Not knowing what you buy is always expensive!

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Issue

BidCo, a car manufacturer located in one of the BRIC countries, had the desire to add a crown jewel to its volume based business. For this it had the opportunity to acquire TargetCo, a niche player in the luxury segment.

Before considering the transaction BidCo asked PwC to:

  • Validate price and volume projections set forward by management
  • Estimate the impact of  upcoming C02 regulations
  • Quantify the downside risk of economic downturn
  • Facilitate discussions with TargetCo management to validate their views on topics like strategy, marketing, product development etc…

Approach

  • PwC sensitized the volumes per model based on key factors of uplift, decay and sales region. This included the use of typical volume cycle decay rates to validate projections
  • Cost was estimated for incremental C02 reduction, based on approximated cost curve model for TargetCo
  • PwC performed a correlation analyses on the impact of GDP growth on car sales in some critical geographies
  • PwC industry and market expertise helped the client obtain significantly more insight into management’s thinking than they had previously achieved

Recommendation

TargetCo sales projections

  • Decay rates used by management were not realistic
  • Risks were identified but not quantified
  • Identified market challenges would be in volume and not pricing

Downside risk economy

  • GDP growth significantly impacts luxury market
  • Worldwide economy was on a negative outlook

C02 reduction challenge

  • TargetCo was not competitive, let alone sector leading
  • Investment levels were insufficient to meet competitive and regulatory standards

Management meetings

  • Management recognized underfunding to meet C02 standards
  • Need for other investments (not incl in business plan) was identified
  • Necessity of partnership to achieve future development goals

Results

  • Another BRIC motoring company acquired TargetCo for several US$ billion. According to press the winning bid was dramatically higher than what BidCo or any other competitor had offered
  • Issues raised by PwC started emerging 3-4 months after the closing of the deal
  • The “successful” acquirer was forced to invest significant amounts in the period thereafter, just to be able to keep TargetCo in the market