A PE firm was looking to acquire a target company for its breakthrough technology. The technology consisted in EDI-based software for tracking and tracing cargo line items across air, ocean and ground transportation worldwide. The target company was a corporate joint venture between a U.S. major airline and a U.S. national railroad company. The acquisition thesis was to grow the company and eventually conduct an IPO. The PE firm needed a strategic due diligence of the company prior to the acquisition.
- The company was a high risk.
- It had sunk cost of $70 million
- No product had been released so far, in its 7th year in operation.
- Products lagged severely behind schedule with the first release scheduled in the next year.
- The next round of investment called for $15 million.
- The management team lacked experience in technology start-ups.
- Wide swings in NPV subject to the choice of risk premium factored in the discount rate, as follows
• $54 million at a discount rate of 35% and
• $175 million at a discount rate of 25%
We conducted the following tests:
- Verification of the perceived value by potential customers (we interviewed 53 companies)
- Sizing the potential market and the time required for penetration
- Assessment of the technology and its compatibility with potential users
- Assessment of product acceptance
- Assessment of the competition
- Determination of whether company operations are adequate to generate the required level of sales and customer support
- Assessment of the management team
- Subject to the results of each test, we rated the specific level of risk and scored total risk.
We analyzed the cost structure of the business and the required investments.
We conducted a Discounted Cash Flow analysis.
We ran several sensitivity analyses subject to varying discount rates.