To: Warren East, Chief Executive Officer – ARM Holdings From: Team 8 Consultants
Date: April 3, 2012
Should JBT buy Key Technologies’ sorter division for $50 Million? To answer this question, our team conducted an examination of the value the division will provide to both your company and your customers, and the effects the purchase will have on your company’s financials and yearly marketing goals. After analyzing these factors, we recommend that JBT should move forward with this purchase.
Value Added to Customers. The proposed acquisition of the sorting division provides JBT customers with an enhanced portfolio of products they can purchase and have serviced from a single source. Also, food processors with employee wage rates greater than $4,081 per annum benefit from purchasing a sorter by the efficiencies gained in reducing manpower on the sorting line. Looking at the largest market - the United States - a food-processing firm will save $338K per year when it shifts its sorting line from manual to automated. This means that the labor savings can offset the cost of the machine in less than two years.
Value Added to Company. The proposed acquisition will provide JBT with a solution for its declining operating profits (from 10.7% to 7.8% YOY). A main cause for this was an unfavorable mix of aftermarket products sold compared to the prior year. By introducing a high-quality, high-margin product (50%) to their product mix; JBT should see increases in their operating profits, which will positively impact their bottom line. In addition, profits from servicing the equipment will provide an additional consistent and profitable revenue stream over the life of the product.
Acquiring Key’s Sorter Division will also provide the JBT sales force with an exciting new exclusive product. The optical sorter has a concrete business case behind it as it provides overhead reduction savings, gained operational efficiencies in the engineering department, and a better value proposition for JBT as a wider range food processor products and services provider.
Effects on Company Financials. JBT can finance its acquisition of Key Technology’s sorting division through a payment combination of $5M from cash reserve and $45M from long-term debt. With a 6.45% weighted average cost of capital, the debt will translate to a yearly interest expense of about $3M for 5 years.
Effects on Yearly Marketing Goal. The $62M total acquisition cost, including interest payments, will increase the yearly quota of your company’s sales department. Nevertheless, the sorting equipment’s gross margin of 50% translates to a manageable required market penetration of 1% per year, or 42 machines per year, to break even. We believe this marketing goal is attainable for JBT.
Based on the analysis of the case, we recommend that JBT should go ahead with the purchase of Key’s sorter business for $50M because it will:
● provide JBT with an enhanced product portfolio, increase operational efficiencies in the engineering department, and add a better value proposition for JBT as a wider range food processor provider overall ● positively impact JBT’s bottom line by providing a solution for declining operating profits by introducing a high-quality, high-margin product (50%) to the product mix ● add an additional consistent and profitable revenue stream over the life of the product through profits from servicing the equipment ● help JBT enter niche international markets where employee wage rates are greater than $4,081 (per annum) ● provide the JBT sales force with an exciting opportunity of selling an innovative, exclusive and patented technology ● provide labor cost-reduction value to its customers; especially those who are operating with high wage rates ● provide more value to JBT’s customers...