Infinity Carpets Inc.
Question 1: was infinity a good LBO candidate?
On the basis of our analysis set forth below, we believe that Infinity Carpets was not a viable LBO candidate. We have answered this question analyzing the various criteria typically looked in a possible LBO scenario, where 1 means low risk and 10 means high risk.
Criteria Rank Comments
Cyclicality/volatility 7 Strong dependence on housing market even though good record during recession (p. 2, paragraph 4). Volatility due to exposure to a volatile middle eastern market (p. 5, paragraph 5) due to the Gulf War.
Capital Intensity 4 Barriers to entry are relatively low in terms capital. Just to get an idea, we have calculated the total assets/sales ratio for Intel for 2007, which gives a ratio of 1.47. Intel is considered to be in a very capital intensive business. Doing the same exercise for Infinity yields 0.86. This gives the impression that relatively speaking this is not a capital intensive business However, given that Infinity needs extra investment to cut costs and expand cut-to-order distribution, we decided to give this a 4.
Technological riskiness 3 Essentially, this industry is not rocket science. There are some complexities but there is little indication that Infinity´s technology and processes will become obsolete in the following years.
Strong, protected margins 7 Margins are relatively strong (Exhibit 1); however, we believe Infinity will have problems protecting them due to the large number of competitors who compete on prices.
Growth rate (mature) 7 Infinity is in a mature market so growth is not expected to be very high. Our calculation yields a five-year CAGR of 39%. Given that LBO firms are looking for companies in mature markets, this item on the checklist might be a problem.
Quality Assets 9 The equipment has a long useful life. However, the equipment does not seem to have much value for third parties given that these types of assets were sold by other companies for just 10% during
On the basis of our analysis set forth below, we believe that Infinity Carpets was not a viable LBO candidate. We have answered this question analyzing the various criteria typically looked in a possible LBO scenario, where 1 means low risk and 10 means high risk.
Criteria Rank Comments
Cyclicality/volatility 7 Strong dependence on housing market even though good record during recession (p. 2, paragraph 4). Volatility due to exposure to a volatile middle eastern market (p. 5, paragraph 5) due to the Gulf War.
Capital Intensity 4 Barriers to entry are relatively low in terms capital. Just to get an idea, we have calculated the total assets/sales ratio for Intel for 2007, which gives a ratio of 1.47. Intel is considered to be in a very capital intensive business. Doing the same exercise for Infinity yields 0.86. This gives the impression that relatively speaking this is not a capital intensive business However, given that Infinity needs extra investment to cut costs and expand cut-to-order distribution, we decided to give this a 4.
Technological riskiness 3 Essentially, this industry is not rocket science. There are some complexities but there is little indication that Infinity´s technology and processes will become obsolete in the following years.
Strong, protected margins 7 Margins are relatively strong (Exhibit 1); however, we believe Infinity will have problems protecting them due to the large number of competitors who compete on prices.
Growth rate (mature) 7 Infinity is in a mature market so growth is not expected to be very high. Our calculation yields a five-year CAGR of 39%. Given that LBO firms are looking for companies in mature markets, this item on the checklist might be a problem.
Quality Assets 9 The equipment has a long useful life. However, the equipment does not seem to have much value for third parties given that these types of assets were sold by other companies for just 10% during