Predator Company (Predator) and Target Company (Target) had been fighting each other fiercely for market share over many years. A new threat to both companies was foreseen. Far East based companies were expected to expand from their domestic base and compete internationally within the next five years. Currently, Far East products were of inferior quality but the gap was expected to be eroded. The CEO of Predator estimated that it would take around five years before the new competitors posed a real threat. A review of the latest forecasts for production technology revealed that there would be a position where significant economies of scale were achievable. The lower costs would allow both unit costs to be competitive against the expected Far East competitors and for additional investment in differentiation. However, Predator’s volumes were too small on their own and hence the company would need either to acquire several smaller companies or Target.

By chance, the CEOs of Predator and Target met at an industry conference and informally discussed the prospects for their industry. The CEO of Target had come to the same conclusions as Predator’s CEO about impending changes in the nature of competition.

Although he had not thought about economies of scale, he did accept the scenario outlined by Predator’s CEO. They agreed to continue their discussions but, for the moment, agreed to leave open the question of whether an acquisition, merger, some other form of cooperation, or none at all, might be appropriate.

Predator had changed significantly over the last five years. It commanded a 23% market share with a turnover of US $450 million, net profits of around US $45 million, positive cash flows of around US $40 million and all borrowings had been repaid. Relationships with the financial community were excellent as reflected in the stock (share) price increase of more than 400% over the last five years on the New York Stock Exchange (NYSE). Analysts reckoned that Predator could easily raise around $650 million through a combination of additional shareholder funds and borrowings. Production facilities were modern and managers from all functions had benefited from personal in-depth development programmes. Production capacity was around 85% utilised and the company growth rate had been around the industry growth rate of 8% per year.

Predator’s workforce had reduced to 9,000 people and was now stable. They were organised according to a functional structure and led by a highly professional senior management team located at head office. Strategic and financial controls were tightly centralised. This was complemented by a highly professional administrative team.

Predator sold premium-priced consumer products through dedicated, but non-owned, distributors around the world. End customers valued high quality. This was maintained by internal product development. Market growth rates had dropped over the past few years and were expected to remain constant at about 8% per year.

Predator had accumulated the following information about Target. The company was privately owned but had a wide range of shareholders. Its financial gearing was believed to be low. Therefore, it had little contact with the financial community in general. For the most part, Target’s product range competed directly with Predator’s and was of a similar quality. Target had a long-term relationship with an external R&D company which developed their products.

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Target had a small highly professional senior management team but, while maintaining overall strategic control, had devolved much of the responsibility to the product lines around which the company was structured. Production facilities were adequate and running at about 80% of capacity, but a little older than Predator’s. The administrative teams within the product lines were highly competent.

Target generated a turnover of around US $350 million, positive cash flow of US $25 million, and profitability of US $30 million through its 8,000 employees. Target sold its products globally through external wholesalers which also sold products from other companies.

Predator’s CEO believed that the joint production requirements of Predator and Target would allow investment in the next generation of production technology that would provide the economies of scale necessary to keep the expected Far East competitors at a significant disadvantage. Predator and Target’s products were such that they could share such a facility even if they did not share a common product design.

Question- we have to been as an expert in the use of characteristics mapping, been asked by Predator’s CEO to critically review the case study information and provide a case for and against acquiring the Target.