abs 200 business case analysis (bca)

ABS 200 Business Case Analysis (BCA)

Terence Kahapola Arachchi

What we did last week

CASE STUDY 02 : MANSAKO

REMINDER: The process of analysing a business case studyThe basic approach to business case study analysis is a FOUR step process.

1. Analyse the current situation2. Understand key issues and their core elements3. Formulate and evaluate alternative courses of action4. Choose the best alternative and implement it

We will be following this process for MANSAKO case as well. However, before we do the full analysis, let us understand some important background info about MANSAKO and the Luxury Goods Industry

It will help us to understand the case better and do a better analysis.

Let us look at the overview of this case

• A Case from CIMA Global Pre-seen exam material

• Based on a real company - changed due to intellectual property and privacy issues

• Europe based company – Actual company is a French luxury goods maker

• Based in a fictitious country called – Lowerland

• Company name given in the case– Mansako

• Luxury goods industry (leather goods & accessories)

• Niche market (similar to Porsche)

• Expensive products, exclusive retail locations

Mansako occupies a position just below Louis Vuitton and GUCCI • Mansako is mid priced in terms of luxury goods – Hermes, Prada, Dior

and Chanel are high priced and Ralph Lauren is low priced

• Mansako is considered an aspirational brand like Louis Vuitton and GUCCI – It is a luxury brand worn/purchased by those who aspire to be high-lifers and want to be seen as such.

• Therefore, Mansako brand is bought by the segment of customers who also buy Louis Vuitton and GUCCI

Mansako wanting to move to luxury end of the market.

Mansako tried to move to high-end luxury market : That is to get into the customer segment of brands like Chanel and Hermes

• The effort started in 2012

• Raised prices

• Expensive advertising campaign

• The strategy was abandoned in 2015

• Sales dropped dramatically : they lost market share in mid range segment as a result of trying to move to up-market segment.

• Since 2015, sales have rebounded and doing well just before pandemic hit in 2020

What went wrong? We need to read the case to see. However, at first glance

1. High end luxury products is not just about high price

2. It is about being very exclusive – 99.99% of the population should not be wearing that brand

3. It is also about being superior in quality and design

4. It is also about who is designing them? Is there are super-star fashion designer behind the brand?

5. It is also about who else is wearing them?1. Is the brand being worn by super-star entertainers?2. Movie icons? 3. Super-rich business women?4. Members of the European royal families (UK, Belgium, Netherlands, Spain)5. Wives of top government leaders of the developed world?

Board of Directors want to try to enter high-end luxury segment again

• Page 22 – MD’s memo to senior management team

• The board wants a plan ASAP

• Learn from mistakes of 2012

• They calculate that luxury goods industry is going to do well 2022 and beyond.

• The central issue for us will be this challenge by the board – Can the company get back into High End Segment? What would be the best strategy to achieve this?

With these ideas in mind, now you must read the case study carefully.

REMINDER: The process of analysing a business case study

1. Analyse the current situation

2. Understand key issues and their core elements

3. Formulate and evaluate alternative courses of action

4. Choose the best alternative and implement it

Full analysis – I am expecting you to complete the analysis on your own as we went through all the steps in Porsche.

The process is the same for Mansako

What are the key issues facing Mansako?

● Based on the analysis following key issues were discovered

○ ISSUE 1 - How to regain growth for the existing product portfolio of Mansako as the pandemic is still raging on in March 2021?

○ ISSUE 2 - How to reposition Mansako to the high-end segment as the Board of Directors are demanding?

○ ISSUE 3 - What new market segments should the firm enter to continue growing?

○ ISSUE 4 - Should Mansako grow through Mergers and Acquisitions –if it should, what are the possible takeover candidates?

ISSUE 1 - How to regain growth for the existing product portfolio of Mansako as the pandemic is still raging on in March 2021?

● What are the most important geographical markets for the current portfolio?

● What the economic and pandemic situation of these geographical markets?

● Who are the customer segments that we target for this product portfolio?

● How is this segment doing economically and how are they weathering the pandemic?


● The most important geographical markets for Mansako’s existing product portfolio are;

1. UK, most EU countries - They have not returned to normalcy. There are restrictions and lockdowns

2. Japan – Must wait to see whether they can stage the Tokyo Olympics as planned from July 23 to August 08, 2021. If Olympics happen, it will be a huge confidence booster and Japan will return as a strong market

3. China - China is almost back to normal

4. Asia Pacific – Markets like Korea, Australia and other South East Asian Countries are slowly returning to normal

5. United States – The all important US market is opening up.

ISSUE 1 - How to regain growth for the existing product portfolio of Mansako as the pandemic is still raging on in March 2021?● What should be our plan for these geographical markets?

○ We must take a step by step approach considering the situation in each market and have appropriate strategies.

1. China – we should increase our marketing communications efforts in China and make sure all our stores are open. China should be our biggest focus as it is the only major market with normalcy.

2. Japan – we must see whether Olympics will happen. Our Japan office must run a good marketing campaign in Japan targeting Olympics and the feel-good factor it brings.

3. Australia, New Zealand, Singapore, Hong Kong, Taiwan and Korea – We must restart all our promotions and ensure our stores are open in these countries.

4. UK and USA – UK and USA will probably become near normal by Halloween/ Thanks Giving in Autumn. We must get ready for a good Christmas season in UK and USA.

5. EU - We should wait on EU. France, Germany and Italy – Our biggest markets in EU are at different stages of lockdowns and restrictions.

Who are the customer segments that we target for this product portfolio?

• Mostly Millennials and Generation Z

• Seek affordable luxury

• Seek high quality life BUT also seeks value for money• This would mean that they cannot afford high-end luxury products such as

Chanel, Hermes or Dior


Who are Millennials and Generation Z?

Where does this company’s current product portfolio stand compared to other real-life luxury goods companies – Extracts from the case

How are millennials doing economically during the pandemic?• Please refer to “The Deloitte Global Millennial Survey 2020” which is

uploaded to LMS.

• You must also refer to “The Deloitte Global Powers of Luxury Goods 2020 The new age of fashion” which is uploaded to LMS.• Deloitte is a global consulting company with approximately 330,000 professionals

working for them globally.

• Deloitte has offices and operations in 150 countries and territories.

• Deloitte in Sri Lanka is represented by SJMS Associates from their main office in Castle Lane, Colombo 08

• The next few slides will show extracts from the Deloitte millennials report.


• Can Mansako depend on Millennials and Generation Z to regain growth?

• According to facts presented in the Deloitte survey of Mills and Gen Z, both groups have suffered but are financially sound so far (as of 2020).

• Our target customers are the higher income bracket Millennials and Generation Z. These would be

• Group 1 - Born rich and have trust funds and inherited wealth

• Group 2 - Entrepreneurs who have started successful start-ups and are now in high income brackets

• Group 3 - Those who highly educated and skilled and have secured well paying, stable jobs at top companies in their respective countries

How are Millennials and Gen Z in our target group doing economically and how are they weathering the pandemic?

• Group 1 - Born rich and have trust funds and inherited wealth• This group is not impacted and will start their purchasing as their countries return to

normal.

• Group 2 - Entrepreneurs who have started successful start-ups and are now in high income brackets• Some in this group would have had major economic hits as some new businesses had

to struggle during 2020 lockdowns.• At the same time, some start-ups and new businesses did unexpectedly well as

pandemic opened up new opportunities and new uses for their products and services.

• Group 3 - Those who are highly educated and skilled and have secured well paying, stable jobs at top companies in their respective countries• This group is also OK as most companies did not/would not get rid of their highly

skilled staff even though they may have laid off or furloughed other staff.

What should be our approach?• Millennials and Gen Z are highly concerned about the natural

environment and climate change.• Communication Point 1 - Our marketing communication (advertising, digital

marketing) should highlight the Mansako is a earth and environment friendly company.

• Communication Point 2 - We must highlight that we source leather and other inputs from sustainable sources.

• Our marketing communication should focus on digital platforms such as most Ms and Zs spend a lot of time with their personal devices. We should focus on• Website and online shop of Mansako.com

• Social Media – Facebook, Instagram and LinkedI

Must focus on not just digital communication but in-store promotion as well.• In store promotions is really important – According to case study only 19.7%

(2017) of the total sales came from online sales.

• This figure is about 50% now due to pandemic and in some countries 100% sales are from online.

• However, luxury goods shopping is an entertaining experience and most people love to visit a luxury goods store and crave the attention, pampering and special treatment they receive from those stores.

• Therefore, visiting stores will return as pandemic goes away.

• People would love to visit our stores and enjoy it after not being able to go out shopping for months.

ISSUE 2 - How to reposition Mansako to the high-end segment as the Board of Directors are demanding?

● To get an idea of the high end market, we will take some extracts from “The Deloitte Global Powers of Luxury Goods 2020 The new age of fashion”

● The report is available for you to download from LMS.

Mansako 2019 Sales L$219 million. L$ to US$ exchange

rate is not given. Even if L$=US$, Mansako is not in

the Top 100 list.

COVID 19 – The New age of luxury and fashion• Pandemic hit luxury industry very hard

• Sales have crashed.

• However, Chinese consumers have shown renewed interest in imported luxury goods.

• UK, EU and US are expected to return to normal by the end of the year.

• Millennials and Gen Z are redefining fashion for the post-Covid 19 world

The luxury sector embraces online selling

What are the key insights and takeaways from this report?• INSIGHT 1 - Millennials and Gen Z are not just important to mid-level

leather goods segment that Mansako is operating in. These two groups are most important to high end segment as well.

• INSIGHT 2 – The entire industry is moving fast towards Wokeness• Sustainability• Equality• Minimizing Environmental Impact• Ethical Practices

• INSIGHT 3 - The entire industry has moved to embracing online sales, digital and virtual experiences and virtual fashion shows.

What are the key insights and takeaways from this report?• INSIGHT 4 – China, France, Italy, Germany, Spain, US, UK, Switzerland

and Japan are the most important geographical markets for luxury industry

• INSIGHT 5 – Bags and accessories that Mansako specializes in consist of a small segment (5.6%) of the total luxury sales. Cosmetics, Jewellery and foot ware segments are bigger. It is also one of the slowest growing segments (4%)

ISSUE 2 - How to reposition Mansako to the high-end segment as the Board of Directors are demanding?● What do these insights tell us to plan our effort to reposition Mansako to

the high-end segment?

1. Target market will be Millennials and Gen Z

2. Need to cultivate the woke image and back it up with practices

3. Embrace digital – internet sales, virtual showrooms, virtual fashion shows

4. China, France, Italy, Germany, Spain, US, UK, Switzerland and Japan are the most important geographical markets for luxury industry

5. Leather goods are not growing fast – should we enter the high end market through a different product category?

BIGGEST ISSUE TO ADDRESS IN MOVING TO HIGH END LUXURY MARKET

WHAT SHOULD BE THE STRATEGY?

Corporate Strategy of LVMH – World’s biggest luxury goods company

● LVMH, is a French multinational corporation and conglomerate specializing in luxury goods, headquartered in Paris, France

● LVMH controls around 60 subsidiaries that each manage a total of 75 luxury brands.

● The subsidiaries are often managed independently, under the umbrellas of six branches: Fashion Group, Wines and Spirits, Perfumes and Cosmetics, Watches and Jewelry

Top brands of LVMH


● What key things should include in our plan?ISSUE PROPOSED APPROACH

What should be our corporate strategy?

We should adopt the strategy of the French luxury giant LVMH – Assemble a portfolio of brands over time rather than be a one brand company.

Product Category to launch into high end of the market?

What product category are we going to enter the high-end segment with? Stick to leather goods or choose another category? Ideally choose another category.

Market Entry Brand? Are we going with Mansako brand – which is known as a mid level brand –? THIS STRATEGY FAILED BEFORE. Alternatively we can takeover a struggling high end brand and use it to enter the segment? That way, we will not be associated with Mansako brand which can be a problem. Further it will help our overall strategy to build a portfolio of brands.

Target Market? High net-worth Millennial and Gen Z

Initial Geographical Market for Entry?

We should choose one or two countries and enter those. Should avoid highly competitive markets like US, UK or France. Germany or Spain could be a starting place.



Social Image we should develop?

Woke, ethical business practices, ethical sourcing of material, environmentally caring manufacturing, equal rights, equal opportunity employer

Brand Image we should develop

High quality, best in class. We cannot cultivate this image with Mansako as it is well known as a mid level brand. This strategy failed last time.

Retail Strategy Separate brand website for this segment with online sales and last-mile deliverySeparate company owned retail outlets. Should not use existing Mansako outlets

Promotion Strategy Digital and traditional

Product design and development

Product design capabilities will have to be built from scratch OR may be we can use what the previous brand owner had developed and improve on it. (Assumption – we will be buying a struggling luxury brand and use it to enter high end)

Production and Supply chain

Production capabilities and supply chain will have to be built from scratch ORWe can use what the previous brand owner had developed and improve on it. (Assumption – we will be buying a struggling luxury brand and use it to enter high end)


● To get an idea of the high end market, we will take some extracts from “The Deloitte Global Powers of Luxury Goods 2020 The new age of fashion”

● The report is available for you to download from LMS.

What are the key insights and takeaways from this report?• INSIGHT 1 - Millennials and Gen Z are not just important to mid-level

leather goods segment that Mansako is operating in. These two groups are most important to high end segment as well.

• INSIGHT 2 – The entire industry is moving fast towards Wokeness• Sustainability• Equality• Minimizing Environmental Impact• Ethical Practices

• INSIGHT 3 - The entire industry has moved to embracing online sales, digital and virtual experiences and virtual fashion shows.

What are the key insights and takeaways from this report?• INSIGHT 4 – China, France, Italy, Germany, Spain, US, UK, Switzerland

and Japan are the most important geographical markets for luxury industry

• INSIGHT 5 – Bags and accessories that Mansako specializes in consist of a small segment (5.6%) of the total luxury sales. Cosmetics, Jewellery and foot ware segments are bigger. It is also one of the slowest growing segments (4%)

● What do these insights tell us to plan our effort to reposition Mansako to the high-end segment?

1. Target market will be Millennials and Gen Z

2. Need to cultivate the woke image and back it up with practices

3. Embrace digital – internet sales, virtual showrooms, virtual fashion shows

4. China, France, Italy, Germany, Spain, US, UK, Switzerland and Japan are the most important geographical markets for luxury industry

5. Leather goods are not growing fast – should we enter the high end market through a different product category?

BIGGEST ISSUE TO ADDRESS IN MOVING TO HIGH END LUXURY MARKET

WHAT SHOULD BE THE STRATEGY?

Corporate Strategy of LVMH – World’s biggest luxury goods company

● LVMH, is a French multinational corporation and conglomerate specializing in luxury goods, headquartered in Paris, France

● LVMH controls around 60 subsidiaries that each manage a total of 75 luxury brands.

● The subsidiaries are often managed independently, under the umbrellas of six branches: Fashion Group, Wines and Spirits, Perfumes and Cosmetics, Watches and Jewelry

Top brands of LVMH

Mansako – Corporate Strategy & Competitive Strategy

Mansako – Corporate Strategy• What is corporate strategy?

• The overall strategy used by the company.

• It guides everything they do and affect all investments and other long term decisions.

• Mansako Corporate Strategy• Create a holding company modelled on LVMH

• The holding company will own various subsidiaries that own a number of luxury brands catering to different product categories and segments of the luxury goods market

• Mansako brand will also become one of the subsidiaries of the holding company

• Each subsidiary/brand will have their own CEO and corporate structure to maximize opportunities for their brand/brands

• Each CEO will report to the Board of Directors of the holding company, led by the Chairman/Managing Director

Mansako – Competitive Strategy• What is competitive strategy and how is it different from the corporate

strategy?

• Competitive strategy is business unit level strategy.

• Business unit level strategy is how the company (if it has only one business unit or one product category), its different business units or individual subsidiaries competes with rivals in their markets/market segments

• E.g. 1 : Unilever has 4 business units - Foods & Refreshments (beverages and ice cream), Home Care, and Beauty & Personal Care.

• Each business unit can have their own competitive strategy however, all business units are guided by the Unilever Corporate Strategy

• E.g. 2 : John Keells Holdings have many subsidiary companies.

• Each subsidiary has their own business unit strategy (competitive strategy)

• All JKH companies follow the same corporate strategy

Developing a business unit strategy (competitive strategy) using Porter’s Generic Strategies Model

• Michael Porter proposes following competitive strategies for a company to compete in their industry

1-Cost leadership Strategy• Source of competitive advantage – ability to control costs

• Markets/segments where the company competes – Broad (competes in almost all segments)• The company tries to keep costs as low as possible and gains an advantage in

the market by offering lower prices to customers

• They have products/services in all segments of the market they serve

• Examples• US Retail Giant Walmart

• German Retail Giant Aldi

• Chinese smartphone maker Xiaomi

2- Cost Focus Strategy• Source of competitive advantage – ability to control costs

• Markets/segments where the company competes – Narrow (specializes in one or two segments)• The company tries to keep costs as low as possible and gains an advantage in

the market by offering lower prices to customers• They have products/services in one or two segments of the market they serve

• Examples• Irish low cost airline Ryanair• American ride sharing company Uber• Sam's Club Wearhouse retailer (owned by Walmart) – People must buy bulk

quantities and get very low prices.• Sweden’s IKEA furniture company – Furniture must be assembled by the

customer

3- Differentiation Leadership• Source of competitive advantage – ability to produce innovative,

unique products

• Markets/segments where the company competes – Broad (competes in almost all segments)• The company invests in R & D and Product Development to create new

technologies, processes and product designs to create unique and innovative products

• They have products/services in most segments of the market they serve

• Examples• Car companies such as VW, Toyota, Kia• Software, games and cloud giant Microsoft• Web, search, social media and technology giants such as Google

4 – Differentiation Focus Strategy• Source of competitive advantage – ability to produce innovative,

unique products

• Markets/segments where the company competes – Narrow (specializes in one or two segments)• The company invests in R & D and Product Development to create new

technologies, processes and product designs to create unique and innovative products

• They have products/services in one or two segments of the market they serve

• Examples• Social media giant Facebook (owns FB, WhatsApp and Instagram social

networks)• Elon Musk’s Tesla, Space X and Starlink• Germany’s Porsche and UK’s Jaguar-LandRover

Mansako – Competitive Strategy

• We can propose that Mansako’s subsidiaries (or business units) follow DIFFERNTIATION FOCUS strategy as each of them will be in the Luxury Goods Market.

Mansako – Competitive Strategy > Differentiation Focus Strategy

• Each subsidiary (business unit) of Mansako Holdings will focus on a very narrow product category or two of the luxury goods market• E.g. – Leather goods & accessories subsidiary.

• Each product/brand offered will be high quality, highly unique and will match the characteristics of the market they serve

• Pricing will match the targeted market segment of each business unit (e.g. $3000+ high end segment, $500-$3000 mid level segment and sub 500 entry level segment)

• Each business unit will compete in only one segment of the market (i.e. High end, Mid Level or Entry Level)• This is to ensure that the brand image will not get diluted by being in low

price segment

Mansako – Competitive Strategy (Business Unit Level Strategy in Summery with some examples)

Mansako Holdings -Corporate Strategy

Business Unit 1 –Segment: Mid Level

Product category –Bags and accessories

Brand - Mansako

Business Unit 2 –Segment: High End

Product Category –Clothing & Footwear

Brand? (To be acquired –E.g. Dolce & Gabbana)

Business Unit 3 –Segment: Entry Level

Product Category -Cosmetics & Fragrances

Brand? (To be acquired –E.g. Nina Ricci)

Business Unit 4 –Segment: Mid Level

Product Category –Jewellery & Watches

Brand? (To be acquired –E.g. Saint Laurent)

Business Unit 5 –Segment: High End

Product category –Bags and accessories

Brand? (To be acquired E.g. Valentino)

Competitive Strategy / Business Unit Strategy showing the market segment and focus product category


● What key things should include in our plan?ISSUE PROPOSED APPROACH & JUSTIFICATION

What should be our corporate strategy?

We should adopt the strategy of the French luxury giant LVMH – Assemble a portfolio of brands over time rather than be a one brand company. As explained in Corporate Strategy Section.

Justification –

It is better to assemble a portfolio of brands rather than try to attack all markets with Mansako brand. Therefore, we will develop or acquire a new brand(s) to enter high-end luxury segments

That way, even if the move to upmarket fails with a new brand, it will not damage existing sales of Mansako.

Having a portfolio of brands will help the company to enter all market segments (high end, middle and lower end) of the luxury goods industry and maximize revenue.


● What key things should include in our plan?ISSUE PROPOSED APPROACH & JUSTIFICATION

Product Category to launch into high end of the market?

What product category are we going to enter the high-end segment with? Stick to leather goods or choose another category?

The field is wide open if we choose the LVMH type product portfolio strategy.

We can look for high end luxury brands that are struggling and looking for investments.

Then use that brand to enter its current market segment.

This can be repeated again with a different brand for another segment of the high end market.



Target Market? High net-worth Millennial and Gen Z

ISSUE PROPOSED APPROACH

Initial Geographical Market for Entry?

We should choose one or two countries and enter those.

Should avoid highly competitive markets like US, UK or France.

Germany or Spain could be a starting place.



Social Image we should develop?

Woke,

ethical business practices,

ethical sourcing of material,

environmentally caring manufacturing, e

qual rights,

equal opportunity employer



Brand Image we should develop

High quality, best in class.

We cannot cultivate this image with Mansako as it is well known as a mid level brand.

This strategy failed last time.


Retail Strategy Separate brand website for this segment with online sales and last-mile delivery

Separate company owned retail outlets.

Should not use existing Mansako outlets


Promotion Strategy Digital and traditional



Product design and development

Product design capabilities will have to be built from scratch OR may be we can use what the previous brand owner had developed and improve on it. (Assumption – we will be buying a struggling luxury brand and use it to enter high end)


Production and Supply chain

Production capabilities and supply chain will have to be built from scratch ORWe can use what the previous brand owner had developed and improve on it. (Assumption – we will be buying a struggling luxury brand and use it to enter high end)

NEXT UP

● ISSUE 3 - What new market segments should the firm enter to continue growing?

● ISSUE 4 - Should Mansako grow through Mergers and Acquisitions – if it should, what are the possible takeover candidates?

ISSUE 3 - What new market segments should the firm enter to continue growing?


● Luxury goods industry has four major categories of products1. Clothing & Footwear2. Bags and Accessories3. Cosmetics & Fragrances4. Jewellery & Watches

● Luxury goods industry has three major market segments1. High end segment – Very high net worth individuals (Upper Class/Millionaire Club)2. Mid level segment – High net worth individuals (Aspirants/Upper Middle Class)3. Entry level segment – Middle class professionals with high income


LUXURY GOODS INDUSTRY

HIGH END

$3000-$25,000 price point

Clothing & Footwear

Bags and Accessories

Cosmetics & Fragrances

Jewellery & Watches

MID LEVEL

$500-$3000 price point

Clothing & Footwear



Jewellery & Watches

ENTRY LEVEL

Sub $500 price point

Clothing & Footwear



Jewellery & Watches

Current Segment of Mansako

● Mansako is currently operating in only one market segment and in one product category.

● Which means they have 11 more possible market segment/product categories they could possibly enter to expand

● Most likely possibilities○ Mid level segment – other three product categories

1. Clothing & Footwear2. Cosmetics & Fragrances3. Jewellery & Watches

○ High end segment – all four product categories1. Clothing & Footwear2. Bags and Accessories3. Cosmetics & Fragrances4. Jewellery & Watches

Richemont – Swiss luxury goods company: Revenue €14.238 billion

Chow Tai Fook – Hong Kong luxury goods company (private)

Swatch – Swiss luxury watch company (private)

Phillips-Van Heusen (PVH) – US company which own Tommy Hilfiger, Van Heusen & Calvin Klein – Revenue US$ 9.8 billion

Ralph Lauren – US Company – Revenue US$ 5.9 billion

Hugo Boss – German company – Revenue €2.7 billion

Estee Lauder – US company – Revenue US$ 14.2 billion

L’Oréal Luxe - The luxury products division of French company L'Oréal . Owns cosmetics and fragrance products of 36 brands including Lancôme, Diesel and Prada

Shiseido – Japanese cosmetics company

EssilorLuxottica – French Multinational company and owners of Ray-Ban, Oakley, Michael Kors brands of eyewear and accessories

● Main limiting factors that will limit or restrict Mansako’s expansion to market segments and product categories listed above.

1. Brands that are available to takeover or looking for investors/partners2. Ability to raise capital to takeover those brand assets

What are the limiting factors which might prevent Mansako from expanding into new market segments?

ISSUE 4 - Should Mansako grow through Mergers and Acquisitions – if it should, what are the

possible takeover candidates?

What are mergers & acquisitions?

● Mergers and acquisitions (M&A) is a general term used to describe the consolidation of companies or assets through various types of financial transactions, including

1. Mergers2. Acquisitions3. Consolidations4. Tender offers5. Purchase of assets6. Management acquisitions.

● Mergers

In a merger, the boards of directors for two companies approve the combination and seek shareholders' approval.

For example, Compaq merged with Hewlett-Packard in 2002. Compaq's pre-merger stock market symbol was CPQ. This was combined with Hewlett-Packard's stock market symbol (HWP) to create the current stock market symbol (HPQ)

Another example – Disney Pictures and 21st Century Fox merger valued at –$52.4bn

Sri Lanka - Hutchison Etisalat merger (May 2019),

● Acquisitions

In an acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or alter its organizational structure.

Sri Lanka examples –

● Hemas acquisition of Atlas Stationary Company● Hayley's acquisition of Singer SL● Mr. Dilith Jayaweera’s (Triad, Derana, Citrus) Divasa Equity Ltd, acquired over

40% of George Steuarts – Now Mr. Dilith Jayaweera is the Chairman of George Steuarts

● George Steuarts acquisition of tea exporter HVA Foods● Access Group’s acquisition of Ninewells Hospital and Colonial Motors (Jaguar-

Land Rover)

● Consolidations

Consolidation creates a new company by combining core businesses and abandoning the old corporate structure.

Stockholders of both companies must approve the consolidation, and subsequent to the approval, receive common equity shares in the new firm.

For example, in 1998, Citicorp and Traveler's Insurance Group announced a consolidation, which resulted in Citigroup

● Tender offers

In a tender offer, one company offers to purchase the outstanding shares of the other firm, at a specific price rather than the market price.

Outstanding shares – shares that are held by the shareholders of the company. Some shares are held by the company itself and they are called treasury shares.

Total Issued Capital = Outstanding shares + Treasury shares

Authorized capital = Total value of shares that the company is allowed to sell to investors.

The acquiring company communicates the offer directly to the other company's shareholders, bypassing the management and board of directors.

● Acquisition of assets

In an acquisition of assets, one company directly acquires the assets of another company. Only the assets are purchased and not the company itself.

The purchase of assets is typical during bankruptcy proceedings, where other companies bid for various assets of the bankrupt company

This may also happen when the selling company may sell some of its underutilized assets (land, buildings, factories, patents, technology) to raise finance for more profitable activities.

● Management acquisitions

In a management acquisition, also known as a management-led buyout (MBO), a company's executives purchase a controlling stake in the company, taking it private.

Such M&A transactions are typically financed disproportionately with debt, and the majority of shareholders must approve it.

Example: By 1980, Harley-Davidson, the iconic American motorcycle company was on the verge of bankruptcy due to Japanese competition from Honda, Yamaha and Suzuki. In 1981 its management team did a management buyout and acquired the company.

Today, Harley-Davidson has a $5 billion revenue and controls 50% of the world’s super-heavyweight motorcycle market

Should Mansako grow through Mergers and Acquisitions?

● Yes, the proposed corporate strategy is to grow by acquiring small, high quality luxury brands and the companies that make them.

● These brands/companies when help Mansako Holdings to enter new market segments and product categories.

● This is the strategy used by LVMH, the word’s largest luxury products company.

What are the possible takeover candidates?

● That question cannot be answered until we are sure of following○ The board of directors must accept and approve this strategy

○ Restructure the company as a holding company

○ There has to be an agreement on the segments and markets the firm will be entering

○ Manasako's ability to raise finance for these acquisitions must be worked out

○ What brands can Mansako acquire depends on■ What are the brands currently looking for investments and partnerships■ Capital available for such investments

What do Mansako’s financials say?

● Revenue 2019 – 218 Million● Gross Profit 2019 – 135 Million● Operating Expenses (Overheads) – 126 Million● Operating Profit 2019 – 9.7 Million● Net Profit 2019– 6.4 Million● Net Cash 2019 – 24 Million● Total Equity 2019 – 105 Million● Long Term Liabilities 2019 - 0

Profitability Ratio Analysis

● Gross Profit Margin 61.9%● Operating Profit Margin 4.4%

What do these numbers say?

➢ 1. The company has massive operating expenses . 126 million for sales of 218 million. It is not clear from the data given what these overheads are. However, serious investigation has to be done to analyse these overheads.

➢ 2. All the costs that goes into producing and selling goods have been accounted in the cost of sales

➢ 3. Why are operational expenses so high?

What are operating expenses?

● 1. Operating expenses are incurred in the regular operations of business and include rent, equipment, inventory costs, marketing, payroll, insurance, and funds allocated for research and development.

● 2. These costs are incurred regardless of sales

● 3. Therefore, operating expenses have to carefully managed.

Cost of Goods Sold

● 1. Cost of goods sold refers to the business expenses directly tied to the production and sale of a company's goods and services.

• 2. Examples of Cost of Goods Sold• Labor directly tied to production• Direct materials needed for the production of goods and services• Sales expenditures

Gearing or Financial Risk

● 1. The company has zero long term liabilities● 2. Therefore, there is zero financial risk of the firm being unable to

service the loans it has taken.● 3. This is a good thing. This allows the firm to borrow easily and at a

lower interest cost

Funding for expansion – Retained earnings

● Mansako also has 86 million in retained earnings (2019)

● 1. Retained earnings are profits not distributed to shareholders as dividends and accumulated.

● 2. Retained earnings is an excellent source of zero cost financing – no interest has to be paid to anyone

● 3. Since retained earnings belong to the shareholders, it is considered equity (part of owner’s capital) and the company can use it to expand the business and bring more value to the shareholders

Funding for expansion - Borrowings

● 1. Funding is needed for the expansion strategies discussed earlier● 2. The firm will need a lot of money to buy the brands it wants to buy to

enter selected markets.● 3. The company has 41 million worth of tangible assets (2019) and zero

long term debt.● 4. Therefore, the firm may be above borrow by keeping its tangible

assets are security● 5. Borrowings could be in the form of bank loans or debentures● 6. Debentures are a type of borrowing where no security is offered.

Firms with good balance sheets (like Mansako) with very little long-term liabilities can issue debentures.

Funding for expansion – Equity financing

● Equity is ownership – Getting funding by selling shares (equity)● 1. Mansako can raise funds for expansion by issuing more shares● 2. This can come in the form of a rights issue or a new share issue● 3. A rights issue – where existing shareholders can buy additional shares.

This will not change the ownership structure● 4. A new share issue means the firm will sell additional shares and allow

anyone to buy. This will change the ownership structure.● 5. New shares can also be issued without voting rights – non voting

shares. These owners will get dividends but cannot vote in the annual general meetings. Usually not voting shares are priced lesser than voting shares.

abs 200 business case analysis (bca)

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