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.

 

site in progress

 

 

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

wages/union/

specific knowledge

environmental constraints

PP&E, land

materials

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

who are the players

public or private

legal constraints

financing/reimbursements

-

Well known

à Take care early to keep contacts and specialists from Montagne Medical

Public procurement

who are the players

legal constraints

how works the purchase process

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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© Dipl. oec. Anke Wittig