Berkshire Partners is a limited partnership, which focusses on acquisitions of companies valued in the range of $25 million to $250 million. The purpose of the case study is to explore the firm's resources and discuss the company's competitive advantage vis-a-vis other types of such enterprises.
Cynthia A. Montgomery, Dianna Magnani
Harvard Business School (391091-PDF-ENG)
Mar 18, 1991 (Revision: Aug 22, 1994)
Case questions answered:
- What are LBOs and why do they exist?
- Does Berkshire Partners create economic value?
- How does BP add value to its businesses?
- What are BP’s most important resources?
- When does BP add the most value to its businesses?
- How imitable is BP’s strategy? What stops other firms from doing it themselves?
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Case answers for Berkshire Partners
1. What are LBOs and why do they exist?
A leveraged buyout is the acquisition of another company financed using a significant amount of borrowed money to meet the cost of acquisition. The contribution of equity is usually relatively small, often the assets to the company being bought are used as collateral for the borrowed money in addition to the assets of the acquiring company.
Even though LBOs are associated with high risk because the acquired company’s cash flow might be inadequate to protect themselves from insolvency, they can generate significant returns for both sellers and buyers. If the company is public, shareholders can earn substantial premiums over the market value to the shares they own.
2. Does Berkshire Partners create economic value?
By taking over other companies, Berkshire Partners at the same time introduces changes in capital structures, management incentives through free stock options, and especially corporate governance. This provides an environment conducive to long-term growth and profitability for its portfolio companies, so BP does create economic value in numerous ways. On the other hand, the high debt levels involved in LBO’s impose a high risk of becoming insolvent. However, in this regard, one has to mention that by actively monitoring their portfolio companies carefully, BP managed to fully realize the great majority of investments made.
3. How does BP add value to its businesses?
BP analyzes the target company’s operations, facilities, management, industry their competitive and regulatory environment. BP adds value to its companies by…