Saturday, 17 July 2010

Parallel Learning – M&A Case Study – Finding a PlayBoy Friend.

The ever ongoing demand for structural and organisational change in the auto-sector sees senior management changes at Ford and Volvo. Stephen Odell steps across from Sweden to Germany tasked as FMC's new European Head, and Volvo takes on its new Geely related Chairman in the guise of Li Shufu, with Olov Olsson as new Vice Chairman.

Quite obviously, during all periods of renewal the status quo is questioned.

Especially so after the pain experienced by the auto-sector over the last 3 years, eased only in part by near morphine like applications from the state to the largest VMs which dulled the pain yet left the need for deep and near constant surgeory. Board-level capability at steering their ship through what has been a prolonged period of treacherous waters has never been so apparent, dividing the wheat from the chaff in identifying those that were prepared, those who quickly reacted and those who flailed.

At this time, as the waters quell, no matter what condition that ship, the Board must endeavour to understand the broad scope of the future, beyond the all too typical “Narrow-Scoping” of “good / middling / bad” business development scenarios which illustrate only more of the same strategic and operational approaches leading to varying levels of success.

What may be deemed (Futurological) “Broad-Scoping” has normally been undertaken only in the best of times, riding high on market returns and as a darling of the capital markets; when immediate pressures are absent and the scale of internal 'fire-fighting' small.

That is the time for blue-sky thinking is it not?

Perhaps not always so.

Beyond his/her independent viewpoints and contribution on other general company matters, it is the special remit of the Non-Executive to think more broadly about the future of his/her commercial 'ward'. The very nature of the role means distance from immediate internal 'busyness', and so theoretically mentally open to a far wider range of inspirational influence - this especially the case if holding similar positions across 2 or more industrial sectors, or multiple positions throughout a single sector's value-chain.

Beyond an M&A ideas generator, such an individual must be the voice of external objective reason during the corporate 'broad-scoping' exercise. Prompted by management trends or capital market dynamics, overtly nave or ambitious middle and senior management may be unduly swayed and enthused by well intentioned outside third parties such as high-profile consultants or financiers seeking copy+ book-running deals. These sorts of quasi-independent contributors can of course be very useful for introducing alternative perspectives, yet it is both management's and the Board's remit to counter-balance the world of the possible with the world of the feasible.

Typically within M&A realms (and indeed IPO realms) 'Big Tomorrow' stories are underpinned by high impact presentations crammed with well set-out argument in which a small enterprise which rides today's & tomorrow's 'dynamic trends' requires the resources and scale-up abilities afforded by a new corporate guardian. The theoretical synergies of the 'May to December' relationship is laid-out with of course the full intent to excite the larger, more secure 'broad-scoping' enterprise. The ideal of stability meets dynamism is for all to see. What is often less clear is the ability for the 'broad-scoping' entity to critically and honestly assess what such patronage brings.

[NB Of course the same 'mating game' is played with the capital markets.

Presently here in the UK it is truly in-credible that the much publicised Ocado floatation seeks a valuation x50 p/e, at a time when solid, asset laden businesses hold x9 to x12 p/e, and long after China's own x30 p/e push has been deflated. On this basis, the Ocado 'Big Tomorrow' story which in reality is little more than a delivery service for Waitrose, in time others, and possibly itself, should not be viewed on par with a successful 'sector disruptor'. It plainly is not, no matter what how much PR spin is created around it. It will instead simply be positioned to take-over individual supermarket's own delivery fleet. This is indeed worthy, but the present business model - well critiqued in The Economist - is out of kilter with the smaller, local scale requirement which works around local customer dynamics].

Thus there will be many many occasions in all sectors when a 'light presented in the dark' will be highly misleading and indeed possibly graven – especially if it is in actuality seeks a parasitic stance. An entity at which first appears friendly but inadvertently shows itself to hold an alternative self-regard agenda, is of course to be avoided at all cost.

Thus the substance of the case presented here, is that any 'broad-scoping' enterprise must lay out its own firm criteria by which it judges an M&A match to offer the foundations of success – at strategic, operational and bottom-line levels.

Part and parcel of this procedure for the auto-sector is the need to learn from the external world, both from within a firm's own sphere, and from further afield in other industrial and commercial realms.

Such a case study that may be of merit is the (still very early) M&A possibility between FriendFinder Networks' $210m offer for Playboy Enerprises Inc.

At first appearance it seems like an odd mis-match between the new and old worlds of a contemporary dating website and a renowned Men's magazine publisher. However beyond a diverse range of websites (including men orientated building materials), the former also operates AdultFriendFinder and own Penthouse Magazine.

Its brand coverage across magazine publishing, television and of course the web reflects Playboy's own coverage and so on the surface highlights synergies. So in the typical M&A value-creation models that espouse 'horizontal', vertical' or 'diagonal' integration, there is seen to be overlap.

Obviously there is scope to build a pricing-based ladder model, placing a higher-brow Playboy over a more overtly sensationalist, pornographically driven Penthouse. But the wish to build the adult-entertainment side of the FriendFinder Network business also reflects the desire and need to cross-feed consumer traffic.

The relationship between the reel packaging business and FriendFinder may not be immediately apparent, but the inter-link between construction sites and the 'show-reel' aspect of adult films is none the less their and subconsciously strong. Moreover, the relationship site FriendFinder links across to AdultFriendFinder for those relationship website visitors that may not have found the prospect of love, yet instead seek prospects for near term physical gratification, and of course inter-linked again is Penthouse (and would be Playboy) for immediate visual gratification.

Thus, as is the ambition of most portfolio holding companies, FriendFinder Networks seeks to build an effective and efficient consumer feed-through and circulation model which both maximises capture and spend.

In regard to the automotive sector, it has a history of 'vertically' leveraging its supply-side value chain, and 'horizontally' leveraging the R&D, development and production processes, as seen through-out historical M&A's, from GM's origination to pass-the-parcel of Chrysler (eg Rootes, Daimler & FIAT)

Most illustrative are Henry Ford's early days with agrarian supplies from lumber, to rubber to soy plants (for body frames, tyres, seals and pipes to plastic mouldings) to GM's creation of the multi-systems Delphi supply base to Ford's more recent acquisition and disposal of Hertz Rent-a-Car. (This exploitation of vertical integration replayed by the Japanese, Koreans and Chinese).

In latter days, looking forever up to the top of the value-curve - re-positioning western auto-companies as brand enterprises (reflecting Jacques Nasser's ideal) - many alternative mobility models have been dreamt-up; and either largely left on the drawing board: as with INDEGO, or tentatively introduced: as with PSA's Mu

[NB see the review of PSA in investment-auto-motives' previous post].

However, whilst this reflects a more visionary CRM stance, is there more?

Whilst the worldwideweb has undoubtedly been exploited by auto-companies expanding beyond the normative channel advertising vein – from 30 seconds TV slots to viral Marketing to Corporate Messaging to Consumer Feedback – the previously described 'network feed' pattern enabled by the web – and as being exploited by FriendFinder Networks – may offer an alternative philosophical viewpoint by which auto-execs can survey the access points and transfer channels of their terrain.

Of course even though evolving heavy industry manufacturing companies tied to the realities of balancing stretched B2B relationships to today's more fragile B2C patterns, They must attend to required but not over-played expenditures in capital equipment, supporting the supply & distribution chains, and maintaining as much captive control of dealer and customer credit finance as possible.

But looking elsewhere into the very different worlds of other industries which themselves focus on CRM and the systemic captive through-put of customer attention and spend is an increasingly critical feature of a modern - and capital markets attractive - automotive company.

But in that search for identifying, creating and leveraging the potential of the future, Execs and Non-Execs alike must temper the 'fast charge' business model idealism with an objective outlook that underpins a slower yet stronger built reality that firmly demonstrates the firm's measurable and true innate value.