PE Portfolio Strategy

The interviewee should perform a back-of-envelope calculation that answers two key questions:

• The profit growth potential of the company
• How can we add value to this company given the companies in our portfolio?

Interviewer’s answer: It is expected to keep growing. Electronics content in an average vehicle is expected to represent 17% of total purchased materials by 2006. As per a previous study conducted by us, approximately $150 on average per vehicle will be represented by sensors by the year 2005.

Yes, in aerospace, medical devices, semiconductors, and consumer electronics. Automotive and aerospace are the biggest growth areas.

A recurring investment of $10M, $11M, and $12.1M respectively starting years 0, 1, 2. We also expect a cash flow of $12M after the first year growing at a rate of 5%. Following our internal investment rules, we usually do a three-year outlook to decide whether we should go ahead with an investment or not. In the past, we assumed the cost of capital as 10%.

Increasing consumer demand; government regulation for safety, environmental, and comfort in automotive.

The customers of sensor manufacturers are OEMs. Since electronic systems are seen as a source of differentiation, they place a high value on leading-edge technology.

Fragmented. Leading sensor companies are growing by using acquisitions and partnerships to expand their product, industry, geography, and/or new technologies.

The interviewee should ask questions regarding the background of the case.

Assumptions:

• Growth rate = 5%
• Cost of capital = 10%

Calculation and Conclusion

Present Value estimation reveals a positive return of $1.25M taking a time horizon of three years into account.

Discussion and Conclusion:

Advantages

• New technologies that can be used by our portfolio companies could be accessed
• Expansion in other growing industries (beyond the automotive industry)
• Since the market is currently fragmented, the firm could aim to be the industry leader
• The size of entities dealing with OEM customers could be enlarged

Disadvantages

• Good chance that a significant investment will be required to stay competitive as the OEMs place a high value on leading-edge technology
• The acquisition could also be expensive
• Risks are high as there is a long lead time from R&D to market

The present value estimation reveals a positive return of $1.25M at the end of three years.

To add value to this company given the companies in the firm's portfolio, the firm should expand beyond the automotive industry, access technologies that could be used by other companies, and enlarge the size of entities.