Strategic Due Diligence

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This deck was displayed at the MIT Private Equity Symposium April 5, 2013

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Strategic Due Diligence

  1. 1. STRATEGIC DUE DILIGENCE David Goldstein President, Mekko Graphics david@mekkographics.com
  2. 2. Introduction • Mekko Graphics is used by over 75% of the top 25 private equity firms as identified by Private Equity International • It plays a critical role in all stages of the strategic due diligence process: • Market analysis • Competitive positioning • Customer analysis • Company analysis • Mekko Graphics supports chart types and features that are valuable for due diligence and not found in PowerPoint or Excel: • Marimekko chart • Bar Mekko chart • Cascade, waterfall or bridge chart • Data rows, data columns and CAGR columns that align with the chart • Growth lines and comparison lines • Mekko Graphics has over 15 years experience satisfying the charting needs of: • Strategy consultants • Private equity firms • Strategy and marketing professionals at Fortune 500 companies 2
  3. 3. Market Analysis 3 Use a Marimekko chart to map the market by industry vertical, identifying an unpenetrated market opportunity.
  4. 4. Market Analysis 4 A Marimekko chart can also map the market by company size and industry vertical
  5. 5. Market Analysis 5 Use an area chart with a CAGR column to track market trends over time 0.0 1.0 2.0 3.0 4.0 $5.0B Other Medical Industrial Machinery Auto 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 5% 8% 14% 3% TotalMarketSize($B) 2002-2012 CAGR 4.7%Total
  6. 6. Market Analysis 6 Use a 100% stacked bar to identify market opportunities.
  7. 7. Competitive Positioning 7 This Marimekko chart presents market share by competitor and industry vertical. We use a data row to show overall competitor revenue. 0 20 40 60 80 100% Competitor A Automotive Medical Distribution/Industrial Supplies Industrial Machinery & Equipment Electronics Consumer Goods Fabricated Metal Products Hydraulics & Fluid Handling Appliances & Housewares Rubber, Paper & Plastic All Other Industries Competitor B Automotive Medical Distribution/Industrial Supplies Industrial Machinery & Equipment All Other Industries Competitor C Automotive Medical Distribution/Industrial Supplies Industrial Machinery & Equipment Hydraulics & Fluid Handling All Other Industries D Automotive Medical All Other Industries E All Other Competitors All Other Industries PercentofTotal $800M $400M $300M $200M $50M $500MCompany Revenue
  8. 8. Competitive Positioning 8 CountryCurrent Marginal Cost: ~$80 Previous Marginal Cost: ~$50 0 20 40 60 80 $100 Vale SA Ku m ba Iron O reCV G F/ON M D C CSN Rio Tinto BHPBFortescu e M etalsSa m arco Cleveland C liffs UnitCost Chile Canada Sweden USA Brazil South Africa Venezuela India Australia Peru Mauritania The Bar Mekko shows competitor cost analysis. We use color coding to differentiate countries and average lines to highlight key costs.
  9. 9. Competitive Positioning 9 The bubble chart contrasts earning, market share and revenue for each competitor. The competitors in the shaded area are niche players with relatively high earnings. -20 0 20 40 60% 0.01 0.02 0.05 0.1 0.2 0.5 1 2 5 10 100,000 Competitor 9 Competitor 10 Competitor 16 100,000 Competitor1 Competitor2 Competitor3 Competitor4 Competitor5 Competitor6 Competitor7 Competitor8 Competitor11 Competitor12 A.C.M.E. Competitor13 Competitor14 Competitor15
  10. 10. Customer Analysis 10 This Marimekko chart presents sales by brand and channel. You can spot opportunities for growing a specific brand in a sales channel.
  11. 11. Customer Analysis 11 This Marimekko chart presents sales by customer and region. 0 20 40 60 80 100% Revenue in $M South Customer1 Customer2 Customer3 others $50,764M South -East $20,021M Mid-West $42,107M North/North East $9,074M Total = $121,966M
  12. 12. Customer Analysis 12 A Bar Mekko is an effective way of summarizing a company’s overall profitability by breaking out its components, revenue and contribution margin in this case
  13. 13. 0% 50 60 70 80% 0 2 4 6 8 10 12 $14K Segment Revenue Hydraulics Pneumatic and Fluid Handling Rubber Paper & Misc Plastic Products Segment Revenue Average Account Size ($000s) CustomerContributionMargin Automotive Hardware Industrial Machinery and Equipment Medical Electronics and Electrical Sporting Goods, Toys & Recreational Equipment Fabricated Metal Products Appliances and Housewares Air, Land and Water Transportation Customer Analysis 13 A Bubble chart can be used to overlay two additional dimensions of information to the overall profitability. Medical and Air, Land & Water Transportation segments display outsized margins vs. what would be expected for customers of that size R² = 0.68
  14. 14. Customer Analysis 14 Use a cascade chart to track customer gains and losses. 0 10 20 30 40 50 $60M 2011 All Other Customer1 Customer2 Customer3 Customer4 $49M Customer Gains All Other Customer5 Customer6 Customer7 $14M Customer Losses All Other Customer1 Customer3 Customer8 -$13M New Product Line All Other Customer9 Customer10 $9M 2012 All Other Customer1 Customer2 Customer3 Customer4 Customer9 $59M
  15. 15. Company Analysis 15 Add a growth line and a CAGR column to a stacked bar chart to track sales by product for the last four years. 0 20,000 40,000 60,000 2009 2010 2011 22,597 2012 CAGR +3% 30,970 19,875 1,539 52,812 33,045 20,186 1,612 55,024 32,813 2,101 57,623 31,151 24,684 2,133 58,067 CAGR +3% 0.2% 7.5% 11.5% -38.8% 09-12 CAGR PRODUCT 1 PRODUCT 2 PRODUCT 3 PRODUCT 4
  16. 16. 0 20 40 60 80 100% Percent of Total Brand 1 Operations Marketing Corporate Marketing Support Curriculum Training Ops Processes CEO Office $10,162,964 Brand 2 HQ Operations Operations Marketing Corporate Marketing Training Training CEO Office $4,608,052 Development Development Real Estate Sales Construction Design $2,903,704 Human Resources Recruiting/ Staffing Travel/ Aviation Compensation/ Benefits Field Recruiting OtherAdmin Services Management $2,083,092 Legal Risk ManagementLossPreventionContractAdm/Legal Other CEO Assistant InternationalEquipmentServices $1,641,224 Finance Finance TaxPayrollTreasury Corporate AccountingFranchiseeAccounting Business Analysis $4,355,556 Information Technology Telephony / Comm / Web Technical Support HelpDeskSoftwareDevelopment P&D ProcurementManagementDistribution Internati onal Purchasi ng /D i stri buti on MiscQA $1,325,604 $1,136,232 Information Technology $2,335,588 Total = $30,552,016 Company Analysis 16 Use a Marimekko chart to break out costs by department.
  17. 17. 0% 40 50 60 70 80 Total Custom 57% M edical 84% 79% 75% 69% 54% Automotive Total Custom 57% T ransportation Rub ber/Paper/ Plastic Products H ardw are Ind ustrial M achin ery Ele ctro nics 0% 40 50 60 70 80% M edical 70% Appliances/H ousew ares Electronics/Electrical Automotive H ardw are 58% Fab M etalProdu cts Rubb er/Paper/ Plastic Products Recreational Equipment IndustrialM achinery Company Analysis 17 The profitability of Plant 1 is higher than Plant 2 even though the automotive segment is weighing it down. Plant 1 Profitability: 70% Plant 2 Profitability: 62% ContributionMargin ContributionMargin Plant 1 Plant 2 By using two Bar Mekkos side by side, the profitability across two divisions of a company can be shown while retaining the relative size of each.
  18. 18. Company Analysis 18 The decrease in profitability among automotive customers was more than offset by the increases in industrial machinery, medical, and all others between 2011-2012.
  19. 19. Company Analysis 19 You can also use a cascade to estimate the overall change in equity value for the investment. 0 50 100 150 200 250 300 350 $375 Equity Value Creation ($M) Equity Value at Close PE Firm Mgmt $136M Fees & Expenses -$14M Debt Paydown $108M EBITDA Improvement Market Growth Share Gain Expense Reduction $137M Equity Value at Exit PE Firm Mgmt $367M
  20. 20. Learn More To learn more about creating persuasive charts, download the free Mastering Chart Selection Guide, which includes a 30-day trial of the Mekko Graphics software. Questions or Comments? Join us on Facebook or Twitter and say hello!

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