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Hg Capital and the Visma Transaction (A) Case Solution & Answer

Hg Capital and the Visma Transaction (A)

Debt Structure

Under the structure of debt given in the case, it is assumed that the market will offer different rates under each type of debt. If the company will purely focus on the senior debt, then it can be very risky to payoff in the given years as the size of debt is too large to recover it would take seven to ten years for repayments.

Under the case of mezzanine debt, the period can be flexible for repayments as compared to the senior debt however, it contains high interest amounts which can affect the company’s operating activities. Therefore, it is risky to hold large amount of debt under the case of mezzanine.

The third type of debt in the case is PIK Preferred debt, which is the most flexible to handle and allows less period to pay off with lowest interest rate offered. Under the assumptions given in the case, it can be the desired rate to offer the PIK preferred debt as it can cover even less than a year for repayments, which would allow less risk for the company to engage in full debt activities as in senior debt.

Therefore, the analysis from the projected financial results shows that the company will still offer the same rate as given in the case. Moreover, it can be a minimum ratio of 12% as Visma’s projected results indicate the high debt to equity ratio. The fact of the matter is that the total value of debt is approximately 70% of total capital and it comprises of more risk for liquidity, therefore the company should distribute all the three types of debt.

Under the case of PIK Preferred debt, Hg Capital should leverage more amount in order to recover it in the early periods of development and continuously decrease the interest value associated with income statement.

The benefit from it can be useful to pay minimum margin of interest rates and consider as the short term debt, where the interest ratio under mezzanine can be expensive for the company to hold. Therefore, it will be the perfect decision for Hg Capital to hold large amount of PIK debt at the same rate given in the case.

Deal Structure

In order to acquire Visma for business expansion, Hg Capital should know the current market situation of debt and equity in the Europe. This will help to analyze the relationship between the borrower and the lender and to know the trust of local debt holders with the providers.

Hence, after analyzing the current situation of debt level, it is recommended for the company to hold at least 70% of debt, if it is composed of high volume of PIK Preferred debt and 66% under the given case.

As mentioned in the early part of case, the short term debt can be expensive under mezzanine as its average ratio in the past years was16%, which is higher than other two types of debt. On the other hand, under the case of senior debt, the interest rates can be acceptable for the company however, the long term maturity will negatively affect the entire operations if the process will not be performed to provide enough interest.

The most acceptable debt structure to implement is PIK Preferred debt as it covers less maturity as well as it offers the lowest rate as compared to mezzanine debt. Therefore, if the company will hold 70% of debt, then it is recommended to have more PIK preferred debt as compared to the senior debt because in this case the company will be less risky to provide large amounts under the long maturity.

If the company will hold 66% of debt, then it can follow the same percentage of debt as given in the case. Moreover, the current market practice also indicates the average results of holding the fixed percentage of debt and is successful to apply the structure.

It has been analyzed that the relationship between the banks and companies was strong in the past as well as currently. Therefore, in order to avail the opportunity for building the relationship with the banks, Hg Capital should borrow long term debt from the local banks of Europe as the reputation of Visma was positive in the past couple of years and had strong relationship with the banks.

Thus, it must connect to the local debt providers and secure the operations under senior debt level and if it will go for PIK Preferred debt, then it can borrow from other banks under lowest interest rate payments. This combination will strongly support the company to repay the debts in the early stages and try to deduct the tax rates under the case of senior debt with long maturity period.

Recommendations

The results from the case clearly show that Hg Capital has an advantage as well as disadvantage to acquire Visma. The advantage to acquire will be the business expansion in the European markets, which would allow to increase the revenues as well as offer new type of products and services.

The disadvantage is to struggle first in the new market, as the company may suffer loss in its early years of development and will not able to provide generate enough revenues to increase its operations. Therefore, the best decision for Hg Capital is to acquire Visma because in the case of struggling for new market, the company can still generate more revenues in the established markets.

The total price of the acquisition according to the projected result will be 9.2 million GBP, which is three times greater than the offer of Sage. It indicates that the company’s value is evaluated according to the future EBITDA results. On the other hand, the offer from sage determines the current value of the company therefore, it is the best option to accept the offer of Hg Capital, which would allow each firm to expand its business in the selected areas. It will also benefit both the companies to exchange the products and offer into the markets for revenue maximization.

Under the non-price consideration of Hg Capital, it is expected that the software technology and advance services such as financial outsourcing and accounting services will play a vital role in the development of the company’s reputation in the existing market.

As discussed in the case, 70% of revenue of the entire market comes from the software houses. Therefore, according to the situation of the market, Hg Capital should introduce software technologies after the acquisition and also provide other services with the ratio of 30% of total revenues from Visma.

The financial worth of these non-price considerations will reflect the selected percentage of sales volume, which can also be calculated through the net value of the company. For instance, if the total value is 9.2 million as per the results, then the total worth of software held by the company will be 70% of the net value.

It is concluded that Hg Capital will be considered as the best option to acquire Visma, as well as the counter party can out-bid according to the analysis given in the case. Finally, every company should first consider the projected value and then offer to bid at acceptable prices…..

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