1. Berkshire brought expertise in finding the right financing structure and operational and strategy related to the retail and manufacturing industry. Berkshire managers believed that the equity portion of a capital structure should be at least 25% to order to achieve the desired results as far as return and to show true commitment to the lending base. When determining the capital structure, they also seriously took into account such questions as: Is this the appropriate amount of leverage for a business of this type; what do the rating look like; how difficult will it be to get financing and what about financing costs? Once Berkshire had taken an equity position in a firm, Berkshire would help the firm management by prioritizing key objectives, improving organizational design, building a quality team of managers and aiding the integration process of a subsequent acquisition.
Berkshire would add value up front with extensive due diligence, addressing opportunities for companies, and aligning strategically and building a strong relationship with management.
Since Carter’s was an established business, they would receive a great deal of care and attention up front and then moderate to low oversight during the rest of the investment until exit. Berkshire also added value by exiting most of their investments by sale of a company instead of the typical IPO used by most private equity firms. Berkshire was more apt to facilitate an IPO in the middle of ownership with the intention of staying involved with the management and helping the company grow. Berkshire’s deep acquisition experience and familiarity with capital markets enabled very attractive financing to be put in place, as Berkshire solicited the views of a range of potential partners including Merrill, First Union, Lehman etc. in order to ensure the optimal financing structure.
In addition, Berkshire had met with the Carter Management on two occasions and had a strong, open line of communication. Therefore, Berkshire should have a strong understanding of Carter’s goals. Ultimately, Berkshire used “internal and external resources to undertake a thorough planning process that both built a road map to guide management’s operating execution, but also served to coalesce the team around the significant potential inherent in the opportunities ahead of their company.”
2. Berkshire had developed a focus on “building strong, growth oriented companies in conjunction with strong equity incented management teams.” Carter’s was definitely financially strong as mentioned in the last question and growth orientated, as they recently diversified into the discount market for baby and young children’s apparel and were looking to move into the two to six year old playwear segments . They had shown success in a competitive, non-seasonal industry. Carter’s management team was disciplined and working to increase operating efficiencies by shortening development cycle and aiming to use 100% offshore sourcing in the near future. Management was also set on building on relationships with major customers (top eight wholesale customers represented 74% of wholesale revenue), and to continue to build profitable retail outlet stores.
Berkshire liked the fact that Carter’s was a strong recognizable brand that could be leveraged across multiple channels and be viewed as a consumer products company. The only problem could be that Goldman Sachs was using a staple on financing structure. Berkshire felt this structure limited their ability to get an edge in the bidding process by bringing more creative financing deals to the table with Carter’s Investcorp wanted to exit the company in mid 2000 because they were at the end of a 5 year investing period and wanted liquidity in order provide quality returns for investors to set the stage for future financing.
They could of went public (IPO) with Carter’s in 2001 but it would take over a year to exit the situation after the IPO and the IPO market was at a standstill. In addition, in summer of 2001 Carter’s was on the path to operational and financial success. From 1992 to 2000, the company increased revenue at a compound annual growth rate of 9.5% with EDITDA increasing 22.1%. Since Carter’s was bought by Investcorp, the firm had a improved brand recognition, a lower cost structure, expanded into the discount channel with Tykes, and the movement of some manufacturing operations offshore to reduce cost. These improvements and Carter’s ability to weather economic swings made the company a attractive commodity among financial buyers.