Case 1: Private Equity Acquisition

FRAMEWORK 1: MARKET SITUATION

Greystone Partners, a North American-based private equity firm, is considering the acquisition of
Deluxe Cane, the leading manufacturer of walking canes for the elderly in the US. Greystone
Partners has engaged your team to help determine whether to proceed with the investment.
Here is the data we have.

See the case questions on the next page.

Case Questions
1. Estimate the market size for walking canes in the US. Is the market attractive?
2. How is the financial performance of Deluxe Cane?
3. You have just run additional competitive analysis and found that Deluxe Canes two
largest competitors operate as part of larger organizations that sell related mobility
devices. Using all the information you have collected thus far, do you believe Deluxe
Cane is competitively positioned?
4. What other issues would you want to analyze before making an investment decision?
5. Should Greystone Partners invest in DC?

Case Solutions
Question 1: Estimate the market size for walking canes in the US. Is the market
attractive?
Firstly, you need to establish the structure you will use for estimating market size:

Total
population

Share of
population
over 70 years

Percent of >70
years olds
needing a cane

Lifetime
amount of cane
purchases per
customer

Secondly, you will make the estimations. You can either make your own assumptions or ask for
inputs.

US Population: 300 million

Population over 70 years: 15%
Percent of >70 population needing a cane: 40%
Average life of cane: 5 years

Now you can make the actual calculations. The population over 70 years is 45 million and 40% of
these need a cane. That is 18 million. Assuming that the average life of a cane is 5 years, onefifth of these 18 million buys one cane every year. That is 3.6 million canes annually.
The second part of the question is to discuss whether the market is attractive. When looking at
market attractiveness, remember to use the framework. According to this framework, market
performance, competition, suppliers and customers drive market attractiveness. You dont have
any information about suppliers and customers, so you would make your analysis based on the
remaining two drivers.
Market performance: you already know the size of the market, and you can see that at least
Competitor 1 and Competitor 2 have solid operating margins. You should also make a comment
about market growth, which is typically population-driven at about 3% per year. Aging
populations will likely cause the market growth to increase.
Competition: the competition is limited with 3 large players with about 1/3 market share for
each. It would be hard for customers to find substituting products, and the fact that there are
only 3 players indicates that the market is difficult to enter for new players. This is a good
competition situation.

Based on this analysis, the market seems attractive. You would want to comment that an
analysis of suppliers and customers is also necessary to make a sound recommendation.

Question 2: How is the financial performance of Deluxe Cane?

Discuss that revenues are larger than the share of volume. The prices of Deluxe Canes canes are
higher than the prices charged by the competition. Does this matter? Yes, walking canes are
largely a commodity product and the elderly, living on fixed-incomes, are price sensitive.
You should also comment that the gross margin is significantly lower for Deluxe Cane than for its
competitors. This means that Deluxe Cane has much higher production costs. Dont be tricked by
the fact that they are able to charge slightly higher prices.
The financial performance is quite bad compared to the competition.

Question 3: You have just run additional competitive analysis and found that
Deluxe Canes two largest competitors operate as part of larger organizations that
sell related mobility devices. Using all the information you have collected thus far,
do you believe Deluxe Cane is competitively positioned?
Knowing that Deluxe Canes competitors are a part of larger organizations selling mobility
devices should worry you. Both competitors will be able to benefit from economies of scale, and
they have already priced their walking canes lower. This allows them to win market share.
Deluxe Cane has lost 9 percentage points market share in the last 5 years to these competitors.
As discussed earlier, Deluxe Canes cost structure is high relative to its peers, and Deluxe Cane
has a significant materials procurement disadvantage.
The conclusion is that Deluxe Cane is not competitively positioned although it is in an
attractive market.

Question 4: What other issues would you want to analyze before making an
investment decision?
This is an easy question if you look at Framework 5: M&A Target. You need to analyze the target
company, market performance, strategic fit and deal economics. A private equity fund does not
need to have a strategic fit (as it is not a market player), but needs an exit strategy.

You have already discussed market performance and also done some analysis on Deluxe Cane. So
the two major issues left for analysis are the deal economics and exit strategy. Here are some
questions that you want to analyze before making an investment decision:

What is the likely pricing?

Will Greystone be able to meet its return hurdles (about 20% IRR)?
Does Greystone have related portfolio companies that might allow for procurement
synergies along the lines of what the competition is able to achieve?
Can the transaction be financed?
What is the exit strategy?

Question 5: Should Greystone Partners invest in Deluxe Cane?

This should be a pretty easy conclusion to make.
No, Greystone Partners should not invest in Deluxe Cane primarily due to a difficult competitive
position. Deluxe Cane is losing share to two competitors who are lower-priced and have
significant built-in cost advantages.