ANCA Group

Market Research & Analysis

Background & Scope

Whig Capital was retained by the ANCA group – one of Australia’s leading manufacturers – to assist with internal due diligence of a potential acquiree. Over the course of two months, Whig Capital undertook a comprehensive market research and analysis project to inform ANCA’s evaluation. The aim was to establish the extent to which ANCA could broaden the company’s revenue base, or capitalize on any new business opportunities, following acquisition.

Research Considerations

“The first important fact about growth is that in the hands of a competitive disadvantage, growth destroys value”.

by Bruce Greenwald and Judd Kahn

Synergies from acquisition inherently rely on the presence of a competitive advantage. Otherwise a potential acquirer may reproduce on its own anything that could be done following acquisition. Without synergies, the potential upside is limited to the extent that new ownership may eliminate any negative impact of the existing management team, or improve operational effectiveness. The potential benefit of such an acquisition is measured by the anticipated cost savings.

If a company fails to exhibit a durable competitive advantage, then any investment in new product lines, marketing capacity or territorial expansion, will fail to create value for shareholders. No matter how rapid the growth – or enthusiastic the management team – any increase in revenue will only generate returns on capital that are equal to the cost of raising it.

In contrast, growth under the protective umbrella of a competitive advantage will always create value for shareholders. The payoff to investing in any new business opportunity, therefore, is not earnings per se, but earnings that exceed what one would earn on an alternative investment of equivalent risk. Returns earned over and above this opportunity cost of capital is what creates value for shareholders.

The three sources of a durable competitive advantage are: supply-side, demand-side and economies of scale. Supply side advantages allow a company to deliver its product or service more cheaply than its competitors. They are generally rooted in proprietary technologies, which are protected by patent, organisational experience or both. Demand side advantages stem from a captive customer base, caused by strong consumption habits, high switching costs, or difficulties in searching for substitute providers. Economies of scale are found in industries that exhibit both homogenous technology and declining unit costs, as output volumes increase.

Project Methodology

Whig Capital completed a host of primary and secondary research, including interviews with company management; review of industry reports and trade journals; and the cataloguing of various product, competitor and customer capabilities. This was followed by critical analysis of historical revenue figures to ensure that customer revenue and gross margins reflected underlying business performance. Customers were then categorised according to major industry segment, and historical revenues ranked over single and multiple time periods, to deduce the level of concentration in company sales.

Whig Capital then sought to understand the needs of each customer segment and key downstream drivers of demand. This was followed by dynamic industry analysis to identify the scope of competitor strategies, intensity of competition, and average industry profits. In particular, Whig Capital completed a comprehensive Porter’s Five Forces Analysis; Market Segmentation, Targeting & Positioning Analysis; and Comparative Industry Value Chain Analysis. All findings were then used to derive and evaluate a unique set of strategic business opportunities for the potential acquiree.

Findings & Conclusions

Preliminary investigation revealed that the potential acquiree did not hold a durable competitive advantage. Accordingly, any attempt to grow company revenues would require exploitation of a new strategic opportunity. Strategy, in this sense, refers to the identification, creation, and management of barriers to market entry. The pursuit of growth through strategy is what keeps competitors at bay and generates excess returns on invested capital. A potential set of opportunities was derived from the evaluation of competitive industry forces, existing business strengths and competencies, and the identification of underserved customer needs.

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Market Research & Analysis