Rally racing

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Information that can be shared on the interviewee’s inquiry:

• Jazz Sweets pays to the new team half the sponsorship fees that the existing team receives
• Since the potential new driver is inexperienced in rally racing, the second team will only generate one-fifth of the race-winning revenue that the first team generates.
• No additional revenue will be generated from selling engines. No revenue will be generated from merchandising (new team has no image to sell).

In a first step we investigate the revenue sources.

If Jazz Sweets pays to the new team half the sponsorship fees that the existing team receives, we will receive $6 Million.

Since the potential new driver is inexperienced in rally racing, the second team will only generate one-fifth of the race-winning revenue that the first team generates.

Information that can be shared on the interviewee’s inquiry:

No synergy for race-facing salaries and 100% synergy for non-race-facing salaries (UBS #42’s existing back office will also serve the new team).

60% synergy for equipment (the new team needs a new car but it can use the same spare parts)

No synergy for travel.
(two times more tickets and cargo shipments necessary).
That is a cost of $1 Million. 100% synergy for engine shop. No extra costs. 100% synergy for R&D. No extra costs.

Next, let us analyze the new team’s cost structure. It is essential to identify potential synergies between both teams.

Due to synergies, the new team can save some costs.

The candidate should include these points in the conclusion:

• If our revenue and cost synergy assumptions are accurate, the second team can break even as long as Jazz Sweets is willing to pay a sponsorship fee of $6 million.
• If they are willing to pay more than $6 million, the client should definitely launch the new team.
• Otherwise, the client should try to search for other sponsors. If the client can obtain more than $6 million in sponsorship fees, the client should launch the new team.

Suggested answer:

The interviewer should evaluate the logic of the interviewee’s response. There is no right or wrong answer.

• Option 1: Yes, we should charge a premium. Jazz Sweets seems to be committed to the deal because they have already conducted initial negotiations with a potential driver. The client has bargaining power and can justify the premium by showing Jazz Sweets a good return on investment (RoI) analysis and by promising that Jazz Sweets will be the team’s sole sponsor.
• Option 2: No, we should not charge a premium. Jazz Sweets can choose to choose several other options to sponsor:

1) Another race team

2) Another sport (e.g., baseball)

3) Another racing category (e.g., Formula One).

Suggested answers:

• The synergies might be weaker than estimated. For example, the new race team might need more spare parts. This could result in losses.
• The new team could win fewer races than expected, thus reducing its revenue.
• These risks could be avoided by:
  • Acquiring more sponsorship capital
  • Putting a cap on the new team’s salary
  • Trying to open more revenue streams, such as selling more engines of the first team and transferring some of the additional revenue (however not a long-term solution)