The document discusses mergers and acquisitions (M&A) processes and traditional approaches to evaluating potential acquisition targets that often focus too heavily on financial and legal due diligence. It argues that a more holistic analysis is needed to truly understand problems within a target company and develop strategies to transform its performance. A case study example is provided of improving cash flow and profitability at a retail company by addressing inefficiencies in its supply chain management and inventory controls.

1. Where are the money tree roots? 1

2. M&A ProcessesI. Identify targetII. Analyze businessIII. AcquireIV. Turn aroundV. Increase bottom line results significantlyVI. Sell business 2

3. Why investors acquire and sell businesses? 3

4. I. “. . .to acquire or not to acquiry? - That is the question” 2 4

5. “. . . If yourbusiness or job is to acquirebusiness so it’s impossible for you not to acquire business.” 2 5

6. Other motives: 1. To buy competitor 6

7. 2. To buy market share 7

8. 3. To secure the rapid business growth 8

9. However, inall cases, the dominant issues are: 9

10. 1. How to findthe target if themost attractive companies have already been sold or they are conducting in such a waythat they it self attracts the capital? 10

11. 2. How to evaluate growth potentialof possible to buy targets? 11

12. 3. Where in the market can we find good leaders that could transform the purchased company in to the best? 12

13. II.“. . .to sell or not to sell? - that is the question” 2 13

14. Why companies are on sale?1. The price offered is so high that ownerthink that they will never acquire such sum. 14

15. 2. Owners do not knows how to get outfrom the problem circle… 15

16. 3. Fatigue, for aconstant cash-flow shortage ... 16

17. 4. Business activities purification 17

18. But doesn’t it look, that in all cases that meansthat for the owners burnt out one main - how toearn money with current business activities? 18

19. But does this mean that buyer has enough ideas? 2 19

20. Lets see what a buyer thinks?“Acquiring is easy. Owning is hard” -A fact of life 20 20

21. And what does the French people say?There are more fools among buyers than among sellers” -French proverb 21 21

22. Thus, the procedure says that: To create added value, an acquiring firm must get into businesses that can perform better under different management approach and strategy than they could perform operating as “it is” company! 22

23. However, the the traditional acquisition, sought: 1. Companies with undervalued or excess assets  Capital gains may be realized rather soon 23

24. 2. Companies in financial distress May be purchased at bargain prices and turned around 24

25. 3. Companies with profitability ratio lower than industry average 25

26. 3. Companies with profitability ratio lower thanindustry average:  After implementing new strategy there is a potential to improve! 26

27. “If you can not tie good knots, tie lots of them” - Yachtsman rule 27

28. The understanding of the systems never lies in the system - Russel Ackoff 28 28 28

29. Managers who attack results without analyzing causes usually make matters worse rather better -Logic axiom 29 29

30. Recruiting new The easiest way for old The old management is management is expensive management “to improve” – to not capable to generate and time consuming (250) ask for more investment (240) high ROI (300) There is a shortage of The old management is resisting to changes and qualified and available investors are facing with dilemma to change or not to The company washigh quality management change old management (220) sold because the (260) profit situation cash The old management has to change Investors are flow situation was its management approach (210) asking to get short unsatisfactory (310) term Financial Reengineering increasing improvements of Getting rid of financial leverage (190) profitability (230) excess assets (200) Investors try to apply their traditional tools to extract value and decrease risk (180) The risk to acquire target company increases (160) Investors tend to be overoptimistic about There is high chance to “value extraction” possibilities (170) overpay (150) Investors are forced to pick up just “good enough” companies (130) Investors are forced to buy companies as they Investors face a shortage of good have to generate return on capital funds (140) targets (110) The management of Great companies knows how to attract capital and in the market is big shortage of Investors use the traditional methods for selection Great companies (100) of targets and turn-around strategy (120) 30

31. There is a need to change Management reinforce cost Top Management (390) cutting initiative (370) The expected quick “value extraction” does not materialize (360) Investors want to assure fast profit The performance of company It takes 12-18 months until the does not improve enough (350) growth (380) new management starts implementing new strategy (270) The tension/conflict between management The internal and investors is increasing (340) comapany climat After joining the worse and worse Management blames company new One day investors realizemanagement needs (400) that situation is worse investors for not providing additional 4-6 than it was reported (330) enough capital (510) months “to get in”(280) Additional investments will When management “gets Management is trying to not be provided since the first in” it needs some 4-6 massage figures (320) did not show any months to develop new improvements to the bottom strategy (290) line (500) New management Additional investments done by old management have low probability to increase value, ”steps in” after some becouse If the old management really knew where to invest were would have been no need to sell the company (310) 4-6 months (260) Recruiting new management is The easiest way for old The old management is not expensive and time consuming management “to improve” – capable to generate high ROI (250) invest more (240) (300) 31

32. It is a simple thing to make things complex, but a complex task to make them simple -Meyer’s law 32 32 32

33. Creative thinking may simply mean that there’s no particular virtue in doing things the way they have always been done -Rudolph Flesh 33 33

34. 4.Traditional search for the hidden meanings. 34 34

35. Traditional analysis for the companies problems summarize It is not enough to conduct traditional financial and legal due diligences in order to understand the target to be acquired.. Investors can’t build the future of the acquired business making our decision only on the historical quantifications. Traditional approach does not provide insights for creating unique strategy how to transform company into cash machine. 35

36. “The ships speed depends on the design of the hull” -Ship design rule 36 36

37. Analyze: process Conventional way:  Conduct financial due diligence  Conducts legal due diligence “Different” way:  To analyze process flow and identify core problems  To find leverage points – develop new strategy which would generate money in short term and would help company to growth in long term  To prepare detailed actions plan  To analyze management “Simple solutions exist only in the minds of cowboys, fools and investment bankers” -Unknown CEO 37 37

38. Strategy problem Strategy problem means that 97% of companies are choosing the same methods how to compete. Is it possible to compete if companies apply the same tool box for decision finding? Typical strategic approaches are to compete on cost (cost advantage), compete on technology (differentiation advantage) or focus on niche market Regardless what to choose – old management or hire new management – that kind of strategy has a lot of risk. 38 38

39. Implementation problem The problem consists of the challenge how to get people’s buy-in. If you have hired management team and highlighted certain strategy it does not mean that implementation will be successful. What about resistance to change? Actually resistance means “invented not here” or “what is in that for me”. If you not to address this problem, then successful implementation is a mirage. 39 39

40. Increase sales/bottom line resultsHow to raise profits quickly?How to build long term value?“It’s hard to remember your goal is to drain swamp when you’re up to your posterior in alligators” -Unknown 40 40

41. “The ships speed depends on the design of the hull” - Ship design rule 41 41

42. How do we solve those “invisible” problems Instead of trying to compete on costs or to invest heavily into new technology and wait for results we take the guess work out of our strategy:  We make companies growth even when markets do not growth  We make that company competes not on price or technology, but instead creates new business model  Customized business model which we propose is almost impossible to replicate for our competitors 42 42

43. Case study M&A in Retail industry: We are looking:  Retailers who have problems with cash flow;  poorly managing shelves (Supply Chain). 43 43

44. Change in the hulls design We have Know - How for Assortment Management: 1. Technique that allows more effectively to control goods flow from the shelf (Stores warehouse, central warehouse) to the supplier. 2. We know, that lost sales makes up to 30% and overstock up to 30% also. After acquisition and clean up we can win up to... 44 44

45. Case studyTurnover Purchase price %Margin (Throughput) Purchase price $Inventory turns per year Inventory price $Overstock % Overstock $ TextLost sales % Possible additional Salessubstitutions % Margin from additional salesWACC % Cost of MoneyAdditional cash flowAdditional Profit 45

46. Why us? We have done it before successfully (we have references in Russia, Ukraine and Germany) We are excellent at:  analyzing various parts of organization such as supply chain, all types of production, marketing and sales  evaluating their interconnections  finding leverage points using proved methodology We will transform the leverage points into bottom line growth We have more than 15 years experience in doing that in different countries 46 46

47. You can order a book, workshop, analysis or lecture, or just a dream at: darius@versloknyguklunas.lt +37069841027 Darius Radkevičius Author of “God, Quantum physics,Organizational structure andManagement style”http://www.amazon.co.uk/Quantum-Physics-Organizational-Structure-Management/dp/9955689234/ref=sr_1_1?ie=UTF8&s=books&qid=1266446827&sr=1-1 47

48. www.god-­‐physics-­‐management.com 44 48