Case 3: C.M.

Burns Manufacturing Company

• Type : Consolidation / Synergies
• Difficulty: Medium
• Industry: Consumer Electronics / Manufacturing
• Firm Format: Bain & Co
 Difficulty: Medium
Industry: Consumer Electronics
C.M. Burns Manufacturing Company
Type: Consolidation / Synergies
Bain & Co.
Problem Statement Information Provided Upon Request
Scenario: C.M. Burns Manufacturing Co., a $20B • Product mix is the same, meaning that each
annual revenue consumer electronics company has company generates the same proportion of
just purchased Smithers Electronics, a $4B annual revenues from DVD players, Blu-ray players,
revenue consumer electronics company, and is busy TVs, MP3 devices, and headphones.
integrating the two firms. Both companies spend a • Both manufacture proprietary goods and each
significant amount of money on branding and has its own operations.
marketing their different products. Both are present
• Both sell products via retailers, neither sell direct
in all of the major channels, and both produce DVDs (neither is considering direct sales).
and Blu-Ray players, televisions, MP3 devices, and
• Products are not differentiated in terms of quality
headphones.
or functionality, but branding sets them apart and
The CEO of Burns, Charles Montgomery Burns, has distinct customer segments prefer one brand to
come to your firm to request help on identifying the other (though this does not matter which
$350M in near-term synergies in order to justify the segments for this case).
stock-price premium that Burns Manufacturing paid • These are both US-based firms with operations
for the acquisition of Smithers. in the US and both exist in all major channels
across the US.
• Growth of each company is stable.
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Guidance for interviewer
Directions for this case moving forward
The interviewee should immediately recognize a couple of things:
• First, because their product mixes are the same and the brand is the differentiator, interviewee
should get straight to cost synergies, as revenue synergies are not likely to be relevant in this
case. Feel free to challenge the interviewee if they go after revenue synergies. If they provide
decent justification, then give them due credit, but then ask: what other synergies are available?
If they ID cost synergies, push them forward in the case, but if not, then continue to challenge
until they see cost synergies as the clear path.
• Great interviewees will immediately notice that Burns Manufacturing Co.’s revenues are 5X those
of Smithers’. This ratio plays an important role in the case. If the interviewee does not see this
right away, then give them time to ID this element further down the road. When they absolutely
have to know it, then lead them to this insight through targeted questioning. Bonus points for
anyone who sees it very early in the case, though.
A solid framework will:
• Focus mainly on cost synergies, breaking costs into its various components: FC and VC, down to
PPE, back office, packaging, components for electronics, labor, operations, marketing, etc.
• Have a step for quantifying the impact of each of the interviewee’s findings.
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Exhibit Guidance for interviewer
Guidance to Exhibit 1
Once the interviewee asks about costs generally, go ahead and give them Exhibit 1, detailing the
specific cost categories. If they do not ask for this, push them in the general direction. Give them this
cost info before giving them any other specific information.
Somewhere in here the interviewee needs to have recognized the 5X multiplier in the revenues of the
company, but don’t just give it away yet.
Once you give the interviewee Exhibit 1, they may reason through it. Pay attention to their logic and
take note. If interviewee wants to tackle marketing, note that it’s not a bad idea at first glance. But
then ask him/her what we know about these companies and marketing (these are companies who
distinguish themselves through their brands, not differentiated products—can’t easily cut marketing).
Plus, marketing won’t cut along the lines of the 5X multiplier the same way packaging and
components will—because these things are proportionally related to the sales volume, whereas
marketing is not.
Interviewee may also mention labor or distribution. If he/she wants to tackle this issue, say that labor
and distribution is optimized and there’s not a lot of room for improvements in that area.
Interviewee should focus in on components and packaging; may also mention overhead, but again,
overhead does not match up with the 5X multiplier as well as components and packaging.
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Exhibit 1: Cost Categories Across Each Company
Cost Category CM Burns Smithers
Marketing $6,000M $1,000M
Distribution $5,000M $1,000M
Packaging $1,600M $400M
Components $2,600M $800M
Labor $1,000M $200M
Overhead $1,600M $400M
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Exhibit Guidance for Interviewer
Exhibits 2 - 4
As stated earlier, interviewee should prioritize packaging and components. Bonus points to the
interviewee who prioritizes components explicitly over packaging because of the cost savings he/she
can see from the aggregate numbers.
The theory behind these cost synergies is that if CM can buy for a lower price (which it looks like it can),
then now that Smithers is merged with CM, Smithers should be able to get the same price (increased
buyer power, decreased supplier power).
The cost savings look like this (if interviewee can’t eyeball exact numbers, go ahead and tell them):
Components
Smithers Where cost
Cost Category CM Burns Savings
(current) should be
Molded plastic $600M $200M $120M $80M
Chips, proc. $800M $200M $160M $40M
Metal casing $1,200M $400M $240M $160M
Total savings if CM renegotiates w/ Smithers’ component suppliers: $80 M + $40 M + $160 M = $280 M
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Exhibit Guidance for Interviewer Cont’d
Exhibits 2 - 4
A similar process can be done for the packaging costs, which will yield smaller results.
Interviewee should notice on this analysis that cardboard is different from recycled materials
and that without more information, there is nothing to be done about this category.
Smithers Where cost
Cost Category CM Burns Savings
(current) should be
Styrofoam $160M $80M $32M $48M
Recycled materials and cardboard can‟t be compared
Plastic $690M $160M $138M $22M
Total savings from re-negotiating packaging costs: $70M
If the interviewee wants to analyze overhead costs, let them do the math, but then challenge
the feasibility to use the 5X multiplier in this situation—we don’t have enough information to
know if the costs are proportional with the revenues (unlike components and packaging)—so
these are not realizable savings
Smithers Where cost
Cost Category CM Burns Savings
(current) should be
Salaried Staff $2,000M $120M $40M $80M
IT $1,400M $280M $280M $0M
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Exhibit 2: Components Costs
C.M. Burns Manufacturing Co. Smithers Electronics
3000 900
800
2500
600 700 200
2000 600
800 500 200
1500
400
1000 300
1200 200 400
500
100
0 0
Molded plastic Chips, processors, etc. Molded plastic Chips, processors, etc.
Metal casing Metal casing
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Exhibit 3: Packaging Costs (in millions)
C.M. Burns Manufacturing Co. Smithers Electronics
2000 500
1600 400
160
80
1200 300
690
160
800 200
400 750 100
160
0 0
Cardboard Plastic Styrofoam Styrofoam Plastic Recycled materials
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Exhibit 4: Overhead Costs (in millions)
C.M. Burns Manufacturing Co. Smithers Electronics
2000 600
1600
200
400
1200
120
800
1400 200
400 280
0 0
IT Salaried staff IT Salaried staff
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Additional
Brainstorming section (if you have time)
Some interviewees will work through the case very quickly—if they do, ask them to think about long-term
synergies available to the company
Now that we’ve considered short-term synergies, what long-term synergies might we have?
Possible long-term synergies:
• Distribution: using economies of scale, we should be able to decrease distribution costs for the
combined company below a 5-to-1 ratio (as it currently is)
• Overhead: consolidating our various IT systems and corporate functions will be a long project,
but should also allow us to decrease costs as processes are streamlined
• Labor: another long-term project, labor costs should go down as manufacturing operations are
brought together—removing excess capacity will allow labor costs on a per-unit-basis to go
down over time
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Conclusion
Recommendation Next Steps
Re-negotiate supplier contracts so that raw Examine contract requirements (long-term
materials for Smithers Electronics will cost the or no?)
same as raw materials for CM Manufacturing
Co
Identify relevant suppliers and reach out to
Components: $280M in savings them with new deal information
Packaging: $70M in savings
Begin a long-term study of possible
This results in exactly $350M in savings synergies to be obtained from distribution,
overhead, and labor
Long-term synergies to consider:
Distribution
Overhead
Labor
Risks:
Long-term supplier contracts
Recommendation assumes same level
of quality between suppliers/goods
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