Problem Definition
Our client is an electronics holding called Chip’n’Chip.
They want to invest in a Printed Circuit Board (PCB) manufacturer called OnBoard, and asked you whether it’s going to be a good investment.
How would you help them?
Our client is an electronics holding called Chip’n’Chip.
They want to invest in a Printed Circuit Board (PCB) manufacturer called OnBoard, and asked you whether it’s going to be a good investment.
How would you help them?
Notice that the client holding does NOT want to buy the PCB manufacturer entirely, instead just invest in it.
This case encompasses very well a private equity investment. It covers both strategic aspects as well as a detailed analysis of the ROI.
The following structure gives an overview of the case:
Here the interviewee should investigate how much Chip’n’Chip is willing to invest in OnBoard and how much OnBoard is asking for.
Market-information that can be shared if asked by the interviewee:
The market for the 2-layer PCB technology has been declining globally 4% per year in the last years and tends to keep falling. The market for the new 3-layer technology had an increase of 10% per year in the last few years (smartphone boom). OnBoard has a valuation of $320 m. They are looking for a private equity investor to inject $80 m.It will be used to expand the Vietnam factory in order to manufacture 6 m units of the 3-layer PCB technology.
The 2-layer PCB CANNOT be used in advanced and small equipment like the last generation mobile phones, tablets and laptops (requires the 3-layer PCB). Chip’n’Chip has more than $80 m for investments. It requires a 10% ROI in the first year in order to invest. There is a lot of competition in the industry (mainly in the 2-layer technology).Japanese manufacturers control more than 50% of the market, but have been facing stagnation as new manufacturers in Asia improve their technology with less labour costs.
Here the interviewee should ask about the attractivity of OnBoard:
Information that can be shared if asked by the interviewee:
The profit should be calculated by the interviewee!
The complete solution can be found in Table 2.
Information that can be shared if asked by the interviewee:
Chip’n’Chip companies buy 20 million 2-layer PCBs in the US at the same price of OnBoard. This is a hint that these boards could be bought from OnBoard!
There would be an increase of OnBoard’s 2-layer PCB production to full capacity in Germany and China.
The additional profit made with the factory expansion would be:
= $27.5 m + $18m = $45.5 m
As Chip’n’Chip would hold 20% of OnBoard, they would also have right to 20% of the profit.
That means ROI of around 11.3% for Chip’n’Chip.
Chip’n’Chip should invest in the expansion of the existing factory in Vietnam for producing 3-layer PCBs.
Chip’n’Chip’s share of the profits would be of $9.1 m.
That would correspond to a ROI of 11.3%, satisfying the requirement of at least 10% ROI in the first year.
Possible answer:
Since OnBoard’s factories would be used to their full capacity thanks to the new PCB orders of current Chip’n’Chip companies, the CEO could negotiate for Chip’n’Chip’s companies to pay a special price, lower than the US$5.
This way, OnBoard would have to share a part of its profit margin with Chip’n’Chip.
More questions to be added by you, interviewer!
At the end of the case, you will have the opportunity to suggest challenging questions about this case (to be asked for instance if the next interviewees solve the case very fast).
If the investment takes place, the unit costs for the new 3-layer boards will be exactly the same as for the old technology. The unit price, however, will be of $6.5.
If the investment takes place, the unit costs for the new 3-layer boards will be exactly the same as for the old technology. The unit price, however, will be $6.5.
Assuming the transportation costs from China and Germany to the USA are not significant (as PCBs have a very high value per kilo) this increase in production would result in a new profit for the sales of 2-layer PCBs of US$27.5 million (15+7.5+5).
If the investment takes place, the unit costs for the new 3-layer boards will be exactly the same as for the old technology. The unit price, however, will be of $6.5.
If the investment takes place, the unit costs for the new 3-layer boards will be exactly the same as for the old technology. The unit price, however, will be $6.5.
Assuming the transportation costs from China and Germany to the USA are not significant (as PCBs have a very high value per kilo) this increase in production would result in a new profit for the sales of 2-layer PCBs of US$27.5 million (15+7.5+5).