Mergers and Acquisitions

Résumé du document

The acquisition of a company involves several significant steps that one must assess in order not to fail and lose money in the process. This is the case of David Kuchen, a 30 year-old graduate from a top MBA school, who is looking for a business to acquire or some other related opportunity. He aims to become a senior manager with equity in a small business. He focused his research on light manufacturing, service and distribution companies. These are small companies that don't require too much specialized knowledge. Additionally, he has some specific requirement for his business. He wants to avoid businesses with less than $2 million in sales, own 20 percent of the business over time, receive a $100,000 annual salary, acquire a business with at least $500,000 in EBITDA, and has a good middle management and/or an owner willing to complete a proper transition to a new inexperienced manager. He prefers the head office to be located in or near the Great Toronto Area that offers a few solid growth opportunities. Finally, he discovered Cake Masters, a commercial bakery specializing in high-end dessert items, based in Ontario.

Extraits

[...] Moreover, Cake Master exceeds the $ 500,000 EBITDA required by Kuchen. - Angeline Dupre is the chief executive of Cake Master. She is well- known for her innovative products that are low in fat and taste exceptionally good. She is a real competitive advantage for the company. - Cake Master has developed close relationships with few key suppliers, which may constitute as a good competitive advantage. When you have a close relation with your suppliers, you can benefit by some favors. [...]

[...] - Private labels are dominant in Canada (president's choice). - Many restrictive regulations on food products especially on export products. o Economical environment - In the US, the bakery industry generated sales of US $33 billion in 2002/03. For the Canadian sales, it is about 10% of the American number. - The GTA is a very economically active area. It has the third largest concentration of food workers in North America. - The forecasts are good in terms of growth. [...]

[...] In fact, products have to be very fresh and so cannot be shipped overseas. Kuchen has two other alternatives that also seem to be interesting. The industrial product distributor has good EBITDA of $450,000 and the pallet management business presents a high EBITDA of more than million. At first glance Kuchen should be interested by the third-pallet management business with more than million in EBITDA, which represents the best profitability. But we have to understand better what EBITDA represents in making a decision. [...]

[...] Moreover, EBITDA numbers are easy to manipulate. If fraudulent accounting techniques are used to inflate revenues and interest, taxes, depreciation and amortization are factored out of the equation, and any company will look great. That is why, operating cash flow is a better measure of how much cash a company is generating because it adds non-cash charges (depreciation and amortization) back to net income and includes the changes in working capital that also use/provide cash (such as changes in receivables, payables and inventories). [...]

[...] - The major customer of Cake Master is Franco's, it counts for about two- thirds of its sales. It may be too dependent on this client. At this time it's good because Franco's financial strength is good, but if it goes down, the revenues and sales of Cake Master will also go down. And if Franco's suddenly decides not to work anymore with Cake Master, the company will lose a huge part of its sales and revenues. [...]