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Commercial Due Diligence and Growth Assessment

Background and Challenge

A leading European private equity firm was evaluating the potential acquisition of a high performing global manufacturer of ceramics for the medical, automotive, industrial and electronic sectors. As part of its decision-making process, the firm engaged L.E.K. to assess the commercial growth prospects and the positioning of the potential target and provide critical commercial insight to the investment team.

The target’s medical division had a strong market position as a supplier of components for ceramic hip joints, which are higher cost but more durable and clinically superior to metal hip joints, which have been found to leave potentially harmful particles in the bloodstream. The target had an aggressive estimate of how the ceramic hip market would grow, but with little external data available, L.E.K.’s client needed greater confidence that the forecast was correct. In addition, the client wanted to understand the growth potential of the target’s Industrial business.

Approach and Recommendations

L.E.K. brought together a global team from seven different offices, combining deep expertise in commercial transaction support with extensive experience in the technical ceramics, industrial products and medical devices markets. The project included a number of key client deliverables:

  • A detailed view on the future growth trajectory of ceramic hip implants, and the trends driving that growth
  • Identification of potential incentives (e.g., patients, regulators, surgeons or system manufacturers) in the value chain for hip replacements in order to understand the opportunity to promote ceramic over plastic and metal
  • Current performance assessment of the medical and industrial sides of the business, analysing historical data to develop a detailed comparative view. L.E.K. determined that the industrial side of the business was in decline contrary to target management’s forecasts
  • Performance forecast for the business, determining the future revenue and profit contribution of the different business units. This included an assessment of the competitive landscape to identify opportunities for future growth
  • Recommended several growth and performance improvement strategies to help the client realise value form the target

Results

The depth of research, analysis and sector expertise provided by L.E.K. throughout the assignment enabled the client to feel confident in the growth potential of its acquisition choice. The client successfully acquired the target company for €1.49 billion in summer 2013. The success of this project strengthened L.E.K.’s relationship with the client, who was extremely satisfied with the new addition to its portfolio.