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Identifying "red flags" in a China transaction

tl_files/case_studies/RedFlags.gifEngagement Rationale:  We were engaged by a U.S. private equity sponsor to perform due diligence on a Shanghai-based manufacturer.  The Chinese company had two divisions and was divesting the slower growth mechanical division in order to concentrate on the faster growth medical one.  The Client wanted to understand the overall health of the business and had some specific concerns regarding profitability and management capabilities. 

Comprehensive Company Review

We conducted a comprehensive analysis of the target company's manufacturing operations, quality and stability of management, product mix, customer and supplier base, internal systems, etc.  At the Client's request, we performed detailed cost structure analysis on three representative products.  Our findings provided insights on the efficiency and profitability of current operations and to what extent improvements could be quickly made post-transaction.

Key Transaction Issues

We highlighted a number of transaction issues for the Client to consider in whether to "go or no-go" the transaction, including:

  • Assessment of current managers and new management needs in the new organization
  • Utilization, capacity, and capital expenditure needs
  • Ability to scale the existing business model and potential improvements
  • Business development considerations for the buyer

Our due diligence identified areas of concern for the Client and our analyses spurred the Client to reassess the risk and ultimately decide not to move forward with the transaction.