Case Interview Questions #00027: Your client CEMEX (NYSE: CX) is the world’s largest building materials supplier and the third largest cement producer. Founded in Mexico in 1906, the company is based in Monterrey, Mexico. CEMEX has operations extending around the world, with production facilities in 50 countries in North America, the Caribbean, South America, Europe, Asia, and Africa.
Recently, the senior management of CEMEX USA is considering acquiring Miami Cement Company, a small local firm in southern Florida. You have been hired to advise them on the possible acquisition. What factors should be considered? After considering these factors, would you recommend the acquisition or not?
Additional Information: (to be given to you if asked)
The target firm Miami Cement Company is currently profitable, with margins of 5%. Your client CEMEX USA’s margin is 15%. Your client attributes its higher profit margin to economies of scale in trucking and mixing, and a stable labor force.
Both companies compete in the same geographical market, the Southeastern U.S. Your client’s customers are large construction firms and contractors generally in the office and commercial building construction business. The smaller firm Miami Cement Company sells mainly to other small businesses and contractors, such as swimming pool installation firms, patio builders, etc.
Additional research shows that the smaller customers for concrete are growing, while the major office building construction market is stagnant. The smaller firm Miami Cement Company has strong contacts with many local customers, and is often the preferred supplier due to their customer responsiveness.
Your client is not able to fund the acquisition internally, but could obtain bank financing at a rate of 10%. Similar acquisitions generally are made for two to three times current sales of the target firm.
From a simple financial point of view, the acquisition is not attractive if there are no synergies between the two firms.