Apax took a well-designed strategy to bid for Xerium. First, they understood it was not a competitive auction. Secondly, they took advantage of the momentum and circumstances of the seller that was under distress. Finally, they spent huge resources to analyze and calculate the value of Xerium to Apax. First, they analyzed the competitors in the auction. The team observed it was a very opaque industry with only few companies public, limiting the access to information. Luckily, Apax had a competitive advantage (Wangner’s expertise) in the industry which allows Apax to know the sector inside and out.
In addition to this, it seemed to be a very stable business with no high upside potential so the market was not heated about this sell. Furthermore, Apax analyzed the other bidders. They wanted to know if competitors where really interested in Xerium and what was the value for the competitors. Second, Apax understood why the company was being sold. The seller needed to sell this side business because Invensys was in distressed. Xerium was an easy way to cash in and an appealing asset to sell since it was a stable cash generator.
Apax also realized they had big bargaining power because they were the only strong and strategic bidders and probably the natural acquirer because of the synergies with Wangner-Finckh. Finally, in order to come up for the value of Xerium to Apax, they did an exhaustive and expensive due diligence in order to find synergies, potential cost inefficiencies and revenue streams. The complexity of the business and the cost of accessing to information also discouraged competitors. Even though they over-due-diligence and over-spend competitors after this process, they knew more about the company than the seller.
ANALYSIS #11. COMPANY BACKGROUNDThe Home Depot Inc. was founded in 1978 and is the world's largest home improvement retailer and the second largest retailer in the United States. The sales for the fiscal year 2000 were $45.7 billion, compared to $38.4 billion in fiscal 1999. As of January 2001, the company was operating 1,134 retail stores in forty-seven states, six Canadian provinces, Puerto ...
This and the fact that seller was hurrying to sell the company gave Apax a lot of bargaining power into the negotiation and into the transaction. A minor point is that Apax also did tax structuring to decrease the tax burden. Apax was very smart in its strategy. For all these reasons Apax could negotiate and not overpay for the transaction. On the other hand, Apax added value to Xerium by refinancing (repaying high coupon), two small acquisitions (consolidation), hiring Tom Gutierrez (industry experience), emphasis on R&D (market leadership), cost savings, alignment of management incentives, and leverage on Wangner expertise.
These actions allowed Apax to reform Xerium and brought a better Xerium to the market in 2002. 2. What should Apax do with Xerium in 2002? What are the advantages and disadvantages of each option? Why not an IPO? The options that Apex was facing includes A) accepting the bid, B) renegotiation with the third buyer, C) recapitalization, D) IPO, and E) divestiture of two business units. Brief pros-and-cons of each option are listed below. Option Pros Cons Accepting the bid Quick and clean exit Educated buyer Lower than expected valuation market downturn pressuring the price Renegotiation with the third bidder
Clean exit (but not quick) Partly educated buyers Distracting management from operations Being left in the disadvantage in negotiations Market downturn further pressuring price Recapitalization Cash flow earlier Potential of consolidation Potential of a higher price Price increase not guaranteed Low interest from buyers in the future IPO Too small for IPO Low interest in the paper sector Slow in filing, selling, and exit processes Falling financial markets Divestiture Attracting strategic buyers Potential of a higher price Restarting the process Time consuming in restructuring
Unsatisfied management Redundant fees to banks Accepting the bid provides the quickest and cleanest exit for Apax. The buyer is already educated thus the time needed is limited. While the 29% IRR (see below Question 3) is still a good return to boost the performance of its Fund IV, it is hard for the fund managers to accept 935M in the end, since the bidding started with some 1 billion. Also, the market downturn in the paper industry may have a pressure on the price compared with its real value. Renegotiating with the third bidder is also a clean exit for Apax with the target buyer partly educated.
– Relate the concepts of the market equilibrating process in the Weeks One and Two readings and learning activities to a prior real-world experience occurring in a free market. The experience does not necessarily have to be work related. – Explain the market equilibrating process in relation to your experience. Include academic research to support your ideas. – Consider the ...
Unfortunately, another round of negotiation will distract the management from operations, especially when Xerium is being put in the disadvantage side in the negotiation. As the only potential buyer, the third bidder may raise a lot of special requests including but not limited to price and due diligence. Moreover, the bidder has the incentive to “take his time” in making the decision, since the market downturn may further pressure the price. Recapitalization seems to be the best alternative discussed in the case, mainly because of the underlying 39% IRR (discussed below).
There are chances to expand the pie (through consolidation and/or operational improvement) and sell it at a higher price, taking the advantage of the potential market pick-up in 2003. Two potential risks are that the higher price is not guaranteed and that there is low interest from financial buyers and no powerful strategic buyer, future selling negotiations may take time again. IPO is not feasible either. As discussed in the case, the company, although the market leader in its field, is too small in terms of revenue for an IPO.
The paper sector is not hot either, thus the price won’t be too high. Furthermore, in an IPO transaction, the procedure of filing and selling will take a long time, and the fully exit may take years (with lock-up period).
Thus the timing issue doesn’t meet Apax’s wish. Divestiture is not discussed in the case, but we think it might also be an option. As is mentioned in the case, the two business units Xerium operates are totally different in terms of customers’ needs/treatment (high quality + commodity vs. reliability + specialty) and Xerium’s operations (R&D vs.
April 1 st Documentary: No Price Too High Essay By Golkar Mazaheripour When I found out that I had to watch a six hour movie on World War II and then write an essay about it, let's just say that I was less than thrilled This essay was due the day after Easter Monday, and as you would know it, I procrastinated this essay until that Monday. So finally, I got the tape and I inserted it into the VCR ...
Also, the main reason why Xerium failed to attract strategic buyers is its size (too big).
Therefore, maybe separating its two business units and sell to different strategic buyers can increase not only the demand but also the transaction price. Since the current selling process is not fruitful and it looks bad to go back to talk to the third bidder, the new process will open a new round in which Apax and Xerium can re-choose their pool. However, this process will be very time consuming (this time not only in selling but also in the restructuring process).
Also associated with the divestiture is the low morale of the current management team, who knows they will be fired when the business units are sold to the strategic buyers. Last but not least, the divestiture process will incur double consulting fees. 3. As part of #2 above, show the returns to Apax by taking the offer versus doing a leveraged recapitalization and selling later The returns to Apax for taking the offer versus doing a leveraged recapitalization are 29% and 38% IRR, respectively. The latter was reached based on a 5.
6x EBITDA exit multiple for the recapitalization scenario, the same exit multiple that is current on the table in 2002. We are assuming the sales price from the third bidder is higher (otherwise Apax won’t think about it anyway), thus the IRR will be 30%. However, the risk is also higher, and the 1% in increase can hardly compensate the additional risks. In this case, it would appear that the returns of the recapitalization scenario are large enough to justify these risks with its own pros and cons are discussed above.