The Carlyle Group: The Acquisition of Schlosser Forge Company
19 Pages Posted: 15 Apr 2010
Date Written: April 14, 2010
Abstract
This case describes the process of value creation in private equity. Carlyle, a leading private equity firm, had acquired two of the four largest forged rings manufacturers, FMI and Firth Rixson. Following the acquisitions, Armand Lauzon, the new CEO, and David Mortimer, the COO, had worked tirelessly to improve operational performance and to realize the synergies across the two companies.
By the summer of 2004, significant improvements had been achieved in profitability, customer satisfaction, productivity and working capital. At this point, Lauzon had set his sights on Schlosser Forge. The large forging capabilities at Schlosser would provide new aerospace and commercial opportunities by opening up the top-end of the ring size range. In addition, annual cost synergies of $5 million were foreseen.
Carlyle had approached Schlosser three times since 1998, however the discussions had been terminated due to disagreements on valuation. In May 2004, discussions redeveloped because Phil Schlosser demonstrated renewed interest in selling his company. The CEO of Schlosser, Jerry Katz, believed that an agreement could be reached at $55 million.
Some in Carlyle were concerned about the potential Schlosser acquisition. At 11.3 times pre-Synergy EBITDA, the enterprise value was double the multiples paid for FMI and Firth Rixson. Furthermore, the Firth Rixson deal was on track to deliver 5 times the money invested, a good return by any standard. These gains would be placed at risk since the successful realization of the synergies identified was not certain, despite the proven management team. Finally, the acquisition would extend the holding period. Three and a half years after the FMI acquisition, it was getting late in the game.
With these considerations in mind, Bud Watts and Cam Dyer in the Carlyle deal team had their last meeting with the Firth Rixson leadership team, Armand Lauzon and David Mortimer, before they made their final recommendation to the Carlyle Investment Committee. Should Carlyle acquire Schlosser Forge? Or should they start preparing Firth Rixson for an exit?
Keywords: Private Equity, Leveraged Buy outs, Process improvement, Operational Performance
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