Brazos Partners And The Trinorthern Exit Harvard Case Solution & Analysis

QUESTION 1

The fund investment strategy of Brazos, which is a middle-marketed leverage buyout group, focused on the acquisition of the companies through the buyout of those companies which were valued in the lower part of the middle market between $ 250 million and $ 500 million. The investment strategy of the company focused on those companies only which had good management and a demonstrable cash flow. The company planned each of its investments and after proper oversight and good execution; the company was able to capture the operational strategies that increased the EBITDA for the companies. This investment strategy therefore makes sense. Brazos had also invested in many different areas. To differentiate the company, Brazos had also invested and developed the Generation Transfer Transaction. Under this method, the family-owned businesses could obtain liquidity through the sale of a minority share. Still they would be able to have their operating control. This transaction solved all the problems in the family-owned businesses in which the founders and the second generation had different desires. This transaction therefore, is a competitive advantage for the company. It is new, unique and is focused towards the family-owned businesses.

QUESTION 2:

The Tri-Ed Northern Investment was surely a very good investment for Brazos. Both of these companies had distribution strategies, complementary products and customer bases. When both of these would combine, that would surely create significant opportunities for both cost savings and revenue growth. If we look at the income statements of both the companies, than it can be seen that, the sales have been growing at an average rate of 6.9 % and 2.5 % for both the companies respectively. The EBITDA has been growing at 37% for Northern Video Systems and at 34% for Tri-Ed Distribution. This merger was a natural fit for the Brazos fund. First of all, the electronic security distribution industry was large and it was also growing rapidly. Communale and Roth were both a proven management team. After this merger takes place, there would be many synergies that would be created and the merger would create value post-acquisition. For example, after the merger takes place there would be many cross-selling opportunities between telesales and branch-based sales which would enable organic revenue growth.

2009 Tri-Ed Distribution Income Statement

 

 

2007

2008

2009

2010

 
Net Sales

201.3

225.4

223.7

245.2

 
  % Growth 

11.9%

-0.8%

9.6%

6.9%

Gross Profit

43.5

45.7

47.7

54.1

 
Operating Expenses

38.5

39.7

37.6

42.6

 
EBITDA

5.0

6.0

10.2

11.5

 
  

20%

69%

14%

34%

2009 Northern Video Systems Income Statement

 

 

2007

2008

2009

2010

 
Net Sales

141.1

156.6

143.0

150.3

 
  % Growth 

11.0%

-8.7%

5.1%

2.5%

Gross Profit

20.7

23.6

20.7

21.7

 
Operating Expenses

17.2

17.4

12.5

13.2

 
EBITDA

3.5

6.2

8.1

8.5

 
  

77%

30%

5%

37%

 

QUESTION 3:

Brazos has created a lot of value post acquisition. The adjusted present value calculations have been performed in the spreadsheet. The final enterprise value of both the companies after the acquisition shows that the adjusted present value is positive. This shows that the company has created value after the acquisition of both the values. The free cash flow attributable to the capital providers of the company is $ 1430 in the terminal year. The present value of the free cash flow available to the equity providers is $ 1042. After adding the savings from the tax shield, the enterprise value becomes $ 1045. This is a very high value and it incorporates all the synergies that have been created after the acquisition of both the companies. If we talk about the post acquisition synergies than by the early of 2012, this new merged acquisition was generating measurable gains for the business. The best indicator of this hybrid sales model were the sales that were coming from the cross selling products. These sales were being generated at a rate of about $ 6.3 million in addition to the annual revenues of Brazos on an annual rate basis. There was also some evidence that the market share of the company was increasing. About 2000 new customer accounts were acquired by Tri-Northern. This represented around $ 13 million in additional revenues. Altogether, if we total all the revenues than it represented an increase of 23% from 2010 to 2012. The margins had also increased from 5.2% to 5.9%..............................

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