Industrial Component Co:

Divestiture
Contacts: Michael Thorneman

April 1998
Copyright© 2001 Bain & Company, Inc.

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Summary (1 of 2)
Case code:  SK3 – Project Rambo II

Situation:  The client, Rambo, a world-leading industrial components

manufacturer, has been experiencing negative profit
margins in one of its product lines for several years.
 The products are mainly sold to the automotive industry,
where competition is fierce and margins squeezed.
 Furthermore, the client is suffering from a scale
disadvantage compared to the dominant player in the
segment, resulting in a higher cost position.
 Since future prospects are not likely to improve, the client
has initiated exploratory talks with the dominant player in
the segment about the partial or total divestiture of the
operations.

Objectives:  To quantify the value for the client of divesting the

operations.
 To identify and quantify the possible synergies to a
potential buyer of the business.
 To supply the client with negotiation support.

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Summary (2 of 2)
Approach:  The project was run in two parallel workstreams
 Workstream #1 – internal client perspective:
- Identified revenues/costs and assets/liabilities associated with client's
operations
- Calculated value of current operations on an NPV basis
- Packaged disposable assets
- Explored possible related risks and opportunities on other parts of the
client's business of divesting the operations
 Workstream #2 – external perspective:
- Main focus was to identify and quantify the synergies that could be
obtained if the operations were acquired by the currently dominant player
- Performed through external data search, in-depth competitor interviews
and modeling
- Examined other competitors and several players in related industries for
possible synergies

Results:  The study showed that the client should focus on selling the global
operations.
 Nevertheless, cost reductions after the divestiture are critical for value
creation and comprise a major challenge to the client.
 Also, the study showed that the synergies would be highest for the currently
dominant player, as compared to the other possible buyers.
 The client has initiated the negotiating process with the currently dominant
player.
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Workplan
Week Week Week Week Week Week
1 2 3 4 5 6
Kick-off and workplanning
• Client and team kick-off

• Data gathering (client & team)

• Develop approach & action plans

Define disposal package(s)

• Develop profile and value of package(s)

Value to seller
• Develop valuation framework

• Assess risk & opportunities

• Valuation

• P/L & balance sheet impact

Value to buyer
• Complete profile of buyer’s operations

• Identify areas of synergies

• Financial valuation

Strategic options evaluation

• Value of turnaround plan vs. value of sell

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Lessons learned/key insights
Analytical Process/client Team

 In a top-down highly  A buy-in from management  It is critical to involve all

confidential divestiture not directly involved in the team members in the client
process it is difficult to define divestiture is critical interaction to some extent
the package of assets, costs,  (client meetings, telephone
Considerable time needs to
headcount etc. to be conferences, plant tours
be allocated to
divested due to inter- etc.) to ensure
review/explain valuation,
linkages between different understanding and
and when comparing sell vs.
parts of the business motivation
turnaround
 It is important to identify
and quantify risks and
opportunities in other parts
of the business associated
with a divestiture
 The divesting company is
usually stuck with some
“sticky costs” that cannot be
transferred to the acquiring
company and there lies a lot
of value in restructuring the
business after the divestiture
 A fair valuation of the client’s
turnaround plan for the
business that might be
divested is vital for
comparison and to
strengthen credibility.
Ensure consistent approach
when comparing sell vs. IndustrialCompone
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Worldwide market for product line X (1997)

Share of total (%)

Others
Total =
Rambo
SEK
10B 7B 5B 4B 1B 1B
100% 28B

Kaiser Others
Others Nachi
Others Others
Tofu

Others
Rambo
80 SNR Tofu
Tofu
Tofu SumoX
Kaiser
SumoX Kaiser
BobX
60
Rambo

Rambo
SumoX

Tuesday
Rambo Tuesday
40
Tuesday

Tuesday
Rambo
20 BobX Chinese Br
Tuesday

0
North America Europe Japan ASP Latin Middle
(excl. America East &
Japan) Africa

Source: Internal Accounts (BMI); Bain Analysis

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 Product line X: options

How to create value from product line X?

Stay Exit

As is Turnaround Sell Close

Issues:  What is the  To whom?  How feasible

probability of  At what price? and at what
success? cost?
 What are the
linkages and
risks with other
Rambo
businesses?
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Package options (independent of price)

Worldwide
High

Europe

Likely value
to Tuesday North America
Middle Rambo better off
East
& Africa

Latin America 1,250M

Asia Revenue
Low
Low High
Value created to
Rambo if sold
Separability issues

Source: Rambo Management Accounts; Bain Analysis

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Impact of selling product line X on other
Rambo businesses - approach
Red team Green team
(pessimistic view) (optimistic view)

 What is the realistic downside  Can Rambo leverage a closer

of not having product line x relationship with Tuesday to
in the product portfolio? create win-win situations?

 Ideas generated by Rambo management/Bain team

 Validated by interviews and SFERA project findings
 Quantified with MSR accounts, market data and modeling

Caveat:  Top-down view with limited detail on operations

 Ball-park figures to test how big the impact could be;
not the most likely outcome

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Risks/opportunities

Possible negative impact on

other Rambo businesses

Shared costs Automotive sales Industrial sales Intangibles

 Lower volumes  Loss of non-  Loss of  Commitment to

to cover fixed product line X distribution Automotive?
manufacturing VSM revenues business  Full range
costs  Loss of OEM  Loss of related producer?
- Steel
customers OEM business  Weaker global
- Components
 Loss of seals #1 position?
 Sales and
revenue
administration
restructuring
 R&D resources

 Volume loss in emerging markets

- Eastern Europe
- India
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Risks/opportunities: quantification
The total downside impact of all potential risks is ~SEK 700.
However, there are also substantial opportunities to
overcome these risks and create up to SEK 500M of value.

Net present value (SEK M)

600
SEK 0-500M

400 Other

Industrial Distribution

200 Added Seals Revenues

Steel Sourcing Europe

0
VSM Business

-200
Emerging Markets
Industrial Distribution
-400
Other

-600
SEK (0-700)M

Risks Opportunities

Source: Bain Modeling; Interviews

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Value created for potential acquirers

Value created* (NPV of synergies and cost reduction)

SEK 5B

Rambo
4 cost
reduction

2
Synergies

0
Tuesday Kaiser SumoX Tofu BobX

*Estimated with Bain RMS/ROS model; Split cost reduction vs. synergies depends on package
Source: Internal Accounts (BMI, MSR); Annual Reports; Bain Analysis IndustrialCompone
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 Acquisition strategic rationale
Tuesday Kaiser SumoX Tofu BobX

Rationale:  Leadership  Leadership  Entry into the  Strengthens  Helps to gain

position in all positions in EU positions worldwide
product line X EU, Latin automotive outside Japan automotive
markets America and business  Entry into leadership
except Japan Asia Pacific  Strengthen new accounts position
#2 position in  Grown
North through
America acquisitions
 #1 position in before (e.g.
Asia Pacific RHP in
Europe)

Issues:  Potential anti-  Interest in  Integration of  Interest in  Interest in

trust related expanding Federal expanding building
issues in EU, unprofitable Mogule auto business product line X
Latin and auto business  Historically into new business
North  History of not focused accounts outside
America divesting on EU  Not made any Japan?
businesses acquisitions in
since 1991 recent years
 Limited  Limited
financial financial
capabilities? capability?

Strategic fit: Very high Low/medium High Medium Medium/high

Value created* 4.3-4.7 1.3-1.7 0.9-1.3 0.9-1.3 0.6-1.0

(SEK B):
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Expected value creation for Tuesday and
Rambo (worldwide)
Net Present Value Creation (SEK B)

5
SEK 4-5B
Other*
4
Pricing Power

R&D Reduction
3

Plant Efficiency
2
Plant Consolidation

1
Sales & Administration
Restructuring
0
Total Synergies and Cost Reduction (Most likely)

* Other including purchasing cost, networking capital and account dominance

Source: Bain Analysis, MSR, Tuesday Interviews, Tuesday AR, 10K IndustrialCompone
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Turnaround vs. selling: value of product
line X business to Rambo
Net present value (SEK B)

-2 Value of
turnaround
improvements

-4 Option 1: Turnaround Option 2 : Sell

As Is Value of Minimum price Maximum price
product line X (including (full potential
post turnaround additional value to
revenue at risk) Tuesday)

Note: Weighted average cost of capital = 10,99% nominal

Source: Rambo Internal Data; AD2000; Bain Analysis IndustrialCompone
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Value of selling vs. turnaround scenario 1
Turnaround
Sell (excluding price) (full potential)

0
0
High

(1) High
-1
Low
Low

(2) -2

(3) -3

(4) -4 As Is NPV of
Auto.
NPV
of Auto.
NPV of
Other
NPV of
Other
NPV of
Product
As is Value of Value of Value Value of Total
product Product Product Product Product line x
Net of Oppor- Risk of
line x line x line x line x line x Business
Overhead Risks tunities Selling
Business Invest- Improve- Invest- Improve- After
Restruc-
Sold ments ments ments ments Improve-
tering
ments
Cost

Note: Improvements are full potential

Source: Rambo Internal Accounts (MSR 9710 annualized); Bain Analysis IndustrialCompone
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Remaining costs to Rambo after
transaction (worldwide)
Cost
Share of total (%) reduction
potential
SEK 260M SEK 260M
100% OOIE 100%
Import Expenses 100%
All / Shared 0% Difficult to Restructure
80
GHQ 0%

60
Dir / Req 100%

40
Possible to Restructure

20 R&D 75%

0
By Cost Type Post Transaction Restructuring

Rambo can cut at least SEK 180M in costs (NPV value of SEK 1,450M)

Note: GHQ is Group Head Quarter; OOIE is Other Operating Income & Expenses
Source: Rambo Internal Data; Bain Analysis IndustrialCompone
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Logical flow of the deal

Sell product line X packages with as

much S&A as possible

Strike product line X sourcing

agreement with Timken and
agreement to supply steel

Restructure remaining S&A and

remaining automotive

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Divesture approach
Explore interest
Understand product line X
of Tuesday and Prepare sell-off Launch sell-off
business and strategic
potentially other process process
options
parties

Key  Business x-ray  Hold  Finalize  Decide on

activities:  Bottom up plan exploratory “package” exclusive
 Top-down view talks with  Define approach vs.
Tuesday negotiation auction
 Build business strategy  Set up “data
case  Develop rooms”
approach for  Conduct
Competition presentations
Authorities and prepare due
 Define process diligence
and time plan process
 Involve  Hold
external negotiations
advisors  Reach
consensus on
price
Board:  Board  Board informed  Board approval  Board approval
communication of further talks to go on/ to close deal
contingency
plan

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