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FOLLOWING GLOBAL TRENDS: EXAMINING THE NEED FOR MERGERS & ACQUISITIONS IN THE ENERGY SECTOR IN MALAYSIACase studies, Concepts, and Debatable Ideas
Kenny OngCNI Holdings Berhad
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1. M&A Trends in the Energy Sector
2. Rationale for M&As in the Energy Sector
3. Strategies, Structure, and Optimizing Value in M&As
4. Considerations, Risks and Pitfalls
5. Investment Opportunities
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• How to fail without trying
The Roadmap to Failureby Fred Wiersema and Mike Treacy
Before we start…
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The Roadmap to Failure
Fred Wiersema and Mike TreacyP
erf
orm
ance
Time
Clear Sailing
Today’s performance
Ad-hoc Tactics
Denial & Defense
Doom Projections
Overdue Failure
The Moment of Truth
X
Performance Freefall
Tomorrow’s actual
performance
Downpresure of Unclear Strategy
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Denial and Defense
• “It’s not really good value our competitor is offering, because it doesn’t include a lot of our features.” - ABC vs Air Asia
• “It’s good value but not in our preferred customer market.” - ABC vs Toyota
• “Sure they’re hurting us, but with their unfair advantage, what can we do?” – ABC vs MILO
• “The rules we are playing by have always worked before” – AMEX vs VISA
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The Roadmap to Failure
Fred Wiersema and Mike TreacyP
erf
orm
ance
Time
Clear Sailing
Today’s performance
Ad-hoc Tactics
Denial & Defense
Doom Projections
Overdue Failure
The Moment of Truth
X
Performance Freefall
Tomorrow’s actual
performance
Downpresure of Unclear Strategy
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Ad Hoc Tactics• Selectively hold discounts to hold business that has
started to go elsewhere• Introduce new promotions, terms, conditions, and offers to
confuse and cloud the market• Beef up customer service by adding people to fix mess-
ups and quicken delayed shipments• Delay capital investments and adjust accounting methods
to portray quarterly financial results more favorably• Introduce “new and improved” products that are new in
form, but not in substantive ways that are of consequence to purchasers
• Merge, Acquire, Joint Venture and Ally out of desperation or without proper considerations
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The Roadmap to Failure
Fred Wiersema and Mike TreacyP
erf
orm
ance
Time
Clear Sailing
Today’s performance
Ad-hoc Tactics
Denial & Defense
Doom Projections
Overdue Failure
The Moment of Truth
X
Performance Freefall
Tomorrow’s actual
performance
Downpresure of Unclear Strategy
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“What is the moral of the story?”
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1. M&A Trends in the Energy Sector
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M&A Trends in the Energy Sector – Malaysia (1/2)
1. MMC purchase of Malakoff, 2007: largest M&A in Malaysia, 2nd biggest in Region
2. Seadrill Ltd (Oslo Stock Exchange, offshore drilling operations) SapuraCrest Petroleum Bhd, raising shareholding from 10% to 18.51%
3. Sarawak Corridor of Renewable Energy (Score) – hydroelectricity, aluminum, steel, oil and gas, glass and agriculture
4. Perisai Petroleum Teknologi Bhd - acquire SJR Marine (L) Ltd for US$42mil, an anchor handling tug (AHT) for US$11.5mil, a portable saturation diving system (SAT system) for US$4.25mil and the disposal of two subsidiaries Corro-Shield (M) Sdn Bhd and Orinippon Trading Sdn Bhd for RM40mil.
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M&A Trends in the Energy Sector – Malaysia (2/2)
5. Budget 2008: Stamp Duty exemptions for PLCs and Petronas vendors
6. Budget 2008: Investment Tax Allowance for energy conservation, energy savings
7. Budget 2008: Tax Exemption of income from Certified Emission Reduction (CER)
8. Europe’s ban on Biofuel i.e. Palm Oil
9. Excess capacity
10. “Energy Blueprint” - IPPs to supply at competitive prices to an Energy Exchange
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M&A Trends in the Energy Sector
1. Booming Demand
2. Supply shift to remote, unstable locations
3. Environmental impact, Fuel Mix
4. Demand shift in Asia
5. Middle East ‘cheap’ energy = diversification
6. Natural resources depleting fast
7. Massive capital required
8. Supply security
9. Interest in ‘Renewable’ energy
10.Demand reduction and Demand Management
11.Scarcity of Talent: Technical, Projects
12.Global labor market
13.New, low cost players
14.Niche companies in new technologies*
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M&A Trends in the Energy Sector
23.Alternative Energy – growth, fragmented*
24.Low R&D, demand for new technologies
25.Anti-Pollution Solutions**26.Credit Crunch27.Foreign entities28.Reliability standards29.Political instabilities30.De-regularization,
Unbundling31.Global Warming, less
Water, less Hydro power
15.Private Equity16.Restructuring
undervalued Conglomerates
17.Record profits, High Prices
18.Antitrust Regulations19.Cross-border
Regulations20.Traditional utilities
consolidation21.Competition for Assets22.Rise of NOCs
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Biggest Trend
“Earnings Per Share growth expectations are way above what companies can
achieve in most territories from organic growth alone”
John McConomy, US Power and Utilities Transaction Services Leader, PricewaterhouseCoopers
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2. Rationale for M&As in the Energy Sector
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Rationale for M&As in the Energy Sector
“Energy companies face a demanding future. They must start
preparing for it now”Ivo Bozon, Director, McKinsey’s Amsterdam Office
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Strategies for Growth
1.Base Retention
2.Share Gain
3.Positioning4.Adjacent Market
5.New Business
GROWTH
“Double-Digit Growth”, Michael Treacy
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Rationale for M&As: Growth
Expansion
1.Consolidate
2.Geographic
3.Distribution
4.Compensate
Transformative
1.Portfolio refocus
2.Diversification
Easier Tougher
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Rationale for M&As: Expansion
Expansion
1.Consolidate
2.Geographic
3.Distribution
4.Compensate
1.Gain Scale to compete
2. Integrated Solutions
3.Financial Growth
4.Supply (security, mix)
5.Developing markets
6.High cost of Extra Capacity
7.Private Equity
8.Expanding NOCswww.myCNI.com.my www.OOBEY.com
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Rationale for M&As: Expansion
Expansion
1.Consolidate
2.Geographic
3.Distribution
4.Compensate
9.Remote, unstable locations
10.De-regularization
11.Demand outstrip supply
12.Fuel Mix – Carbon Tax
13.Talent
14.New, Low-cost Entrants
15.Undervalued Big Players
16.Newer Assetswww.myCNI.com.my www.OOBEY.com
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Rationale for M&As: Transformative
Transformative
1.Portfolio refocus
2.Diversification
1. New Business Lines
2. Selling/Spin-off non-core
3. Increase product line
4. New customers
5. New technologies*
6. Complementary Business
7. Up-down Supply Chain
8. Patent
9. Convergence anticipation
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Rationale for M&As: Energy Sectors
Traditional Utility
AlternativeEnergy
IncrementalTechnology
New Delivery, New Sources, Existing Resources
Oil, Gas, Electricity, Coal
Biomass, Nuclear, Ethanol, Wind, Solar
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Possible ‘Outside’ Acquirers or Investors
Institutional
Fund Managers
Corporations
Sovereign Funds
VCs
NGOs
Non-Profit Org
Financial (Loans)
JV Partners
M&A
Social VCs
Holding Co.
Gov. VCs
Supply Chain
Gov. Partnership
Competitors
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Why do ‘Outsiders’ Acquire or Invest?
1. Return/Profit
2. Risk Management/ Hedging
3. Tax-benefits
4. CSR/Image
5. Diversify revenue
6. Counter-cyclical balance
7. Support ‘Mission’
8. Exclusive rights
8. Contractual obligation
9. National Agenda
10.Control Supply Chain
11.R&D portfolio
12.Control Management
13.Alternative Cash Flow
14.M&A
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3. Strategies, Structure, and Optimizing Value in M&As
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Strategies for Growth
1.Base Retention
2.Share Gain
3.Positioning4.Adjacent Market
5.New Business
GROWTH
“Double-Digit Growth”, Michael Treacy
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How Markets determine Growth Strategies (1)
• Growth Rate
Growth Rate
Strategy Why?
Fast 1. Market Positioning
2. Share Gain
3. Base Retention
•Maintain market share in strategic segments•Prepare for market decline•Competitors focus too much on getting new customers
Flat 1. Base Retention
2. Share Gain (Acquisitions)
•Lose customers slower than competitors•Create scale economics, squeeze costs
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• Churn RateChurn Rate
Strategy Why?
Low 1. Share Gain (Acquisitions)
2. Adjacent Markets
•Buying customer base is cheaper than own efforts•New products, old customers strategy
High 1. Base Retention
2. Share Gain
3. Adjacent Market
•Lose customers slower than competitors•Customers are always open to the best value and offer•Desperate to gain revenue
How Markets determine Growth Strategies (2)
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How Markets determine Growth Strategies (3)
Fast Growth,
Low Churn
1.Market Positioning
2.Share Gain (M&A)
3.Base Retention
4.Adjacent Markets (M&A)
•Energy Sector
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• Neutralize Competitor Advantages
• Deliver far better value
• Buy Market Share outright– Price Premium– Operating Model– Integration
Strategy 2: Share Gain
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Buying Market Share: Acquisition strategy
IntegrationOperating
Model
PricePremium
Buying Market Share
Net Cost per Customer < Direct Acquire
No evidence of previous company
One Kingdom
Pre-integration Blueprint
Slow Trigger, Fast Bulletwww.myCNI.com.my www.OOBEY.com
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Buying Market Share: Side notes on Funding
Preferable OK, but not preferred
1. Cash from Earnings
2. Cash from Borrowings
1. Cash from Stock sale
2. Issue more stock
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*Adapted from Warren Buffet’s acquisition strategies
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Strategy 4: Invade Adjacent Markets
Adjacent Market = Important Similarities and Large Differences in:
1. Cost Structure
2. Competitors
3. Customers
4. Critical Capabilities
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Strategy 4: Invade Adjacent Markets
Traditional Utility
AlternativeEnergy
IncrementalTechnology
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Strategy 4: Invade Adjacent Markets
Upstream Midstream Downstream
DistributionGenerationExtraction
Vendors/Services
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• Is it a promising market?– Best when market is new and not stable– You must time your entry carefully– Entrenched companies usually delay
embracing new technology or process
• Can you win in this market?– Must be built on advantages that are tangible,
practical and easily implemented
Strategy 4: Invade Adjacent Markets
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• Can you match the Standards of Competition in this Market?–You do have to meet the quality level that is
common in the market–Three Standards:- Technology,
Relationships, Business-model–You must have 80 percent of the capabilities
you need to match competitor’s Standards
Strategy 4: Invade Adjacent Markets
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• Make or Buy?1. It is easier to meet the standards of
competition if you buy an existing player
2. Adjacent acquisitions must remain as a separate enterprise
3. Integrate Management Control (systems, technology)
4. Inter-transfer of management talent, knowledge and capability are important
Strategy 4: Invade Adjacent Markets
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Strategy 5: Acquire new Business
• No core advantage to bring in
• Investors mind-set vs. Managers mind-set
• Value unlocking via operational improvements
• Invest in Management/Leadership
• Premium = Combined value > stand alone
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Revenue Growth
Base Retention
Share Gain Positioning Adjacent Market
New Business
Operational Excellence
Product Leadership
Customer Intimacy
Competencies Information Systems
Motivation, empowerment,
alignment
Financial
Learning & Growth
Internal Process
Customers
Investment Strategy
Productivity Market Value
Linking BSC to M&A Strategy
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Optimizing M&A: 4-Wheels Model
Culture
Business
ObjectiveM&A
Strategy
StructureResources
Leadership
Person
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Optimizing M&A : Framework
• Org Structure• Job Design• C&B• Policies & procedures• Decision making• Job fit• Management Systems• BSC and KPIs• Decentralized & Empower
Structure
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Optimizing M&A : Framework
• Role modeling• Vision/Mission/Philosophy• Leadership Style• Delegation & Empowerment• C&B, Promotions• Sense of Urgency• Customer focused• Best practices• Bottom line management• Tradeoff between Cost vs. Value
Leadership
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Optimizing M&A : Framework
• Identification and Recruitment• Incentives• Training• Values• Motivation• Competency Analysis• Education/Curriculum
Person
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Optimizing M&A : Framework
Enablers• Projects• Technology• Equipment• Materials• Intellectual
Property• Partners• Property
Resources
Funding (Capital Access)
• Public• Private
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4. Considerations, Risks and Pitfalls
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Considerations, Risks and Pitfalls
1. Global footprint vs. Local Presence
2. Anti-trust and Regulatory permissions
3. Environmental (e.g. Europe’s ban on Biofuels)
4. M&A Accounting Standards
5. ‘Fair Value’ definition in financial reporting = ‘Exit’ price
6. Acquirer and Target having different Risk Tolerances
7. Public (or Public-hopeful) companies need to consider EPS after acquisition
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Considerations, Risks and Pitfalls
8. Synergies and Improvements need to realized as quickly and efficiently as possible
9. Combined Management capability to deliver improved performance
10.First 100 days post-acquisition blueprint
11.Culture management
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Consideration: Alternative Deals to M&A
“When companies are unwilling to sell or acquisition premiums are too high, alliances are the next best thing to a
merger. In other cases, they are actually preferable to M&A”
David Hernst, Principal, McKinsey’s Washington, DC
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Consideration: Alternative Deals to M&A
Joint Venture
Unite business units
Problem with shared ownership
New Product Lines
Cost Reductions
Share risk, Share Cost in new markets, R&D
Buy-out clause
Alliances Reduce non-core or commoditizing parts
Outsourcing, Offshoring
Help supplier gain Scale
Enter Complementary business
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5. Investment Opportunities
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Examples
1. Renewable Energy: Wind, Solar, Biomass, Hydro
2. New generation Power Fuel Cells: silicon impregnated with hydrogen, easy to transport wind/solar energy to cities
3. Sun-Wind Generator (Solar Thermal): solar at ground to produce hot air to power turbines
4. Fuel from Carbon Dioxide via Osmosis
5. Heating from Datacenters (Server, Network)
6. ‘Smart’ Electric Grid: capacity optimization without adding coal/gas
7. Energy Storage technology
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End Note for Energy Sector
“Globalization, Scale, Profitability”
Michael Hurley, UK Oil and gas advisory leader, PricewaterhouseCoopers
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Thank You.
soft copy of slides: www.totallyunrelatedrandomanddebatable.
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