A printing company is planning to take over another printing company with similar technology and printing machines. The candidate is supposed to evaluate the acquisition by answering a line of questions that are presented in the “suggested approach” section.
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This case is best presented by taking the candidate through the case question by question. The first part is mostly qualitative and the second part deals with heavy quantitative aspects on mathematics and involves some sort of understanding of financial key figures. Depending on what you or the candidate prefer or want to prepare, you can decide beforehand on what you want to focus on.
This case is provided by PrepLounge Expert Robert Steiner.
Synergies are possible and a merger can be recommended.
Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Information to share” 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.
The general process for solving the case is as follows:
Suggestion: You can share the structure with the interviewee after the introduction of the case.
Shareable solution scheme: see diagram 1
The interviewer should tell the candidate the following information upfront without prompting by the candidate.
The two companies „Tyrolia Print“
and „Paper Print“
production site each and are specialized on rotogravure prin
(a technology for printing large batches).
- Overlap of customers is approximately 75%, i.e. 3 out of 4 customers of one company are also customers of the other company.
- All production machines of both companies are similar and can replace each other.
- Due to the harsh competitive situation in the industry, excess capacity and small profit margins, Paper Print plans to take over Tyrolia Print. The Tyrolia Print production site would be shut down after the merger and integrated into the Paper Print site.
Directly after clarifying the basic situation above with the candidate, the interviewer should go through question by question with the candidate.
1. What are the benefits in concentration of production? What related risks have to be taken into consideration? (Calculation NOT necessary)
- Economies of scope
- Economies of scale
- Downsizing of overhead
- Reduction of labor headcount
- Better utilization of production resources and planning
- Higher negotiation power
- Higher risk for customers if there is only 1 production site (major natural impacts, etc.)
- Bad image due to closing of one production site
- Risk of transaction
- Risk of post-transaction integration
The discussion with the candidate should focus on these issues.
The candidate may bring up different or related issues as well, therefore the interviewer needs to have a good general understanding of the situation as well.
2. Which one time earnings and expenditures occur in closing a production site? (Calculation NOT necessary)
- one time earnings:
- Sale of production assets, real assets incl. land
- Sale of licenses and patents
Typical one time expenditures:
- Payments for social plans for layoffs
- Shut-down costs of production site
- Legal and tax advisory costs
- Supplier payments if fixed contracts are terminated preliminary
3. Can Paper Print fully integrate the entire Tyrolia Print production in its factory? (Calculation required)
Share Diagram 2 without prompting by the candidate.
Two steps are required:
1. Utilized capacity of Tyrolia Print has to be calculated.
The utilized capacity is 5.31 billion pages.
2. The free capacity of Paper Print has to be calculated
To speed the calculation up, the resulting free capacity can be shared. It is 5.76 billion pages.
As there is more free capacity in the Paper Print production site than needed, a full integration is possible.
The specific types of machines are irrelevant, so the prints done with MAN machines can also be printed with Harris machines.
4. How much more or less expensive will the integrated production be? (Calculated result required)
Two steps are required:
1. The utilization costs of old Tyrolia Print production site.
The utilization costs are €6.035m
Utilization cost per year = Utilized production time * hourly rate
2. The additional utilization cost of the integrated production
Mention the following:
- In the integrated production process, all machines except Harris Sunday Press run at fully capacity.
- The hourly machine rates reflect only the actual costs per production hour for any amount of productive machine hours.
It can be concluded that Harris Sunday Press has the remaining free capacity of the merged company which is 5.76 – 5.31 = 0.45b pages.
As the full capacity of Harris Sunday is 8.4b pages the machine has a utilization rate of about 95 %
New utilization cost per year = Additional production time * hourly rate.
Harris M-600: 0.36 m = 4500 * 10% * 800
Harris Sunday Press: 1.31 m = 3500 * 25% * 1500
MAN IV: 0.8 m = 400 * 20% * 1000
MAN IV: 1.2 m = 400 * 20% * 1500
5. Why did costs decrease, although hourly rates are higher? Will any other cost reductions occur? What would you recommend concerning the merger?
Assuming that no other effects (like economies of scale) are coming into effect, the costs are reduced by €6.035m – €3.67m = €2.365m
The Paper Print machines are able to print more pages per hour and need less time to print the amount of former Tyrolia Print. This has a higher effect on the production costs than the increasing hourly rates.
Economies of scale will reduce the average hourly rates. Due to a higher utilization, fixed costs will be spread on a longer running time.
An overall recommendation is difficult, as mostly production topics are discussed. However, based on future production costs, synergies are possible and a merger can be recommended.
Suppose Tyrolia Print was already bought. What would be the most important steps in post-merger integration?
Typical discussion points:
- Prioritization of issues and definition of time frame
- Definition and concentration of new strategy
- Clear definition and careful implementation of new organization structure
- Ensuring communication flow within the new entity
- Standardization of reporting
- Enabling technological integration
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).