Does Acquisition of Unprofitable Competitor Make Sense?

TypeSpecialized Due Diligence
Quick Facts$100 million manufacturer (“PersonalCo”) of private label, personal care, consumer products.
ChallengesThis privately held family business had completed a turnaround process by bringing in new senior management and restructuring key components of the business (e.g. the sales and marketing group). Since PersonalCo had regained the confidence of its lenders with a new direction and stronger profits, acquisitions now emerged as another element of the company’s longer term strategic planning. Management signed a LOI to acquire a weak, struggling competitor and presented their plans to the senior lender.
ApproachEven though the asset-based lender gained comfort with the collateral and the overall concept of the proposed transaction, they were concerned about the impact to the P&L of acquiring a company that was losing money. McHugh & Company was hired as an objective resource to analyze these aspects of the combined entity:
  • the plant rationalization program
  • the customer base and product line synergies
  • the gross margin estimates and the components of the P&L
  • the overall strategy – does the deal make sense?
ResolutionThe deal was completed. This acquisition:
  • gave PersonalCo needed additional manufacturing capacity
  • enabled PersonalCo to combine production of similar product lines
  • took a competitor out of an increasingly competitive market and altered the bidding landscapeimproved gross margins and spread SGA expenses over a broader base
  • added new products
  • alleviated a tense labor situation at one plant

Links to the other specialized due diligence cases:
  1. Customer Calls Provide Valuable Feedback
  2. Tired Company in a Mature Industry

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