M&A case study example: Halvern Machinery
Halvern Machinery wants to buy Kestrom Sensors, its main supplier of diagnostic sensors, for $200M to secure supply and capture Kestrom's 25% margin. The CEO wants to know if the deal makes financial sense. The full solution is below: the structure, every exhibit, the math, a model answer and the mistakes to avoid.
- Type
- M&A
- Difficulty
- Easy
- Length
- About 30 minutes
- Format
- Interviewer led
The case
The interviewer reads this aloud. Try it before you read on.
Our client is Halvern Machinery, which makes heavy construction equipment such as excavators and loaders. Every machine carries diagnostic sensors that report wear and faults to the owner, and most of Halvern's come from one supplier, Kestrom Sensors. Kestrom makes $20 million of operating profit on $80 million of revenue, a 25% margin. Halvern's CEO wants to buy Kestrom for $200 million, to secure the supply of sensors and to keep that 25% margin for Halvern instead of paying it to a supplier. The CEO has asked us whether the acquisition makes financial sense.
Facts the interviewer gives if you ask
- Who are Kestrom's customers?
- Halvern and three other equipment makers, which compete directly with Halvern.
- Has there been any supply problem?
- No disruption so far. The CEO is worried about the future, because the sensors are hard to replace quickly.
- Would the other customers keep buying from Kestrom after the deal?
- The team spoke to purchasing managers at all three. Each said they would not want their sensor data and designs in a competitor's hands and would move to another supplier within a year. Assume they all leave.
- Are there other sensor suppliers?
- Yes, two other suppliers make similar sensors. It would take Halvern about a year to qualify one of them for its machines.
- How did the CEO get to $200 million?
- Ten times Kestrom's $20 million of operating profit.
The solution, step by step
How the case runs in the interview, in 5 steps. Each step has the interviewer's question, the exhibit or data shown, and what a strong answer says.
- 1
Structure the problem
The interviewer asks: “How would you evaluate whether Halvern should buy Kestrom?”
A strong structure
- 1Strategic rationale: does owning Kestrom secure supply better than other options
- 2Target's standalone value: revenue by customer, costs, profit
- 3Value after the deal: what changes when Halvern owns Kestrom
- 4Price and alternatives: what $200 million buys against a contract or a second supplier
A strong answer
A structure for a supplier acquisition: the rationale (secure supply, keep the margin) and whether it holds, Kestrom's standalone economics (revenue by customer, fixed and variable costs, profit), what changes after the deal (customers who are Halvern's competitors, costs, synergies), and the price against alternatives such as a long-term contract or a second supplier. A strong candidate asks early who else buys from Kestrom, because a supplier owned by one customer can lose the others.
- 2
Read the exhibits
The interviewer asks: “Here is where Kestrom's revenue comes from, and its cost structure. What do you notice?”
Exhibit 1
Kestrom revenue by customer
Share of Kestrom's $80 million of annual revenue, by customer.
- Halvern50%
- Competitor A25%
- Competitor B15%
- Competitor C10%
Kestrom revenue by customer Category Share of revenue (%) Halvern 50 Competitor A 25 Competitor B 15 Competitor C 10 What to notice
- Halvern is 50% of Kestrom's revenue, $40 million.
- The other 50%, $40 million, comes from three of Halvern's direct competitors.
Exhibit 2
Kestrom cost structure, this year
Kestrom's operating costs by line, $M, and whether each moves with volume.
Kestrom cost structure, this year Cost line $M Fixed or variable R&D and engineering 25 Fixed Plant and overhead 11 Fixed Materials and assembly 24 Variable Total costs 60 Revenue 80 Operating profit 20 What to notice
- $36 million of the $60 million of costs is fixed: R&D and plant.
- Only materials and assembly, $24 million or 30% of revenue, falls if volume falls.
A strong answer
Halvern is only half of Kestrom's revenue, $40 million. The other half, $40 million, comes from three direct competitors of Halvern, the biggest at 25%. On costs, $36 million of Kestrom's $60 million is fixed (R&D $25 million and plant and overhead $11 million), and only materials and assembly, $24 million or 30% of revenue, moves with volume. So if the competitors leave after the deal, Kestrom loses half its revenue but keeps most of its costs.
- 3
Do the math
The interviewer asks: “The team's interviews suggest all three competitors would move to another supplier within a year of the deal. What would Kestrom's profit be then, and what would Halvern's sensors really cost it?”
The interviewer adds
- Variable cost is 30% of revenue. Fixed costs stay at $36 million.
- Halvern buys $40 million of sensors a year from Kestrom today.
A strong answer
Kestrom after the competitors leave: revenue $40 million, variable cost 30% of that, $12 million, fixed cost $36 million, so a loss of $8 million, a $28 million swing from today's $20 million profit. Each $10 million of competitor revenue lost costs $7 million of profit. For Halvern as a whole, its sensors would cost Kestrom's $12 million of variable cost plus all $36 million of fixed cost, $48 million a year, against the $40 million it pays today. So instead of keeping a 25% margin, Halvern would pay $8 million a year more for the same sensors, after spending $200 million.
Every number, worked out16 calculations
Every number, worked out Number Worked out Result Kestrom margin (%) 20 ÷ 80 × 100 25 Deal price ($M) 10 × 20 200 Halvern revenue to Kestrom ($M) 0.5 × 80 40 Competitor revenue ($M) 0.5 × 80 40 Kestrom total costs ($M) 25 + 11 + 24 60 Kestrom fixed costs ($M) 25 + 11 36 Variable cost share of revenue (%) 24 ÷ 80 × 100 30 Kestrom profit today ($M) 80 − 60 20 Variable cost after competitors leave ($M) 0.3 × 40 12 Kestrom profit after competitors leave ($M) 40 − 12 − 36 −8 Profit swing ($M) 20 − (−8) 28 Profit lost per $10M of competitor revenue ($M) 10 × (1 − 0.3) 7 Halvern's sensor cost after the deal ($M) 12 + 36 48 Extra cost to Halvern per year ($M) 48 − 40 8 Margin Halvern thinks it keeps ($M) 0.25 × 40 10 Wrong profit if all costs were variable ($M) 40 × 0.25 10 - 4
Brainstorm the options
The interviewer asks: “If buying Kestrom doesn't work, how else could Halvern secure its sensor supply?”
A strong answer
Organized ideas. Contracts: a long-term supply agreement with guaranteed volumes, prices and capacity, and a change-of-control clause so a competitor buying Kestrom doesn't cut Halvern off. Second source: qualify one of the two other suppliers over the next year so no single supplier can stop production. Partial ownership: a minority stake or a joint development deal that gives influence without scaring other customers. Inventory: a safety stock of sensors. Build: develop sensors in-house only if Halvern can carry the R&D alone. A strong candidate says the contract plus a second source covers the supply risk at a fraction of $200 million.
- 5
Make the recommendation
The interviewer asks: “The CEO wants a yes or no. What do you recommend?”
A strong recommendation
Don't buy Kestrom at $200 million. The price rests on $20 million of profit that depends on Halvern's competitors, who supply half of Kestrom's revenue and would leave after the deal. With $36 million of fixed costs, Kestrom would then lose $8 million a year, and Halvern would pay $48 million a year for sensors it buys today for $40 million. Secure supply instead with a long-term contract that guarantees volumes and prices and includes a change-of-control clause, and qualify a second supplier within a year. Risks: a competitor could buy Kestrom, which the clause and the second supplier guard against, and Kestrom may resist long terms. Next steps: negotiate the supply agreement, start qualifying a second supplier, and check how much of Kestrom's R&D Halvern's sensors need.
The model answer
A strong candidate's whole answer, as it sounds out loud. The marked phrases are explained below.
- 1Goal and structureConfirm the rationale, then test it through Kestrom's economics, what changes after the deal, and the price against alternatives.
- 2Read the exhibitsHalf of revenue is from competitors and $36 million of costs are fixed.
- 3Profit after the dealKestrom goes from $20 million to minus $8 million, and Halvern's sensors cost $48 million instead of $40 million.
- 4AlternativesSupply contract, second supplier, lighter stakes and safety stock.
- 5RecommendationDon't buy, secure supply by contract and a second supplier, risks and next steps.
Thanks. So Halvern wants to buy Kestrom, its main sensor supplier, for $200 million, which is ten times Kestrom's $20 million of profit. The reasons are to secure supply and to keep Kestrom's 25% margin. The question is whether the deal makes financial sense. Has there been a supply problem so far? Thanks, so no disruption yet, the worry is the future because sensors are hard to replace quickly.
I'd look at four things. First, whether the rationale holds, meaning does owning Kestrom actually secure supply and keep the margin. Second, Kestrom on its own: revenue by customer, its fixed and variable costs, and its profit. Third, what changes after the deal, because a supplier owned by one customer might look very different to its other customers. Fourth, the $200 million price against cheaper ways to secure supply, like a long-term contract or a second supplier. My first question is who else buys from Kestrom, because that could change everything.
Looking at the exhibits, Halvern is only half of Kestrom's revenue, $40 million. The other $40 million comes from three of Halvern's direct competitors. On costs, $36 million of Kestrom's $60 million is fixed, $25 million of R&D and engineering and $11 million of plant and overhead. Only materials and assembly, $24 million, moves with volume, which is 30% of revenue. So if those competitors walk away, Kestrom loses half its revenue but keeps most of its costs.
Thanks, so the interviews say all three would leave within a year. Let me work out Kestrom's profit after that. First a quick check on the cost split: 30% of today's $80 million is $24 million, which matches materials and assembly in the table, so the rest really is fixed. Revenue falls to $40 million. Variable cost is 30% of that, so $12 million. Fixed cost stays at $36 million. So Kestrom goes from a $20 million profit to an $8 million loss, a $28 million swing. Put another way, every $10 million of competitor revenue that leaves costs $7 million of profit.
Now from Halvern's side. Today Halvern pays $40 million a year for its sensors. After the deal, those sensors cost Halvern Kestrom's variable cost of $12 million plus all $36 million of fixed cost, because nobody else is paying for the R&D. That is $48 million a year. So instead of keeping a 25% margin, Halvern would pay $8 million a year more for the same sensors, after spending $200 million. It also means Halvern would carry the whole R&D budget for a product only it buys. The margin only existed because the competitors were sharing the fixed costs.
So how else could Halvern secure supply? I see a few options. First, a long-term supply contract with guaranteed volumes, prices and capacity, plus a change-of-control clause in case someone else buys Kestrom. Second, qualify one of the two other suppliers over the next year, so no single supplier can stop the line. Third, something lighter than full ownership, like a minority stake or a joint development deal, though even that might worry the other customers. And a safety stock of sensors covers the short term. A contract and a second supplier deal with the supply risk for a fraction of $200 million.
So my recommendation is no, don't buy Kestrom at $200 million. The price is ten times a profit that depends on Halvern's competitors, and they would leave. Kestrom would lose $8 million a year and Halvern's sensors would cost $48 million instead of $40 million. Instead, sign a long-term supply contract with a change-of-control clause, and qualify a second supplier within the year.
The main risks are that one of Halvern's competitors buys Kestrom, which the clause and the second supplier protect against, and that Kestrom pushes back on long contract terms. Next steps are to open negotiations on the supply agreement, start qualifying a second supplier, and check with Kestrom how much of its R&D actually goes into Halvern's sensors.
Why this answer works
A deal can change the target's customers
Kestrom's profit depends on buyers who compete with Halvern. Ownership by one customer drives the others away.
Fixed costs make lost revenue hurt more
With 30% variable costs, each $10 million of lost revenue costs $7 million of profit, so losing half the revenue wipes out all the profit.
Secure supply is not the same as owning the supplier
Contracts, a second source and safety stock can protect supply for far less than $200 million.
The phrases that do the work
“My first question is who else buys from Kestrom, because that could change everything.”
The right first question. Asking about the target's other customers is what uncovers the case's key risk.
“Kestrom loses half its revenue but keeps most of its costs”
Reading cost structure. Linking the customer mix to the fixed costs sets up the math.
“The margin only existed because the competitors were sharing the fixed costs.”
The so-what. Explains in one line why the CEO's margin rationale fails.
“A contract and a second supplier deal with the supply risk for a fraction of $200 million.”
Alternatives. Answers the CEO's real goal, secure supply, without the deal.
Common mistakes on this case
- 1Valuing Kestrom at ten times today's $20 million profit without asking who its customers are.
- 2Assuming all costs fall with revenue, which would leave Kestrom at a $10 million profit instead of an $8 million loss.
- 3Accepting that Halvern keeps a 25% margin on its own $40 million of purchases, when its sensors would really cost $48 million.
- 4Saying no to the deal without offering another way to secure supply, which was the CEO's first goal.
- 5Missing the risk that a competitor buys Kestrom, which a change-of-control clause or second supplier should cover.
Now run this case out loud
Soreno's AI interviewer gives you this case, shows each exhibit when you ask, follows up on your math and scores each part.
Questions people ask
Is Halvern Machinery a real company?
No. Halvern Machinery is an invented client, and every number is case data written for practice. The numbers reconcile, so you can check your math against the solution.
How long does this case take?
About 30 minutes out loud, the length of one interview case. It is rated easy.
How should I use this solution?
Try the case first. Read the prompt and the facts, write your structure and work the numbers, then compare each step with the walkthrough and the model answer.
Can I practice this m&a case out loud?
Yes. Soreno's AI interviewer runs this case with you, shows the exhibits when you ask, follows up on your answers and scores each part.