The Carlyle Group And Axalta Case Solution
DPC was acquired by the Carlyle Group, as it believed that the business segment had a strong profitability and growth potential. After the acquisition, with the deployment of restructuring strategies; the worth of Axalta investment had enhanced to a significant level within 18 months, and different investment underwriter was suggested, to go for an IPO, as the equity market was going towards a positive trend. The Carlyle Group had to decide whether to go for an IPO or not?
Reason behind DuPont’s Interest in Selling DPC
DuPont decided to sell DPC, because of the business model mismatch. DuPont had transformed itself form the explosives’ manufacturer to a science based chemical company. The company’s business segment which based on the coating, was showing a slower growth as compared to other business segments of DuPont. The company’s main focus was to become a successful industry player in the science based chemical products, but these products were not matching to the company’s overall business model.
The coating segment only generated 13% of the total sales; whereby, the company was generating 37% of its revenues from industrial sciences, agricultural and the nutrition products. The DPC segment was facing different business challenges, which led the management to decide about selling DPC. First of all, the growth of the coating segment was based on the GDP growth, which was quite less as compared to the growth achieved by the science based chemical products’ segment.
Moreover, the capacity of the DPC business segment in Research and Development, was relatively less than the average R&D capacity of DuPont. DPC had an R&D capacity of 1.1% of its sales, while DuPont had an average R&D rate of 5.2% of the total sales. Lastly, there were limited opportunities based on cross fertilization between the coatings and other products’ segments.
These reasons caused a hindrance in DuPont’s’ objective of becoming a market leader in the science based chemical products, which led the management to sell out the DPC segment. DuPont didn’t appreciate the full value of DPC, because the company was focusing on other profitable segments, and DPC was considered to be a misfit for the overall business model and the management had an idea that if DPC is sold, then the new management might be able to reap the maximum value from the coating segments, as the business had a great potential.
Interest of PE Firms in DPC-Acquisition
The key objective of the private equity firms behind the acquisition is to acquire the mature or the profitable companies or business segments, then get the management’s focus towards improving the acquired business profitability and ultimately selling the acquired firm at a higher selling price(Henson, 2021). This objective is linked with the interest of the private equity firms in the DPC. It is because, DPC had been a mature business with unique product offerings, wide customer and geographic approach.
The business had the potential to grow if the management directed its focus towards improving the profitability. The private equity firms are specialized in such transactions, which built up the interest of these firms in DPC. The PE firms had an idea that DPC had a string growing potential and this potential could be used to increase the business profitability, making it profitable to sell the business at a higher price as comparedto the acquisition price. Lastly, the acquisition of DPC would create significant cost and benefit synergies for the acquiring firm, which might be another reason behind the interest of PE firms in DPC.
High Purchase Price for DPC by Carlyle
Carlyle had showed its strong interest in the acquisition of DPC and had paid 7.5 times higher price than DPC’s EBITDA, i.e. Carlyle agreed to buy DPC at $4.9 billion; whereby, the EBITDA of DPC stood at $662 million. It was highlighted by different investors and even by the Wall Street that Carlyle had offered a very high price,but according to the management at Carlyle, it was worth paying for, because the benefits achieved by the acquisition were outweighing the costs. The management at Carlyle, after a detailed analysis, came to the conclusion that the strategic vision and a strong management focus can enable the company to generate significant profitability. After a due diligence process, Carlyle’s management concluded the DPC investment as successful in regards of a few aspects, which are:……………………………
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