Hony Capital and its private equity group's investment in Zoomlion had proven to be successful. It is now considering the possibilities of taking off their money from the table or to re-invest the same to acquire a large Italian competitor.
Josh Lerner; Yiwen Jin
Harvard Business Review (811032-PDF-ENG)
October 18, 2010
Case questions answered:
- What are the risks of pursuing the CIFA acquisition? What are the potential benefits?
- How is investing in Zoomlion’s acquisition of CIFA different from investing in Zoomlion itself? Does this pose fewer or more risks for Hony?
- What is the valuation of CIFA?
- Another source of profits for Zoomlion is sales of its own products through CIFA’s distribution network. This might be assumed to begin in 2010 and grow at the same rate as CIFA’s sales. How significant will the after-tax profits from such sales need to be (if any) to justify a valuation of 500 million Euros?
- How much do you believe Zoomlion should bid for CIFA, based on the answers above?
- What is the estimated return of the CIFA deal for Hony? Assume that a) Hony will exit in 5 years; b) Hony will exercise the option at the time; c) CIFA’s entry trailing EV/EBITDA multiple was 10, and Zoomlion would be trading at an average EV/EBITDA multiple of 20 at the time of exit.
- Should Hony participate in the Zoomlion acquisition?
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Hony, CIFA, and Zoomlion: Creating Value and Strategic Choices in a Dynamic Market Case Answers
This case solution includes an Excel file with calculations.
a) What are the risks of pursuing the CIFA acquisition? What are the potential benefits?
The risks of pursuing the CIFA acquisition are:
- John Zhao was unsure whether Zoomlion was ready for the complex task of integrating a foreign acquisition owing to cultural and geographic distance.
- Since capital markets were deteriorating during that time, a delay in the acquisition would decrease the possibility of getting financing.
- There was skepticism about whether the auction process would value the company at a reasonable level.
The potential benefits are:
- It was anticipated that in the next 3-5 years, there would be overcapacity in China’s construction equipment industry, leading to severe competition. Thus, the CIFA acquisition will provide international exposure to the company.
- CIFA had advanced technology, which Zoomlion did not have.
- Moreover, they complimented their sales network as they have a presence in different geographies.
- CIFA had more favorable purchasing agreements than Zoomlion.
- The acquisition will help Zoomlion expand its market leadership in concrete machinery to mature European markets as well as fast-emerging markets such as Russia and India.
b) How is investing in Zoomlion’s acquisition of CIFA different from investing in Zoomlion itself? Does this pose fewer or more risks for Hony?
Investing in Zoomlion’s acquisition of CIFA is
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