either implicitly or explicitly,

allocated today? Managing for value: Leadership and capability

development

How are decisions made today and how well are they

aligned with valueWhat capabilities need to be developed to support

ongoing management of value?

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MARAKON CONSULTING:

GROWING INTRINSIC

VALUE IN NEW NORMAL

ECONOMY

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Growing intrinsic value in New

Normal economy

PROFITABILITY

GROWTH

RISK

INTRINSIC VALUE

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INTRINSIC VALUE

A companys intrinsic value reflects the underlying

potential for future returns, growth and investment

both short-term and long-term embodied in

managements current plans and initiatives. Intrinsicvalue is calculated as beginning book value of

equity plus the sum of all future economic profit

streams discounted at the cost of equity.

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Traditional approach to growing

shareholder value

EPS, P/E RATIO

Recently slightly complex approach adopted

EBITDA

BUT THERE IS A PROBLEM ASSOCIATED

THE WRONG NOTION ?????

If a company can manage to grow earnings at a

healthy and preferably steady rate, shareholders(and management) will reap large rewards.

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Whats alternative approach?

Focusing on intrinsic value assuming market value

follows it.

Warren Buffet practiced this approach

Correlation between Shareholder value and intrinsic

value is more than 85%.

SO WHY NOT ALL COMPANIES FOLLOWS THISPRACTICE?

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TWO PROBLEMS ASSOCIATED

Not objectively measurable.

Based on future forecasts of profitability, growth

and risks. Not practical to use for management for

the broad decisions it makes daily.

Potential disconnect between earnings growth and

intrinsic value.

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MANAGING THE DRIVERS OF

INTRINSIC VALUE

Manage both quality and quantity. Here earnings

quality:

consistently generated overtime using minimum

capital

Recur year after year rather than 1 big transaction.

Less risky

Create and manage to a suite ofperformancemeasures linked to value: providing for linkages

between profit, growth and risk.

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CNTD..

Correlation between P/E ratio and earnings per

share is said to be less than 50%

And decreased further during recession.

QUALITY IN EARNINGS more important than

QUANTITY.

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CNTD.. Align managerial driverswith intrinsic value

Management model

how we align behaviorwith value

Strategy Choiceshow we position business

for the future

Operating Practices

How efficiently wedeliver customer benefits

Financial performanceand value The value we

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COMPETITIVE ADVANTAGE:

Quantity aswell qualitative

earnings is the mantra.

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HOWHEALTHY ARE THE

BANKS? TIME TO REFOCUS ONVALUE.

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Overview

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The recent 2009 results season delivered some long

awaited good news.

Earnings are up at major banks and share prices

are also on the way to recovery.

Is the worst over????

How healthy are banks today?


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Reality

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Research indicates that the industry is not out of the

woods yet

Most banks are not forecasted to earn their cost of

equity capital in 2010 2011.

Banks cannot build a healthy banking system alone.


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Way OUT !!

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Improving returns relative to risk

should become the key

strategic priority for

management in the near term


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How to respond?

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Allocate capitalto the highest

value use

Capture missingrisk to intrinsic

value

Get smarter on

pricing

Focus on

Customer benefitand realign costs

Refocus on

Competitiveadvantage

Align behaviors

with valuecreation


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Conclusion

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Banks need to go BACK TO BASICS and embrace

the management principles and practices that

underpin managing for valure.

These principles could create a strong platform foraddressing the challenges and opportunities banks

face in these continued turbulent times


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