Case Study: BrasilCo
Background
You are the CEO of a growing, medium sized manufacturing company. You have begun to think about expansion into international markets, and you have just heard a presentation from an investment banker about buying BrasilCo as a means of entering Brazil. It would be your first acquisition, and its size would represent a major strain to your young balance sheet.
Before taking such a big step, you retain the Chesterfield Group to help develop your thinking on the subject.
Shared Goals
You want to grow profitably through successfully expanding into new markets, including offshore markets. Brazil represents such an opportunity. According to the investment banker, BrasilCo has excellent products but is unable to meet its potential because of insufficient funding and an absence of expertise outside its home market of Brazil. It could be said that BrasilCo has similar goals to your own, but with respect to the U.S. market.
Strengths
After some thought, you conclude that both companies have good products that would sell well in each other's markets. Your company is sufficiently strong as to meet the financial needs for BrasilCo's growth objectives, although you would have to take on some debt.
Constraints
The only real constraint is the size of the deal. You fear that it is just too big a bite, requiring the addition of substantial leverage to your company. If you bet wrong, this is the kind of thing that could jeopardize the very future of your company. At the very least, the large investment dramatically raises the stakes and requires a very high level of success to justify it.
Analysis
We asked the question as to whether there might be other ways for these two companies to use each other's strengths to mutual advantage ways that don't put their futures at risk. After examining several possibilities, we settled on a two way licensing agreement, whereby each company added the other's products to its own distribution channels, opening up high potential markets for each of them, with minimal outlay of capital.
Rationale
Meeting the stated goals does not require your company to control BrasilCo, so why pay all that money to do so? All you wanted was access to their market. Once we determined that BrasilCo also wanted to grow without large capital outlays, the answer began to take shape. If the owners of BrasilCo had wanted to cash out (e.g., founder is retiring), this would not have worked, but that was happily not the case here.