Case study
by Anke Wittig, Harvard extension school, course: Merger and Aquisition
This sample case covers business portfolio analysis, potentials and challanges, pricing and culture.
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What are the strategic issues associated with the proposed acquisition?
Purchasing company
Sterling is a consumer products company. Sterling had 3,281 million USD revenue in 2012 with net income of 323 million USD. Sterling produces in 20 countries and sells worldwide in 100 countries through retailers, mass merchandisers, and grocery stores. The company focuses on quality consumer products including a number of highly regarded brand names.
The consumer product industry had weak growth in overall demand. Competition is strong, because customers can easily substitute products. Sterling considered whether it should enter the healthcare sector with a similar product line.
The following table shows its strengths and weaknesses regarding opportunities and threats:
|
Sterling Household Products Company |
Opportunities |
Threats |
|
Acquire Montagne Medical’s germicidal, sanitation and antiseptic products division |
Little overall demand growth in limited high competitive market of consumer products Powerful retailers put pressure on price |
|
|
Strengths |
Sterling has already successfully acquired brands
|
Sterling is a leading manufacturer and marketer of consumer products through all kinds of mass stores Sterling is highly regarded |
|
Weaknesses |
Sterling has no distribution channels into hospitals procurement for germicidal, sanitation and antiseptic products |
Operating expenses grow faster than inflation Retailers have strong power in price negotiations |
How does the target company fit?
Montagne Medical Instruments owns a division that produces germicidal, sanitation and antiseptic products for hospitals. The division had 143.5 million USD revenues in 2012 with net income of 27.0 million USD.
On first sight, product lines of both look similar, but distribution channels are totally different. Looking more carefully on Sterling and Germicidal, sanitation and antiseptic products division, I make the following conclusions and suggest the following actions.
|
|
Sterling Household |
Germicidal, sanitation and antiseptic products division of Montagne Medical |
Conclusion/ à Action |
|
What is the Product? |
Wide range of household products for cleaning, sanitation , cosmetics |
Germicidal, sanitation and antiseptic products for hospitals |
Products are similar |
|
Who are the customers? |
Private households worldwide in 100 countries |
Hospitals and other medicare/healthcare institutions worldwide |
Customers differ |
|
Image |
Well known Quality products Trust |
Products effective to kill wide variety of germicidal and bacterial infections Trust |
Positive image swaps over to human behaviour in institutions |
|
Market |
Market grows slowly, competition is high, market entries/exit rate high Consumers can easily substitute products Environmental/legal constraints for materials and products |
Market grows rapidly, difficult to enter market Environmental/legal constraints for materials and products Profit margins strong Market fragmented
|
Revenue growth in medicare/healthcare but not in consumer products growth trough acquisition less risky than market entry |
|
Production facilities o wages/union/ o specific knowledge o environmental constraints o PP&E, land o materials o economic/legal condition |
Production facilities in 20 countries Good knowledge in economic/environment/legal condition
|
Production facilities Good knowledge in economic/environment/legal condition
|
Synergy between teams Capacity synergies Synergy in procurement of materials
|
|
Distribution channel |
Mass merchandisers, retailers, grocery stores |
Institutional procurement (public and privat) Legal constraints Institutions react more slowly than households |
Distribution channels differ no synergy |
|
|
Sterling Household |
Germicidal, sanitation and antiseptic products division of Montagne Medical |
Conclusion/ à Action |
|
Medicare/healthcare systems worldwide o who are the players o public or private o legal constraints o financing/reimbursements |
- |
Well known |
à Take care early to keep contacts and specialists from Montagne Medical |
|
Public procurement o who are the players o legal constraints o how works the purchase process o how works the inventory/delivery process |
- |
Well known |
à Take care early to keep contacts, and specialists from Montagne Medical à Take care to keep and prolong delivery contracts with customers |
|
Currency risk |
Can be partially hedged within the company at least between production cost and sales in foreign currency |
Can be partially hedged within the company at least between production cost and sales in foreign currency |
Potential to hedge internally increases Synergy between teams Reduced currency risk |
|
Risk in short term liquidity |
Actual Dec. 2012 Strong cash basis: $342.1m Shortterm bank payables: $181.0m Working Capital: $429.8m Longterm debt: $1.257m |
Actual Dec. 2012 Working Capital: $29.8m
|
Risk increases because of higher working capital à Monthly liquidity plan needed à Watch higher working capital à Increase minimum cash/short term bank payables after purchase |
|
Write off risk |
DSR: 38.0 DSI: 25.3
|
DSR: 46.4 DSI: 60.1 |
à Check contracts for payment terms, delivery timeschedules, à Set up combined international implementation team for Inventory management |
Conclusion
There is greater positive potential in the acquisition than there is potential for obstacles. Potentials are:
- High growth rates in the market for germicidal, sanitation, and antiseptic products for the healthcare sector.
- Similar products
- Positive image swaps over to human behaviour side of the institutional procurement
- Acquisition is less risky than own product development
- Synergy between production facilities possible
- Synergy in procurement for materials is likely
- Synergy between teams in managing currency risk
Sterling has two strategic challenges. First challenge is the new customer segment. Second challenge is financing a higher working capital rate.
Action plan to manage challenges :
- Take care early to keep contacts and specialists from Montagne Medical
- Take care to keep and prolong delivery contracts with customer
- Devise monthly liquidity plan
- Watch higher working capital
- Increase minimum cash/short term bank payables after purchase
- Check contracts for payment terms, delivery timeschedules,
- Set up combined international implementation team for Inventory management
What uncertainties or trends do you see which could make the acquisition more or less attractive on both a financial and a strategic basis?
Trends
There are increasing public health concerns about acquired infections in hospitals. Hygienic issues in hospitals will get greater intention in the future. Therefore, an increasing demand for more effective products is likely.
Uncertainties
Healthcare providers are reimbursed. Public budget constraints and ongoing increase in healthcare costs could put pressure on price and margin. In many countries outstanding receivables are difficult to collect. There might be an increase in write offs.
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