Chip equity

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:

I. Feasibility

Here the interviewee should investigate how much Chip’n’Chip is willing to invest in OnBoard and how much OnBoard is asking for.

• Availability of money for investment
• Market attractiveness
• Recent growth
• Competition
• Opportunities to differentiate the company’s own products

Main conclusions

• OnBoard is looking for $80 m and, as it is worth $320 m, would give away 20% of its shares for the investment
  (as the new company value would be $400 m after investment).
• There is a high competition in the industry.
  Producing in China or Southeast Asia is more
  cost-efficient than in Japan or other developed countries.
• The market is divided into two main technologies:
  The older one – 2-layer PCB – is in decline.
  The newer one – 3-layer PCB – on the other hand is booming.

II. Company

Here the interviewee should ask about the attractivity of OnBoard:

• Profitability
• Competencies
• Production capacity
• Profitability of new boards

Main conclusions

• OnBoard is profitable.
• If the investment is done, the new factory in Vietnam will produce an extra 6 million units of the 3-layer PCBs.
  These boards will generate a profit of $3 instead of $1.5 for the
  2-layer ones. The market seems very promising.

III. Synergies

Main conclusions

• The profit due to the full capacity of OnBoard would be around $ 27.5 m.
• Chip’n’Chip’s factory in India requires alone 10 m units of the 3-layer board. That means that if they invested in OnBoard’s expansion of the factory in Vietnam, all 6 m boards produced could be sold to the factory in India.

The additional profit made with the factory expansion would be:

• We conclude that with the synergies OnBoard could make profits of up to $45.5 million.

= $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.

IV. Conclusion

Chip’n’Chip should invest in the expansion of the existing factory in Vietnam for producing 3-layer PCBs.

Main reasons

• Although the market of 2-layer PCB is on the fall, the 3-layer technology is on the rise, expanding more than 10% a year lately.
• Even producing only the older 2-layer technology, the existing factories in China, Germany and Vietnam are already profitable. This is mainly due to the fact that these factories compete with Japanese companies that have higher labor costs.
• Considering possible synergies between Chip’n’Chip and OnBoard, OnBoard’s profit after the investment would increase up to $45.5 m.

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.

Assume that Chip’n’Chip decided to invest in OnBoard and that the utilization of the factories would be at 100%.

The profit of Chip’n’Chip would be around $9.1 m.

As Chip’n’Chip’s CEO, how would you negotiate with OnBoard to try making more profit?

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).