Ktm Venture Capitalist's Exit

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KTM CASE SUMMARY

I. Summary of the case

KTM company history

KTM is a designer and manufacturer of motocross, rally and cross-country racing motorcycle that was created in 1934 in Austria. Since that time, KTM maintained a reputation for producing reliable, high quality motorcycle, and for having an expertise in manufacturing core parts. Its marketing focus has always been on building a brand image of a company with technological leadership, high quality products and a legacy of championship titles. In the late 1980s, propelled by the strong financial markets, a financial investor purchased KTM and took the company private. Though KTM had a good reputation and quality products, it had too many products, inadequate management, and high debt in the books. The company declared bankruptcy in 1991. At that time, a few of the general importers convinced a group of venture capitalists to save KTM. This resulted in the formation of Cross-Holding, involving Knünz (the current CFO) and Pierer (the current CEO). Their strategy then shifted and the management decided to cut out the general importers and to sell directly through dealers. Soon, the group decided to go public to attract partners who would be willing to grow with the company, thus securing the growth. Although the company's share price never dipped below its issue price, a potential takeover bid convinced Pierer & Knünz to go private again. In 1999, BC European Capital invested in return for a 49% stake in KTM. BC European Capital was one of the largest venture capital firms in Europe with over 15 years of experience involving over 40 acquisitions. The venture capitalist helped the management to acquire new skills and business contacts when needed while still giving a great liberty to the management to pursue their business strategy. In return for their trust, investors were rewarded with a cumulative average growth rate of 31% in revenues and 50% in profits from 1999 to 2002. In 2002, KTM generated 80% of its revenues from off road motorcycles and related accessories. Geographically, 60% of its revenue came from Europe (mostly Austria & Germany). The remainder came from the USA (30%). Due to its strategy focus change, the company distributes 80% of its motorcycles via its own sales subsidiaries and 20% through general importers (mostly located in South America, Africa, Australia & small Asian countries). KTM is planning a geographic expansion in new EU countries and in the USA. Also, the company wants to expand its product line by offering on-road motorcycles, ATV and other products. While the growth perspectives for Europe are low, the USA, South America and Asia region are believed to be promising. KTM had a strong dealer relations system that enabled the company to respond quickly to market trends, to effectively predict sales and to reduce inventory costs. Its financial performance is indeed based on these key factors: a strong supplier relationship, an improved inventory management and the rationalization of its administrative costs. Still, the company’s debt to equity ratio is high compared to competitors. Knünz projected EBIT to grow between 6% - 8% for the next 3 years before leveling off to around 4% – 6% for the following 2 years. He wondered how the financial markets would affect KTM's financial outlook.

The motorcycle industry

In 2003, the motorcycle industry was a great sector to invest in as it was expected to experience a 5.3% growth per annum from 2003 to 2007. This growth was mainly due to the fact that motorcycle was likely to gain broader acceptance.

Within this industry we distinguished two main types of product – on-road and off-road motorcycle - that address different type of clients as detailed below.

Product| Target Clients Characteristics/Expectations|
On-road| * Young riders that seek for performance, thus preferring racing-replicas motorcycle * Old riders that look for a certain lifestyle and...
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