Polycom’s Acquisition Process – Analysis And Screening Criteria

Analysis

Discuss about the Polycoms Acquisition Process.

In the given case we are dealing with two companies, PictureTel and PolyCom, they are in the business of Audio-Video conferencing. PolyCom has a share of 90% in audio conferencing and it is leading in the video conferencing market. PictureTel once had a huge market share which is declining currently. Moreover they are going through a loss $ 107 million in the year 2000.

In the given case we have to follow the various process of PolyCom, which they consider while doing any acquisition. We are provided with the Income statement of PolyCom and PictureTel, and thei market share in Video Conferencing Products. Since PictureTel just launched another product IPower which is a substitute of a product launched by PolyCom. It is being seen that IPower might have a better market future than t he one launched by PolyCom. Due to lack in engineers and Research and development team of PolyCom they are considering acquisition. We have to decide whether acquisition of PictureTel is better option for PolyCom or not.

We have to perfom Screening Test, Sensitivity Analysis, Net Present Value etc. We have to also consider other various factors such antitrust issue, lawsuits against PictureTel, and Integration of both companies after acquisition.

Whether to Acquire or do an inbuilt Video Conferencing Product:

Polycom is the company which has a market share of 71%, currently they are selling ViewStation product line which has a market share of 54%. ViewStatiuon product of Polycom deals with prototypical appliance, they want to enter into something major i.e. IPower of PictureTell, which is more technologically advanced and has a better future along with good market share for personal video conferencing.

Their first concern is whether they can make such product or should they outsource their manufacturing (by acquisition of manufacturing company). If we go through the 4 acquisition, we get to see that Polycom has always acquired companies who manufactures product for them and they provide their brand name, marketing help to excel the market.

Name of the company acquired	Product produced by them	Reason
ViaVideo Communication Inc	Video conferencing equipment	Since ViaVedion was in product development stage, it was reasonable to acquire it rather than in house production of video conferencing product.
Atlas Communication Engines, Inc	Integrated Access device Technology	Atlas Communication was again not a big firm, and it was still dealing with their Research & development phase. Polycom again considered purchasing the small firm.
Circa Communication	Voice-over-IP technology Prodcut	Many companies already started to built Voice-Over-IP, if PolyCom started to built such product, it would had been a very late launch of product, as most of the companies would have already secured their market place. So they acquired Circa Communication and financially helped them to get through the stage of production.
Accord Networks	Network System	They didn’t have the core competencies and engineering expertise in that area. So they acquired the company with 50% market share instead of making it on their own.

In the given case Polycom neither have engineers within depth expertise in video conferencing technology, nor research and development team, and ViaVedio is not capable of making such product. Polycom lack such feature hence they are considering of acquiring PictureTell for such benefits and increasing their market share.

Since PictureTell is financially declining, Polycom is considering acquiring it for future benefit.

Whether to Acquire or do an inbuilt Video Conferencing Product

Whether to Acquire PictureTel or not?

PolyCom considers only those deals which help to maintain or enhance its target operating model. Acquisitions needed to fill either a technology or product gap for PolyCom and good cultural fit also needed to exist between the two companies. And also, the company needs to pass the small test – no potentially costly lawsuits, no hint of financial impropriety.

For considering PictureTel, we have to first see whether it fulfills the target operating model.

Growth rate of PictureTel can be calculated from Exhibit 8 and Exhibit 1b:

We have to apply compound Growth rate formula to calculate growth rate of PictureTel,

Formula of compound annual growth rate is,

CAGR = (Ending Value / Beginning Value) ^ (1 / Number of years) – 1

            = (530 / 44) ^ 1 / 4 – 1

            = 86.30% per year market growth

Therefore, Growth of PictureTel would be, 16% (Exhibit 1b) of 86.30% i.e. 13.80%

Estimated increase in Financial Statement of PictureTelupto 2005 would be as follows:

Assumptions for the below calculations:

• Cogs increase as a percentage of total revenue
• SG&A and R&D cost remains similar to previous year

Particulars	2001	2002	2003	2004	2005
Revenue:
Product Revenue	(174071*1.1380)	225429.6	256539	291941	332229
198093
Service Revenue	(71078*1.1380)	92049.14	104752	119207	135658
80887
Total Revenue	278980	317479	361291	411149	467887
Cost of Goods Sold:
Product cost of Revenue	(128252*1.1380)	166092	189013	215096	244780
145950
Service Cost of Revenue	(59945*1.1380)	77631	88345	100536	114410
68217
Total COGS	214167	243723	277357	315633	359190
Gross Margin	64813	73755	83934	95516	108698
Operating Expense:
SG&A Exp	65000	65000	65000	65000	65000
R&D	47000	47000	47000	47000	47000
Total Operating Expense:	112000	112000	112000	112000	112000
Loss from Operations:	-47187	-38245	-28066	-16484	-3302

Checking for operating model

Assumptions:

• If PictureTel is acquired by PolyCom they will lay off 50% of the Employee, so their SG&A expenditure will reduce by 50% of the current expenditure.
• COGS, sales and marketing costs are calculated as a percentage of Revenue.
• R&D cost remains similar to previous year.

Inference from above table: Although operating model criteria doesn’t get met in the first year, it will eventually start getting met from 2002. However the model doesn’t take into account the anti synergy cost arising due to Ipower eating into the revenue of Polycom’s earlier product.

PictureTel is providing technology as well as providing a new product, IPower to deal with the market. Since one of the founder of Polycom Brian Hinman, was also the founder of PictureTel, along with Jeff Rodman being the 5^th employee of PictureTel. Since they used to work in PictureTel, PictureTel will not have much problem with “cultural Fit” factor, since the work ethics and some the policy will be similar to PictureTel.

The company, PictureTel made various changes in their financial statement quarterly in the past, and during one of those changes it received a lawsuit from Securities and Exchange Commission of $ 12 million, which is quite a big amount. They may in future be able to again continue the same behavior of changing their Financial Statement which might cause them a law suit from the SEC. For that Polycom has to take over their accounts and other financial department totally.

Since the Value of operation is already negative, calculation of NPV is of no use. If we see the estimated cash flow pattern, we get to see that the loss of PictureTel is decreasing each year. If Polycom invest in PictureTel, it might turn into a profiting company within time.

Whether to Acquire PictureTel or not?

Sensitivity Analysis:

If we consider doing Sensitivity Analysis, we have to consider changing the growth rate of PictureTel, but even if we increase the growth rate, the estimated cash flow will still be negative, as the Cost of Goods sold will also increase with the same growth.

If the Cost of Goods sold and Operating Expense increases at a decreasing rate or a rate different from the rate of growth, then it might give a positive cash flow. Those cash flows might not be higher, but positive enough for a better future.

Since the founder of the company PolyCom, Brian Hinman and Jeff Rodman were also the founder and employee of PictureTel, they will not have much problem regarding cultural fit of the integration. But since the previous acquisitions of PolyCom has always been of those companies whose number of employees generally ranged from 20 – 180 employees. And the number of employees of PolyCom itself is 537 which is less than the employees of PictureTel i.e. 820. PolyCom will have to do some huge number of redundancy, as they only require their after sales service staff, engineers and research & development employees. They might have to curtail 50% of the employee or more to make the integration work.

Generally during such acquisition, employees of the company which is being acquired are more scared about their status of job. If the company which is acquiring are clear from the beginning about their strategy, number of employees that will be curtailed then it will help the acquiring in integration.

If they acquire PictureTel, then it will require a very carefull planning of integration, and it cannot be rushed upon as PolyCom did with their other such acquisition.

If they acquire PictureTel, they will have a problem with antitrust issues which will be time consuming and costly. Already PolyCom is paying a huge consideration for acquiring PictureTel, with loan and cost for anti-trust issues their expense is only increasing. They should either re consider their consideration or come up with a better way to acquire the benefit of PictureTel.

Conclusion

From the above analysis we get to see various results, we were to decide whether acquisition of PictureTel by Polycom would have been a better decision or not.

We first checked whether Polycom is capable of making the video conferencing product on its own or they need to buy it from outsiders and then sell it in the market with their own brand name and advertising technique.  Since Polycom lacks better engineers and good research and development team, they are bound to get the product manufactured from outsiders. Hence, it is then decided that we should acquire a company whose engineers and Research development are better than the one of Polycom.

PictureTel is in perfect position to be acquired, and since it has the requisite engineers and R&D team plus they have the best after sales service facilities which Polycom lacks. Along with these benefits they can also have a huge market share, which will make them the ultimate seller of Audio-video conferencing products.

From the above analysis which Polycom generally use to determine whether they should acquire a company or not, we concluded that acquiring PictureTel would be a better option for future benefit. The only struggle Polycom will face will be due to antitrust issued. For that we can make sure that Polycam doesn’t acquire PictureTel immediately, when the financial position of PictureTel improves a bit, then they should acquire it, so that in future they can cover up the expense of antitrust issues.

We considered screening test, sensitivity analysis, Net Present value and integration problems that we will face during such acquisition. We prepared the estimated Cash flow of PictureTel from which we get to see that the loss of picture tell is reducing gradually and it will turn into profit if Polycom provide its brand name and advertising facilities. Currently they should provide a loan of $15 million to PictureTel. From all that we finally concluded that acquisition is better option.