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

Your answer
1. Competitive environment
2. Personal Care growth projection is an outcome of assessing the market and our
competitive position within the market. It is not a high-level analysis to use as a pillar of your
framework.
4. Company attractiveness
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


Question 2 of 7
Your answer
3. Hair
4. Face
5. 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.


Question 3a of 7
Your answer


3. Hair
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.
Write your answer here:


Question 3b of 7
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.
Question 3c of 7
Your answer
hair segment is growing fastest and has maximum multiples paid
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 dominanc

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


Question 4 of 7
Your answer
3. Segment market share and RMS
6. Customer size and profitability is important to understand the stability of their book of business, but
again less important than the company's position and profitability by segment.
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
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.
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)

Question 5a of 7
Your answer
5. Competitor sales by segment (2.0d)
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?
Write your answer here:
Question 5b of 7
Your answer
Hair is a highly fragmented market Skin is a concentrated market.
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 opportunitythe markets it plays in are not sufficiently attractive Do not
pursue PCC opportunityit 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
Question 6 of 7
Your answer
4. Pursue opportunity at a fair price and focus on the Skin 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)?
Write your answer here:


Question 7 of 7
Your answer
5
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