Tad O’Malley: The Investment Conundrum
By David Birulin
The Empire Investment Group was a top-tier buy-out firm within the private equity community. Tad O’Malley, a second-year student at the Harvard Business School, accepted a position at Empire Investment Group.
Ted received a call from his boss, Townsend “Sandy” Beech, the head of his four-person deal team and founding member of the firm. Sandy requested Tad, on a Friday afternoon, to review three presentations for possible buyout targets. Tad was to make a presentation at the partners’ meeting on Monday morning, recommending only one (1) investment and detailing the strengths and weaknesses of all three.
The Empire ...view middle of the document...
Companies all over the world, of all sizes and industries, can be targets of leveraged buyout transactions. Strategically, Empire was seeking companies to buy-out in England, the new India office, and Germany.
Empire was facing a tremendous workload and recently had lost a highly publicized deal. Recent trends in the market had seen volume and size of Leverage Buy-out deals rise dramatically. Opportunities were opening up all over the world, and Empire wanted to be sure it maintained its high profile not only in its U.S. stronghold but also in Europe, India, and Asia.
The U.S. Leverage Buy-Out Industry invested in 752 transactions for $136.5 billion in 2004. The average transaction was $181.5 million. In the 1990’s, companies had become more efficient both in terms of finance and operations as compared to the 1980’s where companies were under-productive, underleveraged and needing efficiency increasing measures. According to the Case Study, “Corporate America is generally more efficient than in the 1980’s. There are not as many institutions where you can just cut expenses and capital expenditures and… realize a great return on investment. You have to be prepared to add value in some way.”
The industry’s purchase price in 2004 was on average 7 times EBITDA (earnings before interest, taxes, depreciation and amortization), the highest level since 1999. The average debt multiple was 4.4 to 6.6 of EBITDA.
According to the case study, “another feature of the U.S. private equity market was its increasing internationalization. In 2005, fund-raising outside the U.S. was expected to exceed $70 million.” Also, U.S. firms had established international offices from which to deploy money. “Major U.S. LBO operations like “Carlyle, Blackstone, TPG, KKR, and Bain Capital – all had several overseas offices by 2005.” Empire felt the pressure to compete; “by 2005, the question was not whether a large private equity firm had an international operation but what international deals it was doing.
As an industry, marketing was word-of-mouth and targeted. Empire has an excellent team proactively researching companies from public records who they believe meet their financial objectives. The sales cycle can be long, but the returns are typically high. The basic approach is to build relationships with government agencies, company leadership, and build a business case to help companies achieve their financial goals.
Empire’s product is their knowledge and ability to restructure companies, fund improvements or reduce expenses to increase EBITDA with very little of their own cash. Empire may be a major investor or purchase the company outright, but their objective is to find a company whereby they can achieve an ownership position with very little cash and over a 3 to 5 year period, sell out generating very high internal rate of returns.
The three companies Tad is reviewing are Coming Home Funeral Services, 3F AG, and Gurgaon Manufacturing, LTD.