• Personal Care Co.

Client, Private Equity Co. (PEC), is looking to acquire Personal Care Co.

Personal Care Co. offers a diversified product line of health & beauty products into
several market segments.

PEC would like to sell the acquisition in 2-3 years for a profit.

The new management team PEC would put in place is unsure where to focus Personal
Care Co.'s growth efforts and, therefore, which segments to target with new product
launches.

PEC is asking Bain to provide guidance to help them decide to purchase this firm or not.
They also expect Bain to tell them where to focus their efforts.

Question 1 of 7

How would you go about breaking this problem down?

Think of a high-level structure you could use to guide your thought process.

Be sure to cover all the main areas that need to be considered in order to be able to fully answer
the 2 key questions.

What would be the key elements of the analysis framework?

Competitive environment Personal Care growth projection Market attractiveness

Company attractiveness Legal and regulation environment Potential synergy with
other companies owned by PEC
 •

Question 1 of 7

Your answer

1. Competitive environment

Bain's answer

In this situation we might look to use a standard private equity due diligence framework covering
market attractiveness, company attractiveness, and competitive environment. Given the fund's
objectives, we should also keep in mind the feasibility of a profitable exit in 2-3 years' time.

Note: Private equity cases are typically much shorter than standard corporate cases. Teams need
to be able to quickly assess the situation at a high level and then focus on the issues that have the
greatest effect on the overall answer.
 •

Question 2 of 7

Let's start by considering how attractive the overall market is.

The local information services department (Bain IS) has provided you with the high level market
structure.

Which segments look to be the most attractive?

Please choose one or more options below.

Foot Oral Hair Face Skin

Bain's answer

Face and Skin are attractive as they are the biggest segments in the market.

Hair is also an attractive option as it presents the highest growth rate.

Focusing quickly on the most important items helps prioritize tasks and use your time in the most
efficient way possible.
 •

Question 3a of 7

With the help of Information Services, you have been researching recent deal activity in the
market and have compiled a slide showing profit multiples paid for acquisitions of various
businesses which operate in each of the market segments.

Which segment generates the highest profit multiples?

Foot Oral Hair Face Skin

Please reflect on why this matters to our private equity client in considering an acquisition.

Bain's answer

The hair segment has been generating the highest profit multiples, even when controlling for
market dominance (signified by a high relative market share).

Understanding the profit multiples of recent transactions is important for two main reasons:

• First, it allows the PE firm to make an assessment of a fair market price

• Second, it shows the impact on exit value that improvements in profitability might have.
In this case, improvements the PE firm can make to an acquisition's profits from the hair
segment might command the greatest premium at exit.

Question 3b of 7
Coming back to the chart you compiled, do you see any other information or insight that you can
derive from it?

Please propose other relevant insights based on the chart.

Bain's answer

Comparing multiples and relative market shares, we can conclude that a higher relative market
share is correlated to a higher profit multiple.

It means that the market values leadership positions and is ready to pay for it (in terms of
multiples).

A secondary insight could be that oral segment activity is limited. Possible reasons for this could
be a) the market is already consolidated, or b) no economies of scale exist in the segment that
would inspire consolidation.

Question 3c of 7

The partner on your case wants you to give the client a quick update on your analysis and
findings to date. Your partner asks you to draft a short email for the client (3 bullet points) with
the summary of our findings so far.

Bain's answer

• The personal care market is dominated by the Skin, Face, and Hair segments
• There is a strong correlation between market dominance and profit multiples paid
• The Hair segment generates higher multiples than the other segments, even when
controlling for market dominance

•
Question 4 of 7

Which are the most critical elements we need to understand to assess how attractive the
company is?

Please select two.

Overall profitability Profitability by segment Segment market share and RMS

Top executive biographies Total G&A costs Customer size and profitability
Bain's answer

The most critical assessment of Personal Care Co's performance is:

• Profitability by segment
• Segment Market Share and RMS

Understanding these key facts by market segment is critical to:

• Determine the core segments for the business and concentrate the investment decision on
the attractiveness and competitive position of these segments
• Understand whether there are underperforming segments which might be sold or focused
on for improvement

"Personal Care Co. is profitable in every segment."

- Head of Sales, Personal Care Co.

•
Question 5a of 7

We still need to better understand the competitive environment.

The partner would like to know what key data or analysis we need to assess the competitive
environment. She thinks you should not spend more than two days to collect required data.

Remember, deadlines can be short on private equity cases so we need to focus on gathering the
crucial data necessary to get us the majority of the way to a robust answer.

Which data is the most critical?

Profitability per competitor (1d) Competitive threats (1d) Capital cost of market
entry (5h) Personal Care's cost base (1.5d) Competitor sales by country (1.5d)
Competitor sales by segment (2.0d) R&D budget of each competitor (1d)

Bain's answer

Essential data is sales for each major competitor in our key segments (Skin, Face, and Hair).

• This enables us to map market share by segment and shows if the market in each segment
is concentrated or fragmented

Other areas we may want to look into if we had more time:

• Barriers to entry or exit in the market (includes capital cost of entry)

 • Competitive threats (including profile of key competitors and potential entrants)

Question 5b of 7

What are your key takeaways from this competitive information?

Bain's answer

Personal Care Co. has a reasonable competitive position in Skin but is a very small player in
Face and Hair.

Hair is a highly fragmented category with no clear market leader.

• Suggests lower barriers to entry and regional/private label competition

Our two largest competitors have top share position across the three categories.

• Suggests some degree of cost and customer sharing across the three lines of business (we
don't appear to have taken full advantage of this)

Given the number of industry competitors across the lines of business, it is likely that strategic
buyers would be available if PEC wanted to sell PCC in 2-3 years time.

Question 6 of 7

Given all the data and information you have seen, can you make a recommendation to Private
Equity Co.?

Should PEC pursue Personal Care Co opportunity?

Where should Personal Care Co. focus its efforts?

• Remember to think about all of the insights on the market, the company and the
competitive environment
• Think about how these impact our 2 key questions
• How would you support your answer with the key facts you have learned?

Strategy is about choices. Please check only one recommendation to Private Equity Co.

Do not pursue PCC opportunity—the markets it plays in are not sufficiently attractive
Do not pursue PCC opportunity—it does not have sufficient upside potential Pursue
opportunity at a fair price and leave as it is Pursue opportunity at a fair price and focus on
the Skin segment Pursue opportunity at a fair price and focus on the Hair segment
Bain's answer

PREFERRED SOLUTION

Acquire and Focus on Hair: High-risk, high-reward solution. Growth rates and multiples are
significant. Current market position is low and therefore upside potential exists. Share gain in
this fragmented segment seems achievable with increased focus as it does not have to come at
the expense of large competitors. Cost/customer sharing is likely with our other product lines so
we should have a structural advantage here vs. smaller, focused players. Given the multiples
realized in this segment, growth here has the highest potential reward at exit for PEC.

ALTERNATIVE SOLUTION

Acquire and Focus on Skin: Can be considered as a more conservative solution. While growth
opportunities probably exist, focus here would also need to be on operating efficiencies and
maximizing free cash flow from a more mature line of business.
Question 7 of 7

Given your findings so far, Private Equity Co. has decided to make a bid for Personal Care Co.
with the intention of growing the Hair Care business.

Before evaluating opportunities and expected profit in the Hair Care business in particular, your
team has already evaluated the value of other business units.

Your workstream is to evaluate the profit potential of the Hair Care business independent of the
other lines of business.

Private Equity Co. is planning to pay an 8.0x profit multiple for the business today. Assuming
they can grow in the Hair segment to an RMS of 0.6 in 3 years time, what returns could they
expect to make on sale at this point (Hair Care only)?
Bain's answer

Work through the data you have been given to calculate the implied price today and on sale in
year 3. PEC could expect to make ~5 times returns on the hair care business.

Common sense assumptions need to be made to enable you to arrive at a final sales price:

• Conservative estimate taken for likely exit multiple, range is 15-20x

• Hair care segment continues to grow at historical CAGR of 7%
• Leader retains market share in year 3
• Hair care profit margins remain constant