Helping a conglomerate acquire a company

BACKGROUND

Amdani Enterprises is a diversified conglomerate that operates in multiple industries. It has businesses in telecommunications, FMCG, retail, fashion, chemicals, commodities, hospitality, and many other sectors. Simply put, from shoes to shampoo, watches to laptops, and schools to hospitals, Amdani Enterprises has direct businesses or stakes in all major consumer industries. With annual revenues surpassing $100 billion, the company is a force to be reckoned with in the business landscape.

With the growing popularity of AI, Mukam Amdani, the Chairman of Amdani Enterprises, now plans to foray into AI services to complement its existing IT Solutions business. As such, a Board Meeting was convened to determine a roadmap to enter the booming AI industry. While the management was discussing the setup of a new division, Mr. Amdani proposed to acquire an existing company to speed up their entry into the AI industry.

After a month of extensive searching, they managed to find one company that matched the company’s description. CloseAI is an AI startup that specializes in AI solutions, particularly AI research, development, and implementation. 

However, although Amdani Enterprises likes CloseAI’s prospects, it lacks the knowhow to determine whether the acquisition is a good idea. As such your investment banking firm, PJ Gorman, was hired by Amdani Enterprises to analyze the financial feasibility of the proposed acquisition, provide strategic recommendations, and facilitate the acquisition.

PROBLEM STATEMENT

• The acquisition is expected to result in 20% cost savings while creating a business offering that could improve revenues by (estimated) $1.5 billion annually.
• Valuations conducted by professionals at your firm indicate that the company has a valuation of $1.2 billion. CloseAI’s founders wish to leave the company and are asking for a 20% premium on the valuation as their final asking price. Is this company good enough to acquire?
• Considering that the setup of their personal AI company would take 1.5 years and cost $1.4 billion, would you suggest setting up their own company or acquiring CloseAI?

ANALYSIS

• Ask Price= $1.2 billion + 20% = $1.44 billion
• Revenue YoY growth= 13%
• Revenue CAGR= 15.8%
• EBITDA YoY growth= 24%
• EBITDA CAGR= 26.7%
• EBITDA margin= 15%
• Net Profit YoY growth= 28%
• Net Profit margin= 5%

RESULTS

1] CloseAI’s financials show significant growth over the years:-

• Revenues have shown robust growth over 5 years, more than doubling during the period.
• EBITDA growth has been significant as EBITDA margins have grown from around 9% to 15% as a 26.7% CAGR shows that the company has made significant progress in optimizing its costs while maximizing its revenues.
• In terms of profit, the company has turned profitable within 5 years as yearly growth is impressive while profit margins are showing significant growth. Considering that the firm was incurring losses 5 years ago, the company must have burned significant cash before it decided to focus on cost management and profitability.
• Due to the company’s unique AI offerings and tech competencies, the company has seen a significant surge in market share. Moreover, CloseAI’s proprietary tech is a synergistic addition to Amdani Enterprises IT Solutions arm.
• As a startup, CloseAI was not able to maintain a healthy current ratio initially. However, the company’s current ratio saw a dramatic spike in 2021, indicating that the company raised funds. That would also explain the almost $100 million spike in revenues and doubling of net margins in 2022. Although the current ratio declined to 2:1 in 2023, the company still has enough assets to pay off its immediate liabilities.
• Lastly, the company’s Return on Equity has turned positive. With steady growth in the RoE, the company is getting better at converting its equity funding into profits, thereby making the company more investor-friendly.
• With a business of up to $1.5 billion added due to such acquisition and cost savings of up to 20%, the 20% premium is not a bad deal for Amdani Enterprises.

2] Although personally setting up a company of its own will result in a cost savings of $40 million, the company would be better off acquiring CloseAI because:-

• The setup will take 1.5 years while the acquisition will take 6 months, helping Amdani Enterprises enter the industry faster and achieve rapid growth.
• Amdani will be able to leverage the existing R&D capabilities of a growing AI firm and incorporate them into its offerings, giving it excellent synergy and helping it gain a competitive advantage.
• Amdani will also be able to use CloseAI’s brand image.
• It will help Amdani Enterprises develop new competencies, resources, give it access to industry experts, and give it fresh ideas, thereby giving it an overall advantage in the industry.

Therefore, instead of chasing short-term cost savings and thus delaying a fresh entry into a growing industry, the acquisition of CloseAI would be more beneficial to Amdani Enterprises in the long run since it would give Amdani a headstart in the race while enabling it to build on existing AI capabilities.

CONCLUSION

The AI industry is already at a staggering valuation of $200 billion, but the same is expected to grow to $1.8 trillion by 2030, indicating a CAGR of 36.8% in 7 years! Moreover, reliance on generative AI is growing as people are now choosing to depend more on AI tools for simpler tasks.

Businesses are pivoting to AI as investment into AI by unrelated companies is surging. Thus, entry into such a market by a conglomerate like Amdani Enterprises would give the entity a significant boost.

Thus, after conducting its due diligence and carrying out rounds of negotiations, the company ought to buy CloseAI.

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[Disclaimer: This case study is entirely hypothetical and unrelated to real-world situations. It's designed for educational purposes to illustrate theoretical concepts and potential scenarios within a given context. Any similarities to actual events or individuals are purely coincidental.]