Ducati & TPG – A “Wild Ride” LBO
Q1. The nature of the opportunity and the question of brand expansion 1.1 The situation of the target firm
Positives: (1) The Ducati brand was world famous;(2) The product was great in terms of technology and quality and it had won the 1990, 1991, 1992, 1994, and 1995 World Superbike championships against strong competition;(3) Ducati’s product family was broad offering 15 models in four families based on seven different engines;(4) The company had strong manufacturing fundamentals with low fixed cost and high level of standardization of its engines. Negatives: (1) Ducati faced severe financing problems, so it had to delay payments to some key suppliers which led to unfinished products. This in turn led to lower sales and extended customer wait lists;(2) The management was bad with its business entangled with Cagiva;(3) The financial performance was not at all transparent. 1.2 The nature of the deal. It is the takeover of a badly managed and financially distressed motorcycle manufacture firm who is strong in brand and manufacturing fundamentals. The objective is to use TPG’s mastery in management and its financing support to improve the target’s business situation. 1.3 The brand is expandable or not
We judge that Ducati could expand beyond motorcycles. To have this conclusion, we have gone through the following questions: What kind of products Ducati could provide? As the only business of the firm is motorcycle, motorcycle related products should be the first choice. Two categories of products are suggested: (1) Clothes and motorcycle related accessories like Gloves, sunglasses, and helmets; (2) Mechanical accessories like engines and other parts. Where does the demand come from? It’s natural that a Ducati bike fan will be happy to have a Ducati-styled wears. So clothes and accessories buyers should majorly come from current Ducati bike owners. As Ducati is famous for its engine technology and strong manufacturing fundamentals, its mechanical accessory product should be welcomed by motorcycle manufacturers around the world. The marketing, design and distribution of the product: With a world famous brand already established, promotion of new products is not difficult. As marketing activity is still at low level, all it needs is just to make more efforts in this part. Italy is famous for its fashion and design, so it’s not difficult to find a good designer to implant Ducati’s style into clothes and accessories. For distribution, Ducati could sell its new products in existing Ducati stores. A further approach could be done by cooperating with retailing companies to expand its clothing and accessory products. Role model: Harley-Davidson: Harley’s clothing and mechanical accessory products are highly profitable and account for about 15% of its sales. As Ducati’s situation is quite similar to Harley’s, Ducati will probably copy Harley’s model. Q2: How does the deal differ from a typical private equity deal in the US? 2.1 Deal Flow Generation: In US, private equity firms’ deal flow is generated from many sources, including business plans received, referrals from entrepreneurs or companies in which the fund has previously invested, from other funds looking to syndicate a deal, and from professionals, such as attorneys and accountants, who are familiar with the fund's investment criteria. In spring of 1995, Cagiva confronted apparent financial problems and approached DMG for a bridge loan, who referred a deal of equity investment in Cagiva to TPG. 2.2 Due Diligence Process: In US, due diligence get started after the prospective buyers and sells recognize this deal is mutually beneficial. In depth DD is generally conducted after a binding agreement is in place and earnest money has been provided. Due diligence in this deal was to find out the financial conditions of Ducati, especially its profitability. Because Ducati and Cagiva were so intertwined to...
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