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The role of competitive intelligence in inter-enterprise relationships

Companies fail to rely on real market and competitive intelligence (CI) to fill the gap in pre-acquisition due diligence as well as post-acquisition execution

Poise and execution: Despite all his flash and showmanship, that's exactly what "Broadway Joe" Namath embodied, if we can judge by his MVP status in one of football's most exciting upsets as he led the New York Jets to a 16-7 victory over the Baltimore Colts in Super Bowl III. By putting the AFL on equal footing with the NFL, the victory laid the groundwork for one of the most significant mergers in late 20th century American competition--the one that brought together the two football leagues. But for business leaders today, perhaps the phrase should be "planning and execution," because in contemporary business competition, nothing matters more than making plans, sticking to them, and then delivering on the promises. One of the most important, high-stakes games is the strategic undertaking of mergers and acquisitions (M&A), defined even more broadly by all inter-enterprise relationships, including strategic alliances, joint ventures, consortia involvement and technology transfers.

By many accounts, M&A activity is one of the riskiest in the toolkit of business growth. Most fail to enhance shareholder value ... to the statistically disappointing tune of some 83% of such initiatives, according to KPMG (kpmg.com). So why is it so tough to pull off a success in one of the most active areas of business strategy (more than $2 trillion worth of deals around the world and $500 billion in the United States alone in 1998)? It is often because of a lack of focus in one critical knowledge management arena: Companies fail to rely on real market and competitive intelligence (CI) to fill the gap in pre-acquisition due diligence as well as post-acquisition execution. Such information can help avoid bad "fits" and help ensure good M&A decisions. It is no coincidence that most M&A activity is undertaken with traditional competitors in a given market, and relatively rarely as a means of expansion into new or faster growing, unrelated markets (although notable exceptions, such as Cisco and Microsoft, apply).

Choosing a target It's important to understand the traditional steps in the acquisition process. First, targets are identified based on pre-established relationship criteria that will explain why a particular firm is seeking a particular target as a candidate. The next step is scanning for, seeking out and identifying specific targets that have qualities that the acquirer needs or wants. Next, evaluation/analysis is performed on those targets to arrive at a short list of potentials. From there, due diligence is conducted on site to validate externally collected assumptions about the target. Finally, a recommendation is made and if that recommendation is positive, negotiation of terms, consummation of the deal and integration of the enterprises ultimately ensue.

But where in that cycle does the CI function fit? At all levels, from pre-acquisition candidate screening to integration of the two enterprises, intelligence is necessary to support the decisions that are usually very non-analytical in most acquiring (and acquired) firms. Intelligence is used at the front end for more than just early due diligence, it can also uncover assumptive starts (as well as surprising revelations) and provide a guide for deeper research later on. That includes financial, marketing, technical, product and production or manufacturing information, as well as evaluation of strategic fit and venture benefits (advantages and disadvantages), product/service line, review of product life cycles (PLC) and market share/position, as well as other market forces. Finally, good M&A specialists try to build an understanding of technical capabilities and opportunities, any unfamiliar industry trends, customer and supply chains, potential risks on the downside and summary estimates of the costs and benefits of the deal.

It goes without saying that this information comes from all kinds of sources--from sales force and sales support (one highly underused intelligence gold mine), top management, suppliers, customers, existing surveillance of the company or market, as well as trade publications, specialty or association newsletters and venture capital activity.

Traditional M&A activity--evaluating, negotiating, consummating and integrating such deals--is focused on two areas of responsibility in most firms: legal and finance. But a new model is called for--to include not just the intelligence team, legal and finance, but also market research, marketing, R&D, MIS/operations, HR, engineering and business development. It is largely a question of functional involvement in the relationship with the M&A team and the acquisition process--and it's true that as the deal unfolds, the intelligence team undergoes a decreasing level of involvement during the transition from recommendations phase to negotiation phase. However, many M&A teams have an intelligence liaison sitting at the negotiating table whispering about how a particular point has changed over time on the part of the target.

Analysis is where intelligence really hits the ground running. One technique often used as a starting point for analysis and recommendations planning in candidate selection is a brainstorming session at which initial acquisition criteria are identified, sorted and ranked according to importance to executives. There are usually five to seven criteria for acquisition decisions--two strategic and five financial. They often boil down to subjects such as: return on investment (ROI); break-even (B/E); compounded annual growth rate (CAGR); gross profit margin (GPM); production capacity to fill; products/services mix; intellectual property; people/knowledge acquisition; and investment scale and scope (Do we want to make five acquisitions for $20 million or one for $100 million?).

Those criteria for acquisition candidacy are evaluated with definition parameters (circumstances) aligned for each, metrics for how candidates will fit the criteria and acceptable exceptions to the criteria. During the candidate identification phase, it's important for intelligence to play a role in summarizing the basics. One such tool will include the candidate list detailing companies, their contacts, history, products/markets, differentia vs. competitors, funding and financials (including revenues and profits, if known), employees, sales structure and any notes or source citation, plus details on the current relationship with the firm. The other main output product is a company overview of each target candidate that matches the criteria--describing each company in greater detail including all of the above, plus its founders/investors, a summary of its acquisitions criteria fit and an explanation of why the company is appealing under the current circumstances, plus a SWOT (strengths, weaknesses, opportunities, threats) analysis.

Not fully devoured It’s inappropriate to consider all inter-enterprise relationships as strictly M&A in nature. Many types of relationships do not involve the wholesale swallowing of the target by the acquirer. Somewhat less risky, less intimate options should also be presented--joint ventures, strategic alliances (including cross-investments), consortia organizations and technology transfer activities; sometimes they are far better suited than all-out acquisition. Lately, there has been a steady up-tick in consortia as the number of partners in those relationships tends to increase to three or more. Important factors should be considered for each option. With strategic alliances, strategic intent and fit are most important; with joint ventures, an understanding of the contribution of each partner, with one usually taking the role of the teaching or the "stretch" partner; and with consortia, a tight definition of what roles each actor will play.

Two tools used widely by many intelligence analysts include the "Extended SWOT Analysis" and the "Strategic Gap Analysis.” Extended SWOT is focused on understanding the strengths and weaknesses (usually internal to a company), opportunities and threats (usually external to the company) faced by a particular firm in a few core areas, with others added as needed. Those areas map nicely to the acquisition criteria described earlier--market share gain, market entry, intellectual property, financial metrics, management team, owners/founders, products/services, manufacturing/production capabilities and strategic fit. A comparison chart is built for each one of those areas that considers each alongside the others in terms of the internal strengths and weaknesses and external opportunities and threats presented by the target.

Strategic Gap Analysis looks at many of those same areas (plus business models, customer satisfaction/loyalty, competitive differentia, corporate culture, talent and cost structure), but is focused on the relationship between those criteria to the acquiring firm in terms of four analytical realms (often represented by side-by-side columns in the output of the intelligence product)--current state, desired state, the strategic gap between those, and the costs and benefits of closing the gap.

But one of the most important priorities for involving intelligence is in the evaluation of risks and potential mistakes in executing the deal--and a forecast of the likely situation as it might exist in the future. Those include an understanding of real and intellectual property asset valuations, employee retention, financial liabilities, deal complexity, ownership structure, as well as providing sanity checks to test assumptions, review project objectives and avoid the inevitable "group-think" that often accompanies such undertakings. Potential pitfalls such as non-strategic motives, myopic opinions of real value, poorly defined resource requirements or changes in strategic fit criteria can be avoided by intelligence providing a reality check before the deal devolves into just another statistic.

Finally, as the project is passed to M&A specialists during negotiation, consummation and integration, intelligence is there to help with negotiation strategy and support, testing assumptions and monitoring directional changes. From the perspective of the intelligence team at this point, the acquisition is considered "complete," and the analyst group can move on to the next project.

While this argument has largely been presented from the point of view of the acquirer, all of the principles are of equal importance to the acquired. Involving the intelligence team in M&A activities, in addition to benefiting both parties, helps provide a tangible, value-added means of realizing return on investment.

Arik Johnson is managing director of Aurora WDC, a CI consulting and research bureau, and can be contacted through the Web site www.AuroraWDC.com.

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