![We believe that given the market conditions, the most lucrative investment strategy
would be to acquire the 51% stake in TeamSystem, bring Palamon Groups value added,
connections, and management experience to the company, take the issuance of 46 billion ITL in
debt from Deutsche Bank to fund ongoing operations, and then seek to acquire another company.
The case study cites experts having said, “Two things [will] characterize the future of the
industry – consolidation and growth.” We believe that the best way to increase the value of
TeamSystem would be offering an outright cash bid for their competitor, Esa Software. This
would be financed using 100% cash from Palamons’ war chest. Using Esa’s revenues from 1998,
we used comparable companies multiples to begin projecting future cash flows to derive an
enterprise value of 86.652 billion ITL with a WACC of 17% (Exhibit 2). We then decided that a
proposed outright cash bid of 91 Billion ITL would be alluring enough to convince the Columbo
family to sell their ownership of the company. Ranocchi would run the new combined company,
and we would fire his supporting management staff. They were incapable of performing in a
smaller company, and we need a talented staff to run this larger organization. We would bring in
technology experts, and work on finding synergistic opportunities between the two companies
customer bases. Given market share information from the case, we believe that our new
company, Esa TeamSystems, would control no less than 26.66% of the Italian payroll software
market (Exhibit 5).
Once the logistics of the proposed merger are finalized, we then can start to build
momentum and investor confidence in international markets for this cash cow Italian tech
company. Palamon would own 71.97% of the combined companies from the merger (Exhibit 3).
The synergistic opportunities we would look to exploit would be up-selling each of the
company’s individual products to the other company’s customer bases. Esa Software, founded in](https://image.slidesharecdn.com/57017955-798f-4307-817e-474fdf1f5713-150501130804-conversion-gate01/85/INVESTMENT-BANKINGCASE-STUDY-2-2-320.jpg)
INVESTMENT BANKINGCASE STUDY #2
- 1. Tyler Sullivan,Thomas Armstrong, ColsonCastilla,Andrew Maser,Thomas Passenant Dr. Levkoff – InvestmentBanking PalamonCapital Partners/TeamSystemS.p.A.- Case Study#2 Louis Elson, managing partner of Palamon Capital Partners was considering investing in an Italian software company called TeamSystem S.p.A. in early 2000. In a rapidly changing market, TeamSystem drew great interest from Elson and Palamon for the growth prospect it had to offer. However, before actually investing any actual money into TeamSystem, Louis Elson and his Palamon colleagues had to consider a few specifics in the process to purchase any of TeamSystem Software Company. Elson set up a proposal to the rest of Palamon to assess TeamSystem completely, value the company, recognize the major risks in investing in such a company, recommend investment terms, and go over exit strategies. TeamSystem S.p.A., since it’s founding in 1979 has given its customers excellent service in being one of the primary providers of accounting, tax, and payroll management software in Italy. Over the years TeamSystem has been getting nearly 95% of their customers to renew their maintenance contracts every year. Under ideal leadership of CEO Giovanni Ranocchi, TeamSystem has built up a major base of almost 30,000 firms and owning 14% of the share in the Italian market leading the company to be one of the top European companies. Along with high earnings of 9.5 million in European cash and superb customer service, TeamSystem holds itself to a high standard of being a top tier company in Europe, keeping their software current and giving their customers the ability to remain up to date in the rapidly changing regulatory setting, giving them the opportunity to receive upgrades in software by paying a yearly maintenance fee that TeamSystem collects.
- 2. We believe that given the market conditions, the most lucrative investment strategy would be to acquire the 51% stake in TeamSystem, bring Palamon Groups value added, connections, and management experience to the company, take the issuance of 46 billion ITL in debt from Deutsche Bank to fund ongoing operations, and then seek to acquire another company. The case study cites experts having said, “Two things [will] characterize the future of the industry – consolidation and growth.” We believe that the best way to increase the value of TeamSystem would be offering an outright cash bid for their competitor, Esa Software. This would be financed using 100% cash from Palamons’ war chest. Using Esa’s revenues from 1998, we used comparable companies multiples to begin projecting future cash flows to derive an enterprise value of 86.652 billion ITL with a WACC of 17% (Exhibit 2). We then decided that a proposed outright cash bid of 91 Billion ITL would be alluring enough to convince the Columbo family to sell their ownership of the company. Ranocchi would run the new combined company, and we would fire his supporting management staff. They were incapable of performing in a smaller company, and we need a talented staff to run this larger organization. We would bring in technology experts, and work on finding synergistic opportunities between the two companies customer bases. Given market share information from the case, we believe that our new company, Esa TeamSystems, would control no less than 26.66% of the Italian payroll software market (Exhibit 5). Once the logistics of the proposed merger are finalized, we then can start to build momentum and investor confidence in international markets for this cash cow Italian tech company. Palamon would own 71.97% of the combined companies from the merger (Exhibit 3). The synergistic opportunities we would look to exploit would be up-selling each of the company’s individual products to the other company’s customer bases. Esa Software, founded in
- 3. 1975, specialized in terminal technology, productive systems integration interfaces, industrial IPC’s, and other computer system technology. We believe that bundling Esa Software’s hardware technology with TeamSystem’s payroll automation would create an opportunity for retail clients to use our new merged company as a one stop shop for all of their technology needs. With the combined market share, growth in the market would be immanent as our top line revenues would continue to grow at the 3 year average of 15%, projected out until 2002, continuing on at 6% growth from there. Esa Software had also established itself in other foreign markets, leading us to believe that TeamSystem’s products could follow suit and begin taking hold in those same markets. This added value reinforces our 15% top line sales growth projections as we push products into new markets. Looking at the fractured market in Italy, we believe that pushing forward with the acquisition is the best possible option for long-term growth. Acquiring a competitor was the most logical way to keep up with changing technology in the market. By absorbing Esa’s operations into our own, we believe we gain a competitive advantage over other companies and establish ourselves as the market leader in Italy, making ourselves the most alluring candidate for an IPO to international markets. TeamSystem will borrow 46 billion ITL from Duetsche Bank, in a seven-year loan, at an initial cost of 1.0% plus the Italian government bonds rate, or 6.87%. Deutsche Bank will take TeamSystem’s assets and future cash flows as collateral. There will be a three-year principal repayment holiday, and debt repayments will begin in 2003. By projecting future cash flows for the years 2003 through 2006, we calculated that the debt service coverage would not drop below 1.47x (Exhibit 4). Palamon Capital Partners will guarantee the loan alongside TeamSystem. The debt service coverage ratio in year 2005 will be 1.60x, and the IPO will seem more attractive after a large portion of the debt has been paid down. The 46 billion ITL will be used for capital
- 4. restructuring of the company. TeamSystem currently has no debt on their balance sheet and needs to use leverage to increase their market share organically. The company will focus on their main product lines and will sell off distracting property investments. Proceeds from the real estate sale can either be used to pay down the Deutsche Bank debt or dividends to existing shareholders. The merged company, Esa TeamSystem, will form in 2000 when Palamon Capital Partners offers Esa Systems 91 million ITL for 100% stake in the company. Esa Software is a solid acquisition target because of their strong cash flow and growth opportunities. After the merger, Esa TeamSystem will have a market share of 27% of the Italian payroll software industry. A discounted cash flow analysis puts a 304,855 million ITL equity value on Esa TeamSystem. Our 72% stake in the company will give us an estimated 228,641 million ITL of the equity. Given the dynamic of this company and the unique product mix, we believe that these projections are reasonable. We chose a WACC of 12%. We believe that the size premium of the merged software company justifies a lower discount rate. Our plan is to file an IPO with Esa TeamSystem in 2005 in which we will offer our entire 72% stake. We believe that the IPO would be valued at 228,641 million ITL, giving our group returns on investment of 55.79%, and annualized return of 11.16%. As we said before, we believe that Esa TeamSystem would make for the most attractive IPO to foreign markets because of our massive market share, and value added through the acquisition of Esa Software and the combination of the two companies product mixes and customer bases.