Case Study – Company A

Introduction

Below is a case study of a company Plena acquired, restructured, grew and later on sold to a strategic investor. The process outlined includes the steps, which generally prevail in a Plena transaction and therefore offers good guidance to how Plena Group operates.

The company name, location and most financial information however, has not been detailed.

The problem

Company A was a small public distribution company. Company A was bought in a management buyout by the two main managers at the time having very different personalities. Whilst the organizational structure was clear on paper, it was somewhat cloudy in practice. The Managing Director (partner one) had one view on how Company A should go forward and the Sales and Marketing Manager (partner two) had quite a different view. In addition the Managing Director was also engaged in voluntary work that took quite some time. The company did not develop as expected during the early stages of new ownership but instead, was doing rather poorly, and was not even at the breakeven point financially. The owners both realized the problem that the two partners could not work well together and therefore decided to sell the company. Plena, a supervisory board member at the time, was asked if it wanted to acquire Company A.

The challenge

Plena decided that it was interested in looking at and possibly acquiring Company A. The first challenge was to get the co-owners to understand that Plena did not want them to stay involved as neither a shareholder nor remain as managers. Whilst this is unusual for Plena, it was clear to Plena that, with the background of the two gentlemen, this was vital to improving the organizational structure and functioning of the company. The two owners eventually agreed and Plena could continue its due diligence where the following hurdles were determined.

a) What is the principle aim of the company?
b) Who can be an appropriate person to run this venture?
c) How can profitability be improved in such competitive market?

The Plena solution:

To find solutions to all the three problems, Plena decided that it would buy 100% of the company to have full flexibility to implement plans and completely control the cash position of the company. Thereafter the following decisions were taken.

• Plena is a long term investor and did therefore not implement a short term plan but a well thought through growth strategy.
• Plena immediately considered the characteristics and qualities of the incoming CEO. Shortly after the takeover, Plena found the man it had been looking for. The candidate had previously been in contact with Plena and therefore the parties knew of each other. The new CEO had experience in implementing growth strategies as well as trading company experience.
• Plena had a strategy group to look at the company’s various possibilities. It became clear that the company’s position was weak both in terms of market position and product range. In order get the company on the path for growth, the CEO and Plena decided to do the following:
  • Slashing overhead costs immediately. Sales per sales man ratio were lower than industry average and administration cost was unusually high for Plena standard.
  • Initial reduction in product range to discontinue all non-moving ad-hoc products that took inventory space but were not part of an overall product range program.
  • Thereafter, enlarge the product range again but this time with the aim to supply the customers with a full range of products and make it a one-stop-shop for our clients.
  • Over the coming years the company introduced a complete new inventory system and ran a well organized just-in-time policy. Previously the company had low inventory turnover which reduced margins and limited the growth. The new inventory system meant that the company did not need more space (which would be costly) but instead managed its inventory more efficiently.
  • The company introduced a variable pricing system. It was able to ensure that products sold to important customers in long term contracts were priced more favorably than products purchased on an ad hoc basis from the same long term contract buyers. Pricing policies were not disclosed as is a Plena Group general policy.

Summary

All these changes in policy brought the desired results and transformed the company from a mediocre player into a very profitable market leader over the 12 years that Plena Group owned the company. Finally the company was sold to a large strategic investor. During Plena’s ownership the company increased revenue 6 times and went from a very small gross profit margin to a 25% NET PROFIT MARGIN on revenue.