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Asv M&A "The Kendle Case"Document Transcript
L.A. 06/24/2010 UCLA Anderson School of Management EMBA Exchange program. M&A course - prof. George Geis. Written case assignment: Kendle InternationalALESSANDRO VETRIANI EMBA 7 Bocconi School of Management studentHow is Kendle doing compared to other CRO companies?Kendle started as a small company with a few contracts and business grew slowly thorough referrals from professional colleagues. Kendle suffered its start-up business and for two years had a loss with turned in a significant bank debt (1million). By the mid-1990 CRO evolved into a full service industry and Kendle participated in this growth in clinical research so to increase its net revenues 425% from 2,5$ million in 1992 to 13$ million in 1996. To compete with the largest CRO companies Kendle had to become an International company and that was the main concerns of Candace and Chris. Kendle could not be competitive on price with the major CRO firms because it didn’t have an international presence.What strategic choices does Kendle face? Can it survive as a privately owned domestic company or does it need to become a much bigger firm with operations outside the US?Kendle can survive as a privately owned domestic company but it may be too risky. Kendle’s three largest clients (G.D. Searle, P&G, Amgen) accounted for total 81% of Kendle revenues in 1996. Client dependance was a major risk, project cancellation by the client and change orders to reduce project cost were frequent. Furthermore, after initially the CRO industry was very fragmented, as a result to the increased outsourcing of pharmaceutical R&D and a demand for global trials a consolidation among the CROs occurred. Kendle could not compete with the major CRO firms in terms of price and probably quality of service too so the only way was to grow through acquisition and raise financial resources by an IPO.Should Candace Kendle and Christopher Bergen consider selling their firm to another company in early 1997? How does the potential sales price of the firm compare to its underying economic value as a stand-alone firm?In the table below it is possible to see the comparison between the economic value of Kindle as Stand-alone company through a rough calculation of DCF (zero growth, see Exhibit 12), based on Income statement and Balance sheet for Y1996, and the Sales price recognized from the market for comparable transactions (12,2 av. x EBITDA): the average Market Value is higher than the DCF valuation. From a financial point of view the Kindle family should consider selling their firm but the entrepreneurship style of K. family (both actives and athletics) led them to the challenge to become a large international corporation and keep investing in their business. DCF Evaluation of Kindle.Kindle Inc. (1996 data in thus.$)Tax Rate (not applicable, since subchapter S corp)0,00%WACC12,00%Multiples CRO Acquis. on EBITDA (Av. Market)12,2EBITDA$1.505Net income (EBIT)$1.134EBIT (1-tax)$1.134Plus:Depreciation & Amortization$316Less:Gross Capital expenditures$407Less:Change in Working Capital-$156Free Cash Flow$1.199Kendle Inc. ValuationDCF (zero growth) Valuation = FCFF / WACC$9.992Comparables Valuation - Mutliples on EBITDA$18.361Do the acquisitions of U-Gene and gmi make sense? Are the proposed deals priced fairly?As already said if Kendle wants to become bigger and succeed in the new competitive landscape the acquisitions way was the only available. Having these new units in Europe will allow Kendle to satisfy the customer international expectations, be present in a new market, increase their knowledge through experienced companies especially focused on Phase 2 and 3 where Kendle wanted to invest. The proposed deals seem priced fairly. In fact looking at the data on Comparables CRO acquisitions done either in Europe or US market the average Ratio of deal value to Ebitda has been 12.2 times. U-Gene were supposed to be acquired with a multiple of 9.8 time Ebitda, meanwhile gmi at 8.2 times Ebitda. Both pricing seemed in line with recent CRO deals.What strategy would you recommend? Proceed with both acquisitions now or do one follone by an initial public offering (IPO) and the second acquisition later?The strategy Kendle chose (Acquisitions and IPO at the same time) was the most risky one especially from the financial point of view. Furthermore in the same moment the stock prices of the CROs have been dramatically falling down. If market continued to went down the IPO could become unsuccessful and huge debts they collected will be probably too high to survive especially if compared with their modest equity rate.From a managerial point of view of course the strategy is really aggressive and could give to Kendle the possibility to increase their size and get a relevant market share in one shot. Their financial plans seemed safe and assuming to an IPO of 3 Man new share at a price of 13$ EACH, Kindle would have a cash position of about 14$ Man and no debt in the capital structure. The real trouble could be the financial market situation which was really risky and with a bottom tendency.I sustain the Kendle’s direct approach in doing the operations all at once, even if very risky. The safer approach of doing a first acquisition + IPO and then the second one could bring Kindle to miss the IPO window and miss the opportunity to acquire the second company. This means consequently to cut the Kendle’s owners dreams to resize their company and start growing and competing at a different international level.