Private Equity Client - Industry dynamics in emerging economies

(Case is made anonymous to protect real client and for us to comply with non-disclosure agreement.)

The situation

XYZ Financials is one of the leading private equity houses and considered an acquisition of a major American corporation (XYZ Megatrend Corp.) with a history of more than 150 years and a worldwide market share of 55% in its field. For XYZ Financials, major reasons to consider this opportunity were...

  • a strong cash position in XYZ Financial's closed funds (in 2008) that had to be invested and which would result in a comparatively low percentage of leverage
  • an excellent management team on the side of XYZ Megatrend Corp., which completed several rounds of restructuring in the last 7 years
  • excellent technological and cost leadership position of the target company
  • XYZ Megatrend's activities in a megatrend sector, meaning a sector best paraphrased as "...regardless what happens, people will always need to eat..."
  • emerging economies with a growing middle-class like India, China

XYZ Financials' team made its homework prior to potentially making an offer:

  • Current financial data of were obtained and analyzed for cash-flow projections, leverage ratios, potential exit scenarios
  • The industry dynamics were understood by hirirng a highly experienced executive as advisor
  • Current standard data were obtained and understood by purchasing market reports

However, XYZ Financials realised that among others the dynamics of emerging competitors, which are not yet visible from i.e. New York or Hong Kong, were missing and might significantly influence future scenarios.

The project

Huade Haiyang was contracted to timely contribute in the following areas for three main countries:

  • Liklihood of target player to retain cost leadership
  • Obtaining complete cost structure of emerging players
  • Liklihood of target player to retain technological advantage/R&D activities in emerging countries
  • Changing legislation and likely protective regulations in emerging economies
  • Complete profiling (business strategy, financial, R&D strength) of most aggressive emerging competitors
  • Most likely development of gross margins and raw material prices in emerging economies

The results

The project revealed a picture of an industry in certain emerging economies, that lead already to heavy consolidation with a few very strong players being left. Those, however, were supported by their governments in a effort to nurture future global players and out of self-sufficiency considerations. High raw material prices forced those players early to streamline their operations, leading to very competitive ex-works cost structures, and overcapacities lead to falling prices, thus shrinking margins.

Additionally, technical intelligence indicated that these leading competitors had a strong R&D and development pipeline, which made it likely that within a 2 to 3 years timeframe qualitatively competitve products at good prices will be on the world market, which most likely will negatively affect XYZ Megatrend Corp.'s (the target's) position.

The consequences

XYZ Financials stopped all further internal efforts on acquiring XYZ Megatrend Corp. and continued pursuing other targets...