Background and Challenge

A private equity (PE) firm was evaluating an investment in an industrial distributor that has experienced impressive annual growth since 2003. The PE company believed the company could complement an existing portfolio company; if combined, the two companies could create a highly profitable specialty distributor with significant scale.

L.E.K. Consulting was selected to conduct due diligence on this company, with particular focus on long-term market outlook, the company’s position in the value chain (from the perspective of customers and suppliers), and some specific potential market risks.

Approach and Recommendations

As part of the project, our team found that the company’s sales were projected to increase in the near-term, driven by market rebound. Importantly, stabilization of some specific market threats had the potential to help the company maintain favorable gross margins. Primary research also revealed that the target company is generally well-regarded, especially in its core market. However, the company could improve fundamental operations to drive growth (i.e. enhance customer service, increase sales with existing customers).

Our team also found that the company was favorably positioned against competitors for growth in its core segments and was noted as a reputable regional player by suppliers.

Results

Based on the case findings, our team recommended that our client proceed with the investment. Within four months of the project’s completion, the PE firm acquired the company, creating a sizeable, diversified distributor.