Framework for a McKinsey, Bain, BCG Acquisition Case
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- เผยแพร่เมื่อ 1 ธ.ค. 2013
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An acquisition case which demonstrates the challenges of breaking out benefits and costs in a deal.
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good structure, but I would like to know how did you get this 20-year lifespan to the gold mine. thanks!
Thanks for posting the video! Your framework is very useful. I've been trying to play zentris with the strategy and internal capabilities pieces for months.
Great episode, and will be useful for anyone preparing for case interviews, teaches how to communicate, question, reason and answer, in tied firmly together. Thanks s lot FC!
Thx for your video, really like your style and the passion you bring into it!
Though, I have 3 small issues I would like to clarify/discuss with other viewers:
1) In your initial information you stated "...fixed costs of $25M per ANNNUM". Am I right that you somehow just overlooked it in your calculation and started to depreciate!?
2) Also you mentioned in the beginning, the option of expanding will kick in after 6 Month. So one would need to split up Y1 into Y1_1 (mining th first 60,000ounce) and Y1_2 (producing the other half of 60,000ounce + 10.000ounce of the additional 20,000ounce)
3) Consindering the selling price of the mine in your ROI calculation, you use an P/E multiple of 7 even though you buy it for an 2.1 multiple. Wouldn't it be more apropriate either to use a similar multiple for the exit or at least elaborate on your higher exit multiple.
Totally agree with you
Agree
May I ask how did you come up with a 2.1 multiple at the entry? Thanks~~
yes ,you are right
Agree with you, while the video was played throughout the video, more questions n confusion surfaced. It could have been better if it’s clearer.
Stumbled upon this case and thought you did a great job presenting your approach to solving it concisely and neatly. Thx
Thank you. Glad it was helpful
I see that this is not a simple mathematical problem to solve, but a question that requires a 360 degree method of analyzing the entire situation, probing, searching to find a complete answer. Everything needs to be considered, the political climate, inflation, the expected ROI, etc... Good discussion, challenging question.
Eloquency at its best! I really wish to learn to be able to articulate like Michael. Thanks again FC team for sharing this very insightful episode.
You are very welcome, Hercule
Thank you for posting this video
Like the other commenters, I do not understand the fixed cost component. The "Annum" language appears to me as $25M each year in overhead. Running with this assumption, additional costs account for $75M.
From my managerial accounting class, I recall depreciation shields and their usefulness in comparing two options. I am getting confused about what you mean by depreciating the $25M over the life of the asset. I would do something with tax rate as in depreciation. If this $25M is goodwill, then I believe the item would be depreciated.
Love your videos!
Bobby Mulligan Thanks for the heads-up Bobby. We will adjust the video to show how we arrived at the number.
amazing step-to-step to solve the case from first principle. Thank you for making it available.
Glad it was helpful!
Thank you for posting this video! Great content.
Thanks for the video, a solid case for an ROI calculation. Why have you deducted the $20 million from option 1? The business case explains that to increase the capacity of the mine, $20m would be required, however option 1 is the status quo performance of the mine and thus the upgrading cost should be left out of the calculation. This would change the answer of the profit comparisons and make option 1 the more attractive investment for Goldman Sachs.
I agree with u
Furthermore, at the fixed cost, there is a mistake when he multiple 3 in option 1
Thank you FC! Really great content!
What a case! You make it sounds easy... Hope I get to your level one day :)
I love your content, the quality is amazing
Thank you for your kind words, Bruno
Thanks Michael, this is very useful for me.
You are very welcome, Lucas
Thanks for information, I would be subscribing.
If the price of gold is expected to rise but with a high risk, can't the mine sell futures on its gold? It could provide a guaranty even though it might generate less profits.
Thank you for posting such a gr8 video. I have a quick clarification question
While calculating Fixed Cost for Status quo option you calculated as ($25M/20)*3 and again multiplied it by 3. However while calculating Fixed cost for Y2 &Y3 with expansion option Fixed option is calculated as ($27.5M/20)*2 for 2 years. Can you please elaborate on why you multiplied 3 twice in first option.As per my understanding it should be multiplied only once.
I agree - in first case scenario $3.75m is already multiplied 3x so it does not have to be multiplied again. I would elaborate on that by also asking why are we taking away the $20m for option price in the first case scenario? It is my understanding that first case scenario is the one without the option.
imo it's stated as $25M costs per ANNUM. Therefore here one shouldn't depreciate at all. Assuming its $25M over 20 years, I'ld agree with you as well: $3.75M = $1.25M *3. So it looks like a typo
agree on the fixed costs per ANNUM
Michael makes this videos so interesting, a magnific source for learning storytelling, as well as analitic tools. Great job by firms consulting
Thank you, Jose.
When calculating profits on the upgrade option, shouldn't we divide the Y1 status quo profits by two since we lose 6 months of operations while upgrading the mine?
Really good content!!!
Thank you!
You are very welcome, Thao
1. you already said fixed cost is $25MM/year, how can it be overall capital investment? doesn't it automatically mean it's the cost per year?
2. why did you add the selling price? what selling price is that? selling the mine in 3 years?
If gold price goes up when inflation goes up and dollar price goes up when inflation goes up, then price of gold should be proportional to price of gold (opposite of what was said at 13:30). Thoughts?
another amazing indepth case
Thank you.
Wait! the case says that expansion development would take 6 months to be completed, whereupon the mine would immediately be operating at this new capacity. Therefore, I assumed that when you provided the ROI Y1 with Expansion Options, you were supposed to allocate the numbers considering only 6 months of status quo operations, and the remaining 6 months with the increased fixed and variable costs of the expansion. (example: instead of $800 in variable cost for year 1, it would be $400 for the first 6 months, and $460 for the remaining 6 months). I see that you only applied the increased costs starting Year 2 and 3. Am I missing something?
Hi Daniel, Thank you for your comment. We have well over 6200 episodes across our platforms (StrategyTraining.com etc) so unfortunately do not remember the details of this particular episode.
Hey Daniel, I would generally agree with you, that you would have to split Y1 so thatyou have half a year of pre-expansion cost and earnings and half a year of post-expansion cost/earnings. However, you cannot split the variable cost, as it is unit specific, so for Y1.1 you would use fix: 12.5M var. 800 and Y1.2 fix 13.75M var. 920.
@@firmsconsulting Lol you have the video right here - look at it and answer the good question Daniel posted. You made a mistake in the set-up for this case and now just avoid actually answering to it...
@@asdasdd320 The person who manages their social media accounts probably doesn't have the knowledge regarding to cases would be my guess
@@alexsze9136 Well that just highlights that the company is not providing support / is managed badly if people cannot get valid feedback to questions. Answering this question would take them quite little time just checking what the video says..
Thank you for work!!!
You are very welcome
if the total development time to "upgrade" the mine is 6 months, shouldn't the calculation at the end be based on original figures for .5 yrs and then new figures for 2.5 yrs? Right now the video shows 1 yr and 2 yrs.
Also, is the mine extracting 120,000 oz, 0 oz, or some number in between during the development period while there is construction?
Yes.
agreed! You're right
wow doesnt even mention life of mine. If there are only 1mm ounces of proven reserves in the ground, thats only an ~8 year mine life (at that extraction rate) and with land reclamation / environmental cleanup costs at the end, there is likely no terminal value
You should discount the profit from the 3 years back to year 0.
My man If i was told i can have ROI of 1200% the conversation would have been revolving around your valuation technics or I would fire you right away. That is just wrong to use multiples on sale without understanding the multiple on a buy. Hilarious. Nevertheless, good framework. Do the interviewers pay attention to the reasonableness of the calculations or they just want to see the logic behind it?
Any reason why the $200M purchasing price is not worked in any ROI calculation?
Hi Fabio, Unfortunately because we have over 6000 episodes we are unable to recall the details from a particular video
@@firmsconsulting I love how you just avoid answering questions on your own fuck ups :D
This case is kinda weird. I mean, if you can buy a gold mine for 200 M and sell it for around 7 times its capacity, why would you even bother exploring it? Why not buying it and reselling it immediately? You could simply take that money and invest somewhere else. I have doubts how this selling price was calculated, because it is 10 times higher even after 3 years of mining exploration. Assuming that the mine has more 17 years of exploration at a profit around 100 M per year, we can see that the new buyer won't even achieve a breakeven point after 17 years.
+Lucas C. This is emerging market, Lucas. If you act too smart, your counter party, which is the government, will look very stupid in the eye of the public. They can (and they did) enact a law to tax 90% of your profit. If again you try to be smart and structure the deal thru an offshore entity, they will just confiscate it. You can cry to US embassy, but the fact on the ground is US embassy isn't that powerful. If they were, they should be smart enough to question why someone sold you so cheaply in the first place. Foreign Corruption Act is awaiting at home :)
By the way, I also doubt the multiple in the case. The mine has 17 years of service left, with all the risk attached. I'd be surprised if GS can sell for more than $1B
What do you guys think ?
lots of wrong calculations and assumptions. I'm surprised that someone at Mckinsey partner level's math is so weak..
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Glad you found it helpful
Glad you found it helpful