Problem Definition
Our client is a French holding company with annual revenues of about €1 billion.
Their portfolio consists of different companies that are mostly in manufacturing industries such as the oil & gas industry and the automotive industry.They do not have a specific investment focus. They prefer to buy the best companies available that are also related to their existing businesses.
They are thinking about acquiring an auto parts dealer, OTOpart, and want to know whether you think it is a good idea.
Comments
Since this is a candidate-led case, the candidate should drive the case from start to finish.
This is a typical M&A case where a holding company is deciding whether it should acquire another company.
The interviewee should develop a clear set of criteria to assess the potential acquisition. Based on the data collected, the interviewee should come up with a solid recommendation for the client.
- The auto parts market is very attractive.
- Although OTOpart is less attractive now, the holding company could turn it around by targeting new customers.
- There is potential for synergies.
Detailed Solution
Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.
Paragraphs highlighted in blue can be verbally communicated to the interviewee.
Paragraphs highlighted in orange indicate hints for you how to guide the interviewee through the case.
Suggested case structure:
I. Feasibility
We should first determine whether it is feasible for our client to acquire the company. If it is not remotely feasible, we do not need to analyze further.
- Capital available to buy the firm
- Experience in the target company’s industry
- Competent management for the target company
Information that you should share if inquired by the interviewee:
- Available capital is 3 times more than the amount needed to acquire OTOparts.
- Should the company be acquired, the holding can reallocate experienced managers from other automotive companies that the holding owns.
- In the automotive sector, the holding owns the majority of voting shares of two important car and bus manufacturers in France.
Key Insights
The holding has enough capital and competences to acquire OTOparts.
II. Company
Now, the interviewee should ask relevant questions about the target company and about the holding.
- Company’s profitability
- Company’s market share
- Company’s key customers
- Can the holding use its other businesses to leverage OTOpart’s revenues and profitability
- Potential synergies
The interviewee should also pay attention to how companies are changing over time!
A company with a big market share is much less attractive if its market share has been falling drastically over the last few years.
Share
Diagram 2 if the interviewee inquires information about market share.
In Diagram 4 you will find a detailed breakdown of the competitors.
Share this in the next chapter, if possible.
Information that you should share if inquired by the interviewee:
- OTOpart’s revenues and profitability have been declining slowly and steadily over the last 3 years (around 3% per year).
- Their market share in France was around 28% last year.
- The company does not conduct business internationally.
- Historically, the company has focused on selling parts to small and brand-independent workshops in small towns.
Key Insights
- The company itself is NOT very attractive. However, that may be changed with a mid-to-long-term strategic change.
- OTOparts could purchase its parts from the holding’s automotive parts manufacturers. This will reduce OTOparts’ costs.
- Logistics and SG&A costs could be shared among the holding’s companies. This also reduces OTOparts’ costs.
- OTOparts could take advantage of the holding’s contact network to position itself more strategically in the auto parts market.
III. Market
These are the most relevant questions about auto parts industry and its future.
- Segmentation
- Market and segment size
- Rate of change in each sector
- Profitability of each segment
- Threatening market trends (substitutes, etc.)
- Main competitors within each segment
- Market fragmentation
- Market enty barriers
Share
Diagram 3 with
profit margins of different market
segments, if the interviewee inquires such information.
Share Diagram 4 with an overview of the market competitors, if inquired by the interviewee.
Information that you should share if inquired by the interviewee:
- It is estimated that the auto parts market in France will generate €400 m each year.
- The national market is not growing. However, it is growing 10% per year in developing countries.
- There are NO substitute products that could threaten this industry.
- Auto part retail sellers are increasingly signing contracts with automotive manufacturers to take care of their customers’ vehicle warranties (maintenance at authorized workshops).
- Auto part sales to small, independent workshops have been declining considerably.
- There are significant barriers to entry in this industry such as brand recognition, distribution channels, contracts, and contacts.
Key Insights
The interviewee should realize that:
- The market is €0.4 bn per year (equal to 40% of the holding’s own revenues). Thus, a 50% share in this new market would increase the holding’s revenues by 20%.
- The information about the international market is not very useful unless the holding plans to conduct international business with OTOparts.
- The market is highly profitable. It has a net profit margin of up to 8%.
- Increase of sales to automotive manufacturers could be very strategic for the holding as it could buy OTOpart as part of a vertical integration move.
- For example, OTOpart could be the car part supplier for the other automotive businesses the holding is involved in.
- OTOpart is threatened by the decrease of sales to small and independent workshops.
- The biggest player in the industry, TaVoiture, is consistently increasing its market share. This is probably because their main customers are big automotive manufacturers (an expanding customer segment).
- Since OTOpart had 28% market share last year, it must be the second biggest player. This is a favorable competitive position.
- High barriers to entry prevent new competitors from entering the market.
The auto parts market is quite attractive.
IV. Conclusion
The interviewee should summarize his or her findings and give a solid recommendation.
„Should the holding buy OTOpart?“
The suggested recommendation is that it should do it for 3 main reasons:
- Although the auto parts market is stagnant locally, it is big (equal to 40% of today’s holding revenues) and very profitable.
- Although OTOpart is less attractive now, a change in its customer targeting strategy could turn it around and allow it to achieve excellent results similar to that of its main competitor TaVoiture
- Synergies could be exploited with the automotive companies within the holding. A vertical integration strategy could make OTOparts the auto parts dealer for these companies.
Difficult Questions
If you were OTOpart’s manager, how would you plan to help OTOpart acquire new customers and distribution channels?
This open-ended question tests the interviewee’s creativity.
If OTOpart’s main competitor, TaVoiture, aggressively decreases prices in order to gain market share, how would you respond?
This open-ended question tests the interviewee’s creativity.
More questions to be added by you, interviewer!
If the interviewee solves the case very quickly, you can come up with more challenging questions to ask them.
