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Berkshire Partners Bidding for Carters Case Solution

Solution Id Length Case Author Case Publisher
2494 2715 Words (12 Pages) Malcolm P. Baker, James Quinn Harvard Business School : 205058
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Carter's, the largest branded maker of toddler and infant products in the United States, was asked to bid by Berkshire Partners, a Boston-based private equity firm. Goldman Sachs (GS), the investment bank in charge of the auction, sent the invitation. To speed up the deal, GS was also proposing staple-on financing. Berkshire decided to make an offer for Carter's and planned to fund the transaction with a combination of stock and loan finance. Berkshire is advised on the bid amount and the right debt and equity ratios to optimize Berkshire's rate of return on this investment. The winning bidder would be able to fund the transaction using a readymade capital structure under this arrangement. In a nutshell, adjusted present value is: WACC integrates tax advantages by discounting the cash flows using the rate of discount after accounting for the marginal tax rate (debt times one minus the tax rate). The unlevered cost of capital (precisely like the WACC calculation, but pre-tax, so you take away the one minus the tax rate is the starting point for APV, which is made up of TWO SEPARATE VALUATIONS to put a price for the bid.

Following questions are answered in this case study solution

  1. What are LBOs and why do they exist?

  2. Does Berkshire Partners create economic value?

  3. How does BP add value to its businesses?

  4. What are BP’s most important resources?

  5. When does BP add the most value to its businesses?

  6. How imitable is BP’s strategy? What stops other firms from doing it themselves?

  7. How does Berkshire Partners create value in this transaction? Would you describe their contribution as modest or significant?

  8. How realistic are the management forecasts in light of Carter’s historical performance? Be as specific as possible Preliminary, Subject to Change Posted: 2.3.2015 

  9. How the “staple-on financing” does offered by Goldman Sachs affect the bidding? 

  10. Value Carter’s using the financial forecasts and capital market information posted on the Chalk site. What would you advise Berkshire to bid for the equity, given all the facts and circumstances of the case?

Case Analysis for Berkshire Partners Bidding for Carters

1. What are LBOs, and why do they exist?

Leveraged Buyout or LBO is a term used in mergers and acquisitions. It refers to the form of financing where the acquiring firm uses leverage(debt) to finance its purchase of the target company. Companies can use leveraged buyouts to accomplish major purchases without investing considerable quantities of their own money or resources. Instead, because the acquired firm's assets are utilized as security for the financing, the acquired company's assets serve to make an LBO viable. However, the purchasing company's assets might also be utilized as collateral. Levered Buyouts are generally used by private equities or corporations during mergers and acquisitions. This form of financing assists a corporation in diversifying its portfolio by acquiring competitors and entering new areas. Buyers can report a higher internal rate of return on leveraged buyouts because it requires less to zero equity  (Kemeny, 2021).

In conclusion, LBOs enable businesses to generate better equity returns. LBOs are also a popular selling strategy. The seller can obtain the desired price for the firm and has a plan in place to quit the organization. This helps to acquire firms or individuals to cash out their investment when they wish to at any stage of the firm production. 

2. Does Berkshire Partners create economic value?

Berkshire Partners modifies capital structures, management incentives through free stock options, and corporate governance by acquiring other firms. BP creates economic value in a variety of ways by creating an environment favourable to long-term growth and profitability for its portfolio companies. The significant debt levels associated with LBOs, on the other hand, entail a substantial danger of insolvency. However, it is worth noting that BP was able to completely realize the vast majority of its investments by closely monitoring its portfolio firms.

3. How does BP add value to its businesses?

Carter Company has had strong growth in recent years, boosting annual sales by 9.5 percent and yearly EBITDA by 22.1 percent with significant cost savings. Despite its long history and outstanding financial success, Carter's has a lot of room for expansion (Berkshire Partners: Bidding for Carter's, 2022). According to Berkshire Partners, Carter's has a lot of value potential, which sees the firm as a consumer-products company with various channels outside children's clothes. Berkshire Hathaway may be able to expand through acquisitions and expanded product lines and sales channels by utilising low-cost debt. Berkshire can give appealing incentive structures to reach essential targets, recruit new management to help with the expansion, and upgrade the organizational structure to achieve a cohesive aim to align management with its mission of value generation.

Berkshire Hathaway has expertise with leverage buyouts for retail firms, having raised capital and improved operations during its ownership. Berkshire may access debt that is now 4.6 times the previous twelve months' EBITDA at a weighted average interest rate of 9.7%, virtually tripling the company's total debt and cutting interest expenditure by around 1.8 percent. Berkshire may be able to use Carter's to achieve an ideal capital structure, allowing it to expand high-growth product lines, open additional retail locations, and make acquisitions in large, scattered markets by utilising more inexpensive loans and implementing a growth strategy.

4. What is BP's most important resources?

Berkshire looks for companies with solid management that can be rewarded for achieving high returns. Management has demonstrated its capacity to give corporate analysis and has built solid internal controls, demonstrating a skilled team and an organization that is focused on management's goals. Berkshire Hathaway will use these corporate characteristics to focus management on value generation and preserve order to achieve company-wide outputs. Berkshire may give considerable incentives to management, such as sweat equity, through an LBO, ensuring that they remain committed to long-term development and lean operations. Its reputation was influential in the bidding process. Invested sufficient time and resources to help portfolio companies improve performance. 

Berkshire developed a negotiation team of four to five persons for each deal under serious consideration. Each team has a managing director as the primary partner. A team would typically consist of an extra managing director, a principal, and one or two investment employees. Jones describes their work as a company as "very open and collaborative in our efforts to gather all the key information.” While the transaction team was responsible for coming up with a proposal, doing due diligence, and presenting an investment package, the company as a whole made the ultimate investment decisions. After taking an equity position in a private company, Berkshire saw its role as assisting management in a variety of ways, including assisting in the prioritisation of critical objectives, analysing corporate structure, assisting in the building of a bench of key managers, and also assisting in the subsequent and smooth transition of further mergers or acquisitions.

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