askivy_assessment_center_case_study

Case Study Practice
For
Investment Banking Assessment Centers
2011/12 Edition
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© 2008-2012 Ask Ivy. All Rights Reserved.
Any unauthorised copying, duplication, reproduction, re-selling, distribution or other commercial
use will constitute an infringement of copyright
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What are Case Studies?
Case studies are part of the graduate interview process at investment banks. They were first
introduced into interviews by management consulting firms, but they are now used by many
firms in the City, including the big 4 accounting firms and almost all of the major investment
banks.
A case study will consist of a question or several questions that are asked about a client’s
business. Your task will be to answer those questions, and justify what advice you would give
the client. Typically, this will be questions such as:
• “The CEO of Tesco rings you up and wants to set up a meeting in a few days to hear
what advice you have for his company. Based on the information you have at your
disposal, what would you advise the client to do?”
or
• “The CEO of Marks & Spencer has prepared a list of potential acquisition opportunities,
and he wants you to recommend which one to go ahead with”
To support your analysis and recommendations, various materials about the company will be
provided. This usually consists of i) the recent stock market performance of the company (if it is
listed), ii) annual reports, iii) broker’s research or investor presentations, iv) recent press
releases, v) other information about the potential targets.
Even if this sounds daunting, this exercise should not scare you, because answers do not
require any specific or advanced finance knowledge. The questions can be answered using
common sense and a basic understanding of finance concepts, and you will only need some
practice to master the case study.
Case studies are essentially used to test:
• Analytical skills: can you handle lots of numbers?
• Creativity: can you come up with interesting and original solutions?
• Problem solving ability: can you find the right answer given the data?
• Logic: are your arguments supported by facts?
• Business sense: do you have a good understanding and knowledge of the business
world and basic finance / accounting concepts?
• Ability to justify a point: can you handle the pressure of defending your arguments?
• Ability to understand and identify key and relevant data from a large amount of tables
and charts.
Case study exercises can be done either individually, or as group exercises, and they can be
written or/and involve an oral presentation in front of a panel of judges, usually consisting of
senior bankers. In this guide, we will show you how to handle both situations.
Overall, case studies should give you a good overview of what bankers do on a day to day
basis and what an investment banker job is like.
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Tips for Oral Presentations and Group Work:
Before going into details of the Case Studies, here are a few tips for oral presentations and
group work that you will find useful.
• Appearances matter: leave a good impression
There will be many opportunities for the interviewers to assess your intellectual skills and
motivation, especially in one-on-one interviews and during numerical tests. For oral
presentations, rather than testing the actual content of the presentation, it is your physical
behaviour and overall attitude that will be the most important points on which you will be
assessed. Therefore, pay particular attention to the following:
o Smile. This is so that you don’t look overly stressed and leave a positive
impression.
o Watch your talking speed. When stressed, most people will talk very fast or keep
repeating themselves. The best way to adjust your talking speed is to practice at
least once or twice, and time yourself. Also, the more confident you are about your
arguments and structure, the better paced your talking speed will be
o Don’t bore the audience. Watch your speech tone and don’t be monotone. When
you make a point, try to sound excited. Again, the best way to improve this is
through a bit of practice.
o Don’t look at the floor, the ceiling, or at the presentation. Watch your audience in
the eye, but don’t focus on one person only. The best practice is to alternate
between your audience. If you feel uncomfortable looking people in the eyes, you
can look at their foreheads or between the eyes, they won’t notice and it will make
you more comfortable.
o Watch your hands: keep hand gestures smooth. Don’t put your hands in your
pocket. The best way to use your hands is to point at charts or text on the slide to
capture your audience’s attention.
o Obviously, dress as you would expect investment bankers to be dressed:
conservative suit and conservative shirts and ties, and black, well polished shoes.
• Best practices for PowerPoint slides and supporting materials
o Don’t write everything you want to say on the slide. This would be hard to read,
boring, and when writing everything on the slide you will be tempted to read from it,
which is something to avoid.
o Use graphics and charts and keep the text for “useful” comments. For example, if
you are showing revenue growth on the chart, don’t have text repeating the
graph’s content saying: “revenue growth in 20XX was XX%”. Instead, make a point
saying “revenue growth was very strong over the period because of XX”.
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o Don’t use any fancy charts or colours. Keep it professional and standard. In
banking, best follow this rule: “when in doubt, always be conservative”
o Again, don’t read from the slides. It is very tempting to do so when stressed, but
keep your focus and eyes on the audience.
• Practice, practice
o Practice out loud at least once or twice. You may use small card to remember your
points, but don’t read from them
o Most of the questions from the audience can be anticipated. Therefore, prepare
your answers in advance, which will also help you
• Be a good team player
o Early on during the assignment, agree with the teams members on what the
approach should be to solve the problem. Be flexible even if you don’t absolutely
agree on the approach: the goal for you is to give a good presentation (doesn’t
have to be perfect) and most importantly, to leave a positive impression to the
audience.
o Make sure you contribute to the discussions but don’t dominate or be aggressive.
Don’t cut your teammates or the audience when they speak, and don’t contradict a
team member even if you don’t agree with him/her argument.
o Don’t be too passive either. If you do the work, but then don’t speak much during
the presentation, the audience will not know what your contribution was.
o Don’t compete with your teammates. You are not in a direct contest again each
others, if all of you are good, you will probably all get a chance to go to the next
round. Instead, rely on each other strengths, and have fun during the process. This
is the best way to look relaxed and confident, which is the most important success
factor for those presentations
o If you are unsure or unclear, don’t hesitate to say so, or to ask team members for
help. There is nothing worse than pretending to know the answer – the audience
will notice.
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CASE STUDY 1
SWOT ANALYSIS - VODAFONE PLC
A common case study is question is to prepare a “SWOT” Analysis, which is the acronym for
Strengths, Weaknesses, Opportunities and Threats. This could be a question in itself, or part of
a larger case study, or even an interview question.
The SWOT analysis is a fairly simple exercise once you’ve done a bit of practice. You need to
go through all the data provided to identify and summarise each Strengths, Weaknesses,
Threat and Opportunities for the company. We will now walk you through a SWOT analysis for
Vodafone Plc, the well-known UK mobile phone company. All the necessary information you
need is included in the Vodafone annual report that you can download on the company website
http://www.vodafone.com/content/dam/vodafone/investors/annual_reports/annual_report_acco
unts_2011.pdf
FRAMEWORK
Step 1: reading and highlighting
The first step of the SWOT analysis should be highlighting anything that sounds like a Strength,
Weakness, Opportunity and Threat in the materials provided.
The key area you should pay attention here is not missing any major point: pay a particular
attention and stay focused when you initially go through the information so you don’t miss any
important information. Therefore, start by highlighting anything that you feel is relevant at first,
even if you feel you are highlighting too much initially. If you are unsure, just highlight those
anyway. The table below should provide you with a good list of what typical “themes” would
come out in a SWOT analysis.
“Typical” SWOT themes
Regarding the business
Good and unique products / commodity products
Global business / single-country focus
Well diversified / narrow focus
High margin product / low margin product
Growth opportunity markets / mature markets
Strong market share, leading products / low market share, declining products
Stable business/ cyclical, volatile business
Strong management / management issues
Non core businesses
Regarding the financials
Declining revenues / high revenue growth
Low/high EBITDA, gross, net profit margins
Highly levered (too much debt)
Lot of cash / short of cash, cash flow not strong
Regarding the market
Fragmented market (= acquisition opportunities) / mature market
Growing markets / Declining markets
Pressure on prices
Declining competition, high barriers to entry / increasing competition, low barriers
Read the document in the appendix, and using the table above and taking into account our
advice, try highlighting what you think is relevant.
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Step 2: Categorising and filling the buckets
Once you’ve highlighted all the relevant data, you need to create buckets of Strengths,
Weaknesses, Opportunities and Strengths and allocate the identified bits of text to each of the
categories. You will find the table below quite helpful as the categories tend to apply to most
businesses.
The key area you should pay attention here is not to confuse Strengths with Opportunities and
Weaknesses with Threats. Strengths and Weaknesses are attributes of a company (i.e. The
company has good products), while Opportunities and Threats are external conditions (i.e. the
market for the company’s products is growing)
Typical SWOT Categories
Strengths Weaknesses Opportunities Threats
Strong Products Weak Products Emerging market growth Competitors threats
High market shares Declining market shares Increasing demand Price pressures
Diversified Narrow focus Increasing global presence Government regulation
High-margins Low-margins New products launches Market maturing
Large size, scale Lack of scale Cost reduction programmes Cost increases
Strong Balance Sheet Lack of financial power Regulatory changes Regulatory changes
Strong management Management issues
Good reputation
Bad track record
High Growth
Low growth, declining
Stable
Volatile, cyclical
Using the document you have highlighted previously, try to summarise each point into SWOT
buckets in the table below. You don’t necessarily need to find 5 points for each, but at least 2 or
3:
Strengths Weaknesses Opportunities Threats
1) 1) 1) 1)
2) 2) 2) 2)
3) 3) 3) 3)
4) 4) 4) 4)
5) 5) 5) 5)
One you have finished this assignment please go the solution in Appendix 1.
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CASE STUDY 2
M&A RECOMMENDATIONS - VODAFONE PLC
(GROUP PRESENTATION)
It is Friday afternoon, and Vittorio Colao, CEO of Vodafone, rings you up and wants to set up a
meeting first thing on Monday morning. He just heard that Avea 1 , a Turkish company, has
come up for sale, and he wants to know what to do. You are one of Vodafone’s most trusted
advisors and need to organise your team to prepare this very important presentation. Based on
the information available, what recommendation would you give to Vittorio?
FRAMEWORK
Structure:
First of all, every presentation needs a structure. This type of question is very standard, and
once you will have gone through a few of those and learnt the structure, you should be able to
prepare a great presentation. Having a good structure will give you more confidence when you
speak and when you get questions from the audience. Also, it helps the audience understand
where you are, and where you are going.
The basic rule is to always have an introduction, a middle part with your content, and a
conclusion for any presentation. As a rule of thumb, the “middle” or the main content should
represent at least 70% to 80% of the overall presentation time.
• Beginning / Intro: keep it simple and just welcome the audience, introduce group
members, and let the audience know what you will cover by introducing each section.
• Middle section: keep this section to 3 main points, with well developed arguments.
Making too many points will confuse or bore the audience, you may not have the time
to prepare and research your arguments in depth, and you may go over the time
allocated. Keep to the essentials.
• Conclusion: this should be a brief summary of what you have covered, and make the
final recommendation. Make sure you answer the original question. Finally, invite
questions from the audience, and thank them for their time
One important factor in the presentation is to be familiar with the M&A “jargon”, and concepts
such as synergies, financing, economies of scope and scale, debt versus equity, etc. This
jargon is explained in detail in the next section.
1 Avea is a real company but all forecasts and some of the key facts have been changed for the purpose
of the case study. We also amended P&L data for Vodafone Turkey for the same purpose.
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Content and Jargon
For such a presentation, we recommend you adopt a three part structure for your main content
as follows:
Point 1: Overview of the Target Company, which needs to include:
A. Description of the business: what is the company doing?
o General business description
o Mention products and services using the data provided
o Any brief and relevant history
o Who owns the company with % shares, is it listed? You can use graphs and pie
charts here also
B. Positioning in its market: ideally this should have market shares using graphs and a
strengths and weaknesses analysis (a “mini SWOT” as we highlighted in the previous case
study)
C. Key financials
o Revenue, EBITDA with growth and margins. You can use a table or a charts to
show the financials
o Any history about the financials. For example, if revenues declined, mention why if
the information is provided. You don’t need to be too detailed, just mention the
points that stand out such as big swings in figures
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Point 2: Pros and Cons of an acquisition
A. List the pros. Below are some examples of pros for an acquisition, make sure you are
familiar and understand all of them:
o Economies of scale: this means that the combined entity can reduce its fixed costs
by removing duplicate departments or operations, which increases profit margins.
For example, if you combine two manufacturing companies, you can eliminate the
duplicated production factories and only keep one, which will reduce costs
o Economies of scope: This means that you are able to sell more products without
increasing your cost base. For example, if a retail bank buys an insurance
company, the bank can sell insurance services in its existing branches with no
need to open additional branches. Therefore, it will sell more products but have the
same costs as before, and this will increase margins
o Other “synergies”. The word “synergy” describes the fact that two merged business
may perform better than each business separately (the expression: “1 + 1 = 3” is
often used). For example, by being larger combined, you may have more power
over your suppliers and be able to reduce prices for your raw materials
o Diversification: this is achieved by acquiring a target that sells product that the
company does not sell currently, or acquiring a business that is in a country where
the company is not present yet. Diversification is a good thing because it enables
the company to be more stable because risk is less concentrated in one area. For
example, if a specific country economy does not do well, this will be offset by other
countries that might do better
o Increasing market share: if you buy a competitor, you will increase your market
share, and this will avoid price wars, which means you may be able to charge
higher prices and improve your margins
o Improve management of the target firm: if the target is not well managed, value
may be created by having a more successful management team in charge
B. Following is a sample list the cons of an acquisition:
o The price paid may be too expensive and there may be a bidding war for the target.
o Lack of synergies, or unpredictable synergies
o Lack of diversification
o The target performance is uncertain and volatile
o Poorly performing target due to bad products or reputation
o The acquiring company does not have sufficient financial power to acquire the
target (not big enough, not enough cash, already too much debt, etc.)
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o Extra points for mentioning: execution risk (the process of merging may encounter
problems) and regulatory issues such as monopoly regulations (the government
may oppose a merger because it thinks the combined entity will be too powerful
and dominate the market)
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Point 3: M&A considerations
A. How does the combined entity look like?
o Add revenues and EBITDA forecasts (those will be given) together and show the
revenue growth and EBITA margins of the combined entities. Ideally, this should
show improving growth rates and/or margins. For example, we suggest creating a
table such as the one below:
Year 2011 2012F 2013F
Company A
Revenue 100 120 140
growth 20% 17%
EBITDA 30 35 45
margin 30% 29% 32%
Company B
Revenue 20 22 25
growth 10% 14%
EBITDA 7 9 10
margin 35% 41% 40%
Combined A+B
Revenue 120 142 165
growth 18% 16%
EBITDA 37 44 55
margin 31% 31% 33%
o Extra points for mentioning that there could be “synergies” that would increase
EBITDA margins further. You could add a row just after the line “EBITDA” entitled
“synergies” and add this number to the EBITDA to highlight this, as illustrated
below. You can try to estimate synergies or make a guess. Typically, you estimate
synergies a percentage of revenues. A figure between 2% to 5% is reasonable in
general.
Combined A+B
Revenue 120 142 165
growth 18% 16%
EBITDA 37 44 55
Synergies 5 5 5
EBITDA + synergies 42 49 60
margin 35% 35% 36%
synergies, % revenues 4% 4% 3%
B. How would you buy the company? This is a much more complicated part that needs
detailed explanation, and that you should read carefully, and make sure you fully
understand the concepts discussed below.
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There are 3 main ways to pay for a company you want to buy. First, you can use the cash you
have on your balance sheet. Secondly, you can borrow the money, especially if you don’t have
enough cash to buy the business, or if you want to keep some cash on hand. Third, only if you
are a publicly listed company, you can pay with you own stock. If you are a listed company,
your shares are listed on a stock exchange and will have a trading price or value attached to
them. Therefore, you will be able to use those shares to buy another company: effectively, you
are giving up ownership in your company to the target. We will explain each method in more
detail, but beforehand make sure you understand those definitions below:
o Definition of equity: equity is the residual claim over the company’s asset, after all
liabilities are paid. It is a permanent source of capital, and has no interest
payments and doesn’t need to be repaid.
o Definition of debt: debt is a contractual obligation, which typically carries interest,
has a fixed maturity, and therefore is viewed as a temporary source of capital.
1. Method no. 1: Cash acquisition method: this is the simplest method. Essentially, you
reduce the amount of cash you have on your balance sheet by the acquisition price. This is
typically done for small acquisitions. For bigger acquisitions, the company will want to
borrow money. Why? Because it may not have sufficient cash, and also because interest
expense of debt is tax-deductible.
2. Method no. 2: Debt acquisition method: let’s assume you only have $1 billion in your
balance sheet but you want to acquire a business valued at $3 billion. You can use the $1
billion cash (reducing that cash on the balance sheet) and then you will have to borrow the
$2 billion that remains, which will increase your debt on the balance sheet. However, there
are several areas to pay attention to:
o You cannot borrow any amount you like. Banks, when lending money, look at
specific financial ratios and will impose maximum or minimum limits (those limits
are called “covenant”). The most common limit is the ratio of net debt (total debt
minus cash) to EBITDA. Typically, as a general rule of thumb, this cannot exceed
4 times. So what EBITDA should you use? Because the companies will be
combined and both companies’ cashflows will be used to repay the debt, you
should use your own EBITDA and add the target company EBITDA when
calculating the limit. Lets analysis this example:
Example:
Target price: $3 billion
Target EBITDA: $400 million
Acquiror total cash on balance sheet: $1billion
Acquiror existing debt, that was already on its balance sheet: $1billion
Acquiror EBITDA: $800 million
Assuming that pay the 3$billion with $1billion cash and $2billion debt:
Company A + B EBITDA: $800m+$400m = $1.2 billion
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Company A + B net debt: $1 billion existing + $2 billion new debt – 0 (all cash
is used) = $3 billion
Net debt to EBITDA ratio: $3 billion / $1.2 billion = 2.5 times
In this example, we can see that the ratio of 2.5 times is below the 4 times limit,
therefore we are able to buy this company entirely with debt. If you go over the
limit, you will either have to give up the acquisition, or use equity, as we will
show in method 3.
o Debt has pros and cons: The major pro of using debt is that it is tax deductible.
Although you will pay interest on the debt, you can offset some of this against your
tax expense. The Cons is that you are committed to fixed repayments over the life
of the debt, and this could lead to financial distress.
o There are many different kinds of debt. The only kind of debt you need to
remember are i) bank loans: interest payable every month, usually you repay it
gradually over the maturity life, ii) bonds: interest payable every six month or every
year (the interest is called “coupon”), and the principal, instead of being repaid
gradually, has to be repaid at the end of the life of the bond in a big lump sum, and
iii) convertible debt. This is debt that can be converted into shares under certain
conditions. So instead of repaying the amount, it could be converted into shares in
your company at a pre-determined price.
3. Method no. 3: The Equity method: this method only applies to listed companies. Let’s
assume that Company A is a listed company on the stock exchange. It has 100 million
shares. 30% of its ownership is help by the public and the price per share today is $100.
The remaining 70% is held by the management. The company value, or “market
capitalisation”, is then 100 million shares* $100 = $10 billion. To acquire the target, which
is valued a $3 billion, the company can decide to “dilute” its current shareholder’s
ownership by issuing more shares to the target shareholders to fund this acquisition.
Illustration below:
Example:
Target value: $3 billion
Acquiror share price: $100
Acquiror number of shares: 100 million
Shares owned by the public: 30% or 30 million
Shares owned by the management: 70% or 70 million
Number of new shares issued to buy the target: $3 billion / $100= 30 million
shares. 30 million shares are equivalent to a c. 23% ownership (30 / (30+100)
million shares). Therefore, the target shareholders will hold 23% ownership of
the acquiring company.
Existing public shareholder ownership will decrease to 30/(30+100)=23%
Remaining ownership of the management: 70/(30+100) = 54%
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One important point to understand is the owners of the target no longer own
the target, but instead, they have swapped their ownership in the target for an
ownership in the acquirer: basically 100% in the target in exchange for 23% of
the acquirer.
o Issuing Equity has pros and cons: The pro of the equity is that it is an effective
way to acquire companies if you have already too much debt. Also, with equity,
you don’t have to pay interest. The major con is that using equity, you give up
some ownership in your company (this is called “diluting” your ownership), which
many owners will not be ready to do. Also, issuing equity usually involve higher
fees to be paid to banks.
o You can use a mix of debt and equity: it is quite common for companies to use a
mix of debt and equity to buy targets. Maybe it is because they cannot afford to
borrow the whole amount, or maybe they don’t mind giving up a small portion of
their ownership. In this case, the calculations are the same as described above,
and you just need to adjust the share of debt and equity you want to use.
Assignment: Using the key Vodafone Plc information and Avea Additional Information
provided below and balance sheet data from Vodafone Plc annual report (assume both
companies have same financial year end), write the “content” key points and form an opinion
on whether to buy the target or not. You can then go to the Appendix 2 to see our worked out
solution.
Lira million
Vodafone
Turkey 2010 2011 2012F Avea 2010 2011 2012F
Subscribers 16.7 15.7 16.3 Subscribers 12.2 11.8 12.7
Revenue 2,815 2,730 2,757 Revenue 2,113 2,504 2,650
EBITDA 429 136 303 EBITDA 446 354 358
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CASE STUDY 3
M&A RECOMMENDATIONS FOR VODAFONE PLC
(INDIVIDUAL EXERCISE)
After listening to your presentation of Monday, the CEO of Vodafone mentions to you that in
fact they have been looking at several acquisitions over the past few weeks. He is under
pressure by shareholders to make use of the large cash pile and debt capacity at its disposal to
make an acquisition by the end of the year. He is keen on giving you the M&A mandate if you
can pick the right acquisition for the company. Some information has been provided to you
below about the targets 2 . Based on this, what company would you recommend Vodafone to
acquire?
Company 1: Hellas Mobile
Business Description:
Hellas Mobile is a Greek Mobile phone company, currently owned by Telecom Italy, an Italian
telecommunication company, which bought it several years ago. The company is officially for
sale as Telecom Italy is trying to repay its large debts, and a large number of
telecommunication companies are interested and expected to bid aggressively for the asset.
Hellas Mobile is the #3 player in Greece with 20% market share behind the leader Cosmopolis
(40% market share) and Vodafone itself (35%).
Hellas Mobile’s Market:
Hellas Mobile only operates in Greece. The Greek market has been growing very rapidly over
the last few yeas as penetration rates are well below the European average. Prices in Greece
are amongst highest in Europe, and most players have above industry average margins. The
recession in 2011 has affected the volumes and the market however and there is still some
uncertainty regarding on volumes will fully recover in 2012.
Financials in €m
Hellas 2010 2011 2012 Forecast
mobile
Subscribers 12.2 13.3 15.6
Growth +9.1% +17.2%
Revenue 1,002 1,120 1,201
Margin +11.7% +7.2%
EBITDA 152 150 168
Margin 15.2% 13.4% 13.9%
Rumoured valuation range: €8,000m to €10,000m
2 The targets are fictitious companies for the purpose of the case, but the descriptions and financials are
very realistic
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Company 2: German Telekom
Business Description:
German Telekom is the no.1 telecommunication company in Germany, with a strong presence
in mobile, internet broadband services, and landlines. It also owns several other businesses in
Europe and globally. It has an especially strong business in Eastern Europe, with average
growth rates over 15% in landline, internet and mobile phones. It has also a very strong
presence in the USA though a Joint Venture. The company is not formally available for sale,
but being publicly listed (the German government has a 15% stake) a public takeover is
technically feasible.
German Telekom’s markets:
German Telekom’s main market is Germany, where 70% of its revenues come from, and, being
very mature, this market has been declining slowly. Nevertheless, the company has very high
growth operations in Eastern Europe, including Czech Republic, Poland, Romania and the
Balkans. Recently, it has also entered the US mobile phone market through a Joint Venture
and has secured a no.3 position in the USA mobile phone market, which is expected to grow at
over 10% p.a. going forward.
Financials in €m
German 2010 2011 2012 Forecast
Telekom
Subscribers:
Fixed line 45m 43m 40m
Broadband 52m 53m 55m
Mobile 123m 127m 135m
Revenue 64,122 64,622 64,908
Growth 0.8% +1.0%
EBITDA 6,432 6,321 6,430
Margin 10.0% 9.8% 9.9%
Current market capitalisation: €52,000m
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Company 3: ThaiTel
Business Description
Thaitel is the no.2 mobile operator in Thailand with a 30% market share. The company was
launched 6 year ago by family-owned conglomerate Siam Corp, which has interests in banking,
textile, rubber and shipping products. Last year, the CEO of Siam passed away, leaving
management of the family interests to its son. However several businesses have suffered
during the transition, and while Thaitel is performing relatively well, the conglomerate has
become heavily indebted. The company is not officially for sale, but it has received a lot of
interest from global telecommunications companies recently, and it is believed that the owners
would be receptive to a good offer.
Thaitel’s Markets
Thaitel only operates in Thailand. The Thai mobile market has been growing rapidly and there
are now 64m subscribers in the country. Thaitel is the no.2 player, while the BangkokTelekom,
the government-owned mobile company dominates with a 40% market share. The rest of the
market is fragmented and split between 4 other smaller operators. The market has matured
and penetration has reached 100% and competition is very fierce so margins have been
declining substantially in the recent years. Due to its extensive distribution network, Thaitel
market share has been slightly increasing over the years, however the market share is
expected to stabilise in 2012 due to the increased competition and new product launches from
the smaller operators.
Financials in €m
ThaiTel 2010 2011 2012 Forecast
Subscribers:
Mobile 17.5m 19.2m 20.1m
Growth +9.7% +5.1%
Revenue 513.1 580.2 613.7
growth +13.1% +5.7%
EBITDA 132.1 104.4 79.9
Margin 25.7% 18.1% 14.0%
Estimated valuation based on peer companies: €2,200m-2,500m
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Company 4: MultiTel
Business Description
MultiTel is the no.1 mobile operator in Nigeria, and also owns an international phone card
distribution business. The company has over 35% market share in the country, and its brand is
very well recognised. The company is managed by a British businessman who came back to its
native Nigeria in 2005 to take the post as CEO, and the business has grown very rapidly since.
The company is partly owned by South Africa company SA Telecom (40% stake), various
investors from India (25%) and the rest is owned by the management. Due to financial issues,
SATelecom has been looking to sell its stake, however other shareholders’ intentions are not
known at this stage.
Multitel Markets
Multitel only operates in Nigeria, although it has plans to take advantage of its widely
recognised brand to expand in neighbouring countries. The Nigerian market growth potential is
substantial, as there are currently only 44m subscribers for a total population of 159m. In
additional, GDP growth rates have been stable and the population is very young and
increasingly sophisticated. Growth for mobile phones is primarily driven by the unreliable
landline network, and most people have more than one cell phone. The main competitor is the
government-owned Company Nigeria Telecom, however the company has been loosing market
share gradually due to the below average quality of service and poor network reliability.
Recently, several African and Middle Eastern telecom operators have started to set up
operations in the country, and the market is expected to become significantly more competitive
if those manage to establish a strong presence.
Financials in €m
MultiTel 2010 2011 2012 Forecast
Subscribers:
Mobile 11.2m 15.4m 20.1m
Growth +38.1% +29.8%
Revenue 405.1 534.1 662.2
Growth +30.1% +26.1%
EBITDA 48.2 59.1 66.2
Margin 12.1% 11.4% 10.0%
Estimated valuation based on peer companies: €600m-1,000m
19

FRAMEWORK
For this type of question, there is no strict right or wrong answer, but you need to be able to
justify your choice very clearly based on strong arguments. This kind of case study can come
as a written individual assignment, or even in the form of a discussion with senior investment
bankers.
Structure
For each potential target, you need to go through a “checklist” of pros and cons, similar to what
has been discussed in case 2. During the preparation, go through each checklist point. The
basic questions that you need to be answered here are: i) does the acquisition really make
sense? and ii) is it practically achievable?
Pros checklist:
• There are economies of scale
• There are economies of scope
• There are other potential synergies
• It helps geographic or product diversification
• It makes sense and fits with the overall group strategy (i.e. expand in specific countries
or specific products)
• Its simple (if its openly for sale, favourable regulations, no complicated structure or
non-related businesses that need to be sold off)
• The management is a quality one (i.e. the company is well managed with good growth
and margins)
• The company has been performing relatively well
• The overall market is doing well
• You can afford it (size of the acquisition compared to own size, and the 4 times net
debt to EBITDA we mentioned previously if using debt)
• Its not too expensive (think about the 8 to 10 times EBITDA multiple)
Cons checklist:
• The business is not doing well
• The underlying markets are declining / maturing
• There are few synergies and cost saving potential
• It doesn’t help diversify the company
• It’s a complicated situation (many owners, complex structures, regulations)
• The management is not reliable or trustworthy
• Its expensive
• You cannot afford it because its too big
• It goes against the group strategy or policy (the business is totally unrelated, or in a not
attractive area)
When you have been through this exercise, we suggest you organise your answer as follows:
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• Introduction: mention that you looked at all the opportunities presented, and you
believe that there are several pros and cons for each. However, you find that company
XXX stands out as the better acquisition candidate, for reasons that you will outline
next.
• Highlights all the “cons” of all other companies briefly
• “Pro” Argument 1 for your chosen target
• “Pro” Argument 2 for your chosen target
• “Pro” Argument 3 for your chosen target
• Key “risk” areas to watch out for your chosen target
• Conclusion: based on the above, you believe that company XX would be a good
investment. However, the company needs to pay attention some key risk areas (that
you would have detailed above) before fully committing to the acquisition.
Assignment: Using the company information above and the Vodafone Plc information,
create a pros and cons for each company and make the recommendation. Solutions are in
Appendix 3.
21

APPENDIX 1: SOLUTION TO SWOT ANALYSIS VODAFONE PLC
22

Strengths Weaknesses Opportunities Threats
1) One of the world’s
largest telco with a
strong brand
1) Very competitive
industry driving mobile
prices down
1) More cost saving
programmes improving
margins
1) Strong competition
in key Indian market
with 6 new entrants
2) Geographically
diverse company
present in developed
and in emerging
markets and product
diverse
3) Technology pioneer
in a number of products
2) Volatile business
exposed to economic
recessions (not immune
from economic
environment)
3) Most of the revenues
still com from lowergrowth
Europe
2) Significant growth
opportunities in mobile
data, fixed broadband
and enterprise services
3) Increased presence
in emerging markets
2) changes in
regulations
3) Rapid technological
changes (many
comments in the report)
4) Good at controlling
costs: several cost
reduction initialtives in
plan and reduced
European operating
costs by 4%, equivalent
to over £140m (p25)
5) Leading position in
India, a large and fast
growing market
4) Emerging market
operations have lower
margins
23

APPENDIX 2: SOLUTION TO CASE 2
24

Note: we have used the structure that we recommended in this guide into parenthesis so it is
easy to follow and you can see which points apply or not to this case study.
Introduction: (1 slide)
• Vodafone is already present in Turkey, where it has a #2 position
• Despite the difficult economics conditions, Vodafone increased its market share in
Turkey and Vodafone Turkey service revenue increased by 28.9% (page 20 and 34)
• In this presentation, we would like to analyse an investment opportunity in Avea, the #3
player in Turkey
• We will first provide a brief overview of the target, then proceeds to a analysis of the
pros and cons of the investment, analyse M&A considerations and provide Vodafone
Plc with our recommendation.
Point 1: Overview of Avea (1 or 2 slides depending on info)
(Description of the business: what is the company doing?)
• Avea is the #3 mobile phone operator in Turkey. It was founded in 2004 and reached a
nationwide customer base of 12.5m by the end of the 3 rd quarter of 2011
• Avea is 81% owned by Turk Telekom (which is itself partly owned by the Turkish
government), and 19% by IsBank, a large Turkish Bank
(Positioning in its market)
• Graph with market shares: Turkcell (57%), Vodafone Turkey (25%), and Avea (18%)
(Key financials)
• Insert financials tables or charts
Point 2: Acquisition rationale (2 slides for pros, 2 slides for cons)
PROS:
• (Economies of scale): yes, as Vodafone is already present in Turkey they are
opportunities for savings in combining marketing, selling mobile phones contracts in
stores, and other things like IT and customer support.
• (Economies of scope): doesn’t apply as they are selling the same products
• (Other synergies): There are probably other synergies, although you don’t need to be
an industry expert for this. You can guess from the annual report that mobile phone
companies need to buy licences to operate, and need to invest money in the network
infrastructure to they have signals in rural areas for example. Combining the two
25

CONS
companies means that they can combine licences and infrastructures, so they have
savings.
• (Diversification): In this case it doesn’t apply because they are selling the same
products in the same market
• (Increasing market share): yes. You can calculate combined market share of
25%+18% = 43%, which is still no.2 but closer to the no 1 firm.
• (Improve management of the target firm): probably not, as the target seems to be more
efficient with higher margins. But there is an argument to say that the target will benefit
from Vodafone’s expertise
• (The price paid may be too expensive and there may be a bidding war for the target):
you don’t have much info about the price or a bidding war, so you can just say it is a
question mark.
• (Lack of synergies, or unpredictable synergies): doesn’t apply, synergies seem quite
predicable in this case
• (Lack of diversification): that is a negative as it is basically increasing exposure to
Turkey. But on the other hand, you can say that it improves diversification of Vodafone
Plc as a whole, because at the moment they are very focused on Europe.
• (The target performance is uncertain and volatile): this is a negative because Turkey
just came out of recession. Looking at past financials, we can see that the business is
about to turn around in 2011
• (Poorly performing target due to bad products or reputation): Doesn’t apply, not much
info and they seem to be doing for 2011.
• (The acquiring company does not have sufficient financial power to acquire the target).
Here, you need to calculate Vodafone’s net debt to EBITDA ratio.
o EBITDA = 33.1% * 44.5bn (page 6, the margin is mentioned in the text and
multiply by revenue to get EBITDA) = 14.73bn.
o Net debt = Long term borrowings + short term borrowings – cash = 28,632 +
11,163 – 4,423 = 35,372m or 35.3bn.
o Therefore net debt / EBITDA = 2.4 times.
o Assuming as a rule of thumb that 4.0 times is the maximum net debt to
EBITDA ratio for a company (memorise this number), that means the company
can borrow at least (4.0 * 14.73) – 35.372 = 23.5bn.
o A rule of thumb for acquisition prices is multiplying EBITDA by 8 to 10 times
(also memorise those numbers). Assuming 10 times Avea EBITDA: 358 * 10 =
3,580 turkish lira, which is equivalent to 3,580*.44 = GBP1,575m, or £1.6bn.
o We can see that Vodafone could borrow up to 23.5bn, but Avea would only
cost 1.6bn, therefore it can easily acquire the company.
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• (execution risk): you can mention that there might be issued dealing with Turk Telekom,
which is government owned. The government might not like a British company to
become too dominant in Turkey for political reasons
• (monopoly and regulations): it doesn’t really apply here because Vodafone would still
be no.2. If it would become no.1, there might be some issues though if the market
share is too high
Point 3: M&A considerations (2 or 3 slides)
(How does the combined entity look like?)
You can either present tables like those:
Lira million
Vodafone Turkey 2010 2011 2012F Avea 2010 2011 2012F Combined 2010 2011 2012F
Subscribers 16.7 15.7 16.3 Subscribers 12.2 11.8 12.7 Subscribers 28.9 27.5 29
growth -6.0% 3.8% growth -3.3% 7.6% growth -4.8% 5.5%
Revenue 2,815 2,730 2,757 Revenue 2,113 2,504 2,650 Revenue 4,928 5,234 5,407
growth -3.0% 1.0% growth 18.5% 5.8% growth 6.2% 3.3%
EBITDA 429 136 303 EBITDA 446 354 358 EBITDA 875 490 661
margin 15.2% 5.0% 11.0% margin 21.1% 14.1% 13.5% margin 17.8% 9.4% 12.2%
Or even better, add charts like those:
Revenue growth 2012F
4.0%
3.3%
3.0%
2.0%
1.0%
0.0%
1.0%
Vodafone Turkey before
acquisition
Vodafone Turkey after acquisition
EBITDA margin 2012F
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
11.0%
Vodafone Turkey before
acquisition
12.2%
Vodafone Turkey after acquisition
You can then comment on the slides mentioning: The acquisition of Avea will not only
strengthen Vodafone Turkey’s market share, but it will also improve its revenue growth and
EBITDA margins.
27

(How would you buy the company?) We calculated net debt to EBITDA earlier. Here you can
show a slide that details the net debt to EBITDA ratio calculation, and make an estimate of the
purchase price. Then you can conclude that since the company is so small compared to
Vodafone overall size, Vodafone will pay with the cash that it has on the balance sheet or take
some more debt. A good slide would you the following:
Vodafone Plc
Net debt calculation (£bn):
Aeva
Acquisition price calculation
Long term borrowings 28.4 Avea 2011 EBITDA, Lira bn 0.4
Short term borrowings 9.9 Avea 2011 EBITDA, £bn 0.2
Cash and cash equivalent (8.4) Acquisition multiple 10.0
Net debt, 2011 29.9 Implied value, £bn 1.60
EBITDA 2011 14.7
Net debt / EBITDA 2.04x
And the net debt /EBITDA calculation:
Post acquisition net debt ratio
Vodafone Plc EBITDA 14.7
Avea EBITDA 0.2
Combined EBITDA 14.8
Vodafone Plc net debt 29.9
Avea net debt
0.0 Note: assumed zero due to no information
Add: acquisition debt 1.6
Combined net debt 31.5
Post acquisition net debt / EBITDA 2.12x
Conclusion: recommendations (1 slide)
Here you can decide for or against. There is no right or wrong answer if you can justify it
properly. In this case however, we seem to have many Pros and a few Cons, so I would
conclude like this:
• We recommend that Vodafone go ahead with an acquisition, assuming a 10 times
acquisition multiple, because of the following reasons:
o We believe that the Turkish market is going to do well over the next few years
as evidenced by the positive performance of Vodafone Turkey and turnaround
from Avea in 2011
o The acquisition would help Vodafone better compete in Turkey and boost its
market share
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o The combination would create synergies and economies of scale will help
improve margins
o Given the acquisition small size, Vodafone will be able to buy the company in
cash without affecting its net debt to EBITDA ratio significantly
o Overall, this fits in Vodafone strategy of increasing its presence in emerging
markets and diversifying geographically
29

APPENDIX 3: SOLUTION TO CASE 3
30

Company 1: Hellas Mobile
Pros:
• Economies of scale because Vodafone is already present
• Potentially other synergies by combining infrastructure costs and licence acquisition
costs
• Simple as officially for sale
• Acquisition would make Vodafone the no.1 in the country
• High growth and high margins
• Valuation doesn’t seem too high
• Vodafone can afford it (see prior net debt / EBITDA calculation)
• Fits well into Vodafone’s strategy to expand in emerging markets
Cons:
• Some uncertainty about the market performance
• The price could increase significantly because there are many bidders
Overall comment: this is a quite interesting acquisition target for Vodafone, and could
definitely be one that you put forward and propose.
Company 2: German Telekom
Pros:
• Some strong performing businesses in emerging markets
• Geographic and product diversification as they offer broadband and fixed line services
Cons:
• Much too large for Vodafone to acquire
• Fixed line and broadband products are not part of Vodafone’s strategy
• The largest part of the revenues comes from Germany, which is declining. Overall
revenues are not growing much.
• Likely to be politically complicated with the German government owning a stake in the
business
Overall comment: this is definitely not a good target to mention, due to the lack of
strategic fit, the too large size, and the complexity.
Company 3: ThaiTel
Pros:
• Well positioned no.2 player
• Relatively high growth
• Seems to be for sale
• Fits in Vodafone’s strategy to expand in emerging markets as it has no presence in
Thailand yet
• Some potential to acquire some of the smaller competitors down the road to
consolidate the market
• Some potential to improve management as this is family-owned
• Vodafone can afford it
Cons:
• The growth of the market is slowing down
• Competition is getting quite fierce
• The decline in margins is quite worrying
31

• The price seems to be quite expensive compared to the company’s EBITDA
Overall comment: this is a mixed situation. The target has some attractive point as it is a
new market for Vodafone, and it is well positioned, but the growth of the market and the
competitive dynamics are not attractive. The price seems quiet high to pay for such a
company (compared to the other opportunities), this is probably not the target you want
to recommend.
Company 4: MultiTel
Pros:
• No.1 position with no real contender
• Strong brand and reputation
• Management has done a good job so far
• Officially for sale (even though some level of uncertainty)
• Very good growth potential in Nigeria (large population, increasing usage)
• Financially it has been doing very well from a growth perspective
• Fits well in Vodafone’s emerging market strategy, especially as it has no presence in
the country yet
• Vodafone can afford it, doesn’t seem too expensive, especially taking into account the
growth
Cons:
• New competition coming up. There is also a risk that those competitors will bid for the
company and make the price increase
• Probably will need to sell the phone card business
• Need to find out about other owners’ intentions
• Margins seem a bit low and declining
Overall comment: Multitel sounds like a good business to acquire, even though there
are some points that will need to be investigated further, in particular the intention of
other shareholders and why margins are declining. Other than that, it fits very well with
Vodafone’s strategy, and the company can afford it.
Conclusion: For this exercise, Hellas Mobile and Multitel are the two choices that stand out.
None of them is wrong, and you may argue for one or the other. It will often be the case that
many solutions are possible, but essentially the audience wants you to make a clear choice,
and not hesitate between two solutions. As long as your arguments are solid and your logic
makes sense, the presentation will be a successful one.
In this case, you may argue that Nigeria is a more unpredictable country and Vodafone should
stick to the markets it knows well, such as Greece, where it already is present. There are also
more potential synergies if it is already present in the market. But on the other hand, you may
say that Nigeria is much higher growth and offers a lot of potential and Vodafone should try to
take the risk to not loose out on a potentially enormous opportunity.
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