Summary of the case:
Cumberland Entertainment is a Canadian-based company that had done very well for itself by finding and exploiting a niche market in North American music distribution. But major US clients had started producing their own titles, and were now direct competitors. What was worse, distributors had also started focusing on lower-end products from other suppliers and Cumberland's modus operandi became unsustainable. CEO Tom Smith felt the only sensible course of action was for Cumberland to take over the distribution of its own products, both in order to defend its market position and to ensure higher margins. This movement has been very successful and they have grown a lot. But despite such tremendous expansion, there seemed to be yet more opportunity for growth for Cumberland, so in summer 1999 they are evaluating the possibility to move toward private equity to finance this growth. What do you think of the Cumberland opportunity? As a private equity financier, would you invest in it – why or why not? Positive points:
* Management Team: competent and committed
* Up to now it’s a successful project
* Good business model: they control the distribution, maintain direct relationship with its retailers and are able to know customers’ preferences and adapt their product to it * Opportunity to grow:
* Organically: new product lines, new distributions channels, increase US market penetration, international markets and internet development * By acquisitions: Cumberland could acquire some of its international distributors, its competitors or some niche production companies whose products would complement those of Cumberland * Forecasts are very positive (but maybe not so realistic?) Negative Points:
* It is a business that has had a tremendous and fast expansion exploiting a niche in the market. That may attract competitors to this niche, and it seems that there are not many barriers of entry to...