KTM — Venture Capitalist Exit Case Study


In early January 2003, Dr. Rudolf Knünz, chief financial officer of KTM, was considering the company’s future financing needs. KTM designed and manufactured motocross, rally and cross-country racing motorcycles for adults and children and had ambitious growth plans due to the rapid growth being experienced in this area. At the time, a holding company that KTM management had a large stake in, Cross-Holding, owned 51 percent of the firm. The other 49 percent was owned by BC European Capital

(BC), a venture capitalist firm. Since most venture capitalists made investments that had the potential to grow exponentially (earning their returns when their stakes in the business were sold), BC had been pushing for high growth at KTM ever since they purchased their equity stake in 1999, and would soon be

looking for an exit strategy. To facilitate this, Knünz had to develop a financing strategy that would raise

enough money to purchase BC’s equity and enable future growth plans.

Management had developed a set of objectives to help choose the best means for BC to sell its stake in KTM. First, the option should maximize the proceeds to KTM. Not only would this allow KTM to buy out BC by giving them a fair return on their investment, but it would also provide capital for the company’s expansion plans. Second, it was important to choose an option that would allow present management to continue to play a central role in directing the company. Both Knünz and Stephan Pierer, chief executive

officer of KTM, saw significant growth potential in the company and wanted to see this growth through. The two were partners in Cross-Holding, and they were not anxious to divest themselves of KTM. Furthermore, the value and reputation KTM had developed was a testament to investors’ confidence in Knünz and Pierer’s management. Third, it was vital for KTM to remain financially stable and flexible to capitalize on potential opportunities for future growth. The strength of KTM’s financial position is

highlighted in Exhibits 1 to 4, which show KTM’s recent financial performance, consolidated balance sheets, statement of cash flows and financial ratios.

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KTM began when Hans Trunkenpolz opened a motorcycle repair shop in Mattighofen, Austria, in 1934.

Over the years the company had become a household name with off-road motorcycle enthusiasts because of its sponsorship of cross-country racing events and riders. KTM, with its bold orange logo and renowned Austrian engineering, had a reputation for producing reliable, high-quality motorcycles. The company had also gained expertise in manufacturing core parts such as the engine, radiator and exhaust system.

KTM focused its marketing on building the brand’s image of technological leadership, high quality and a legacy of championship titles. KTM’s customers were young, edgy and liked racing. Knünz explained, “You could take our standard production KTM bike and get to 10th place on it in any world championship

race without doing anything. The proof is in the 23 world championships KTM riders have won in the past three years.”

KTM distributed 80 percent of its motorcycles through its own sales subsidiaries (which contracted with dealers), and 20 percent through general importers. KTM had a strong dealer relations system that enabled the company to respond quickly to market trends, to effectively predict sales, and to reduce inventory costs. General importers were used in smaller markets such as South America, Africa, Australia and smaller countries in Asia.

KTM’s product mix was largely focused on off-road motorcycles and related accessories, which made up over 80 percent of the revenue generated over the past few years. The remainder of sales came from sportminicycles, which were motorcycles designed for youth, and “naked bikes,” which were on- and off-road hybrids. Approximately 60 percent of KTM’s 2002 revenue came from Europe, with Austria and Germany comprising a large share of the sales. The remainder of the sales came from the United States, which made up about 30 percent, with smaller markets around the world rounding out the rest.


KTM’s strategy focused on two avenues of growth: geographic expansion and product line expansion. Geographically, KTM could expand its dealer network and brand into new European Union countries and/or in North America. As of the end of 2002, more than two-thirds of the company’s dealer network was centralized in Western Europe. However, growth for motorcycles was projected to be highest in the United States, South America and Asia. On the other hand, most of Western Europe was becoming saturated and growth was expected to slow. Knünz wanted to ensure that KTM was poised to deal with and benefit from these geographic trends.

KTM could also expand its product line to offer on-road motorcycles, ATVs or other products. For example, almost 80 percent of motorcycle sales were of on-road motorcycles and this segment was growing. To do this, Knünz knew that it would cost €10 million in research and development (R&D) and another €10 million to develop the tooling necessary to start producing on-road motorcycles.

Financial Performance

KTM’s financial performance over the previous few years was very impressive. The company has been able to leverage its strong supplier relationships, improved inventory management and the rationalization of its administrative costs to improve profitability year after year. The company’s efficiency and liquidity positions were in line with industry averages; however, Knünz was slightly concerned about KTM’s capital structure (see Exhibit 4). Although the company had adequate interest coverage, KTM was highly leveraged with debt-to-equity ratios that were much higher than its closest competitors.

Knünz projected earnings before interest and taxes (EBIT) to grow between six to eight percent for the next three years before leveling off to around four to six percent for the following two years. Capital expenditures were expected to be concentrated largely in the next couple of years as shown in Exhibit 5. Depreciation was projected to be similar to last year’s percentage of sales. Knünz believed that growth in EBIT beyond year five would be similar to projected inflation in the European Union, which analysts expected to be around one to two percent. He wondered how the financial markets (Exhibit 6) would affect KTM’s financial outlook. Using the forecasted values for EBIT, depreciation, amortization and capital expenditures over the next several years, Knünz could forecast the free cash flows necessary to estimate a value for KTM. This value could be compared to the values obtained by comparison to similar firms (Exhibit 7). Knünz recognized the importance of these values since they would be what BC would be used to determine the value it would require to sell its equity stake in KTM. Though it was not clear that BC required the entire sum at once, this amount would form the basis for the ultimate value required for BC’s stake.


The motorcycle industry was comprised of the on-road and off-road segments. Both segments had seen steady growth over the last several years. Global demand for motorcycles was projected to grow at 5.3 percent for the next four years as they gained broader acceptance. On-road riders rode for many different reasons. Some young, mostly urban males chose motorcycles as their chief means of transportation.

Younger riders preferred performance bikes such as Ninjas and other Japanese racer-replicas. A significant portion of on-road riders were older, and desired a sense of “lifestyle” and community from their motorcycle-riding experience. This was particularly true for riders of the large, cruising type of motorcycle exemplified by brands such as Harley-Davidson and Victory. This aspect of an on-road motorcycle’s brand was particularly important for attracting new customers.

Off-road riders, on the other hand, tended to be young and edgy and were into racing and adventure. Trends were an important part of producing off-road motorcycles that sold successfully because off-road riders were quick to adapt to these changes. Thus, one of the keys to winning in the off-road segment was flexibility in product mix. Technology was also extremely important in the off-road segment. Racing represented the best opportunity for manufacturers to showcase their products and technology since motorcycles with superior performance usually won races.


Harley Davidson manufactured on-road motorcycles in the cruiser segment that appealed to riders in the 30-plus age range. Harley had a brand that was globally recognized, one that embodied all-American values. Other motorcycle manufacturers admired Harley’s marketing and after-sales methodologies, which had built the world’s largest motorcycle community, creating a lifestyle and heritage around the brand that commanded high premiums for its bikes. Harley bikes were not known to be at the technological forefront. In fact, many of its bike designs had changed very little, if at all, since its release.

In contrast, the “Big Four” Japanese motorcycle manufacturers, which included Honda, Yamaha, Suzuki and Kawasaki, were responsible for many of the major developments in the second half of the twentieth century. These motorcycle manufacturers were highly diversified, producing everything from musical keyboards to power generators. Honda was known for successfully adapting Harley’s successful after-sales strategies to consumers outside of the cruiser segment through value-added services and products. For example, Honda customers were able to custom-build their bikes and take part in training courses and exhibitions. Yamaha focused on its core competencies in design and racing technology, outsourcing many of its non-value-added activities to take advantage of cost efficiencies. All Yamaha employees embraced the company motto of “kando,” which refers to the excitement and satisfaction people feel when they experience something of exceptional value. Seeking kando drove the company to develop bikes to surpass customer expectations on all dimensions. Suzuki and Kawasaki were similar in that they both competed to produce state-of-the-art bikes that incorporated leading-edge technology. Both focused on street bikes that were geared toward younger riders.

Outside of the Japanese “Big Four” and Harley, KTM also competed with Polaris and Ducati. Polaris was a U.S. motorcycle manufacturer that offered a line of bikes under the Victory brand. These motorcycles were in direct competition to Harley’s cruiser offerings. Polaris tried to differentiate itself from Harley by incorporating technological innovations into its bikes by leveraging its R&D expertise in ATVs and snowmobiles. In contrast, Ducati was the only “pure play” company, focusing only on motorcycles. It was a European on-road bike manufacturer that had dominated the World Superbike Championship in recent years, helping it to gain global credibility amongst serious riders. Ducati had a wide range of bikes, from dual-sport to sport-touring to super-sport, and combined leading-edge technology with Italian style. Recent years have seen the company experience steady top-line growth backed by a strong U.S. dealer network.


BC European Capital was one of the largest venture capital firms in Europe, with over 15 years of experience involving over 40 acquisitions. Venture capital refers to the financing of startup and early-stage businesses. The venture capital firm raises money from private investors to invest in businesses that are not available through the standard capital markets, and that are generally recognized as offering higher returns with higher levels of risk. Investors are often larger institutions such as pension funds, university endowments, insurance companies, pooled investment vehicles, or wealthy individuals who are looking to diversify their portfolios.

Venture capital firms usually invest in firms in exchange for equity, making them part owner of the firm in which they are investing. Most venture capital firms expect to sell their investments in a relatively short period, usually between three and six years. BC European Capital became involved with KTM due to its somewhat rocky financial history over the past 20 years. In the late 1980s, propelled by the strong financial markets, a financial investor purchased KTM and took the company private. Unfortunately, the unbridled enthusiasm that accompanied the run-up in equity prices during this time hindered the financial investor’s judgment. Though KTM had a good reputation and quality products, it had too many products and models, inadequate management, a lack of strategic focus and considerable debt on the books. This resulted in KTM having to declare bankruptcy in the largest bankruptcy suit in Austria in 1991. early 1996, Cross-Holding began to buy out the general importers. The formation of the European Union led to shared standards and a common currency prompting Knünz and Pierer to re-evaluate their situation.

They felt that shifting their strategic focus to selling through dealers directly and cutting out the general importers would be crucial for KTM’s future growth. At this point, Knünz and Pierer needed to secure supplier and dealer partners who would be willing to grow with the company. With the support of a couple of domestic financial institutions, the group decided to go public by doing an initial public offering (IPO) to raise money and increase the company’s profile to attract partners. Knünz and Pierer ensured that Cross-Holding remained the most influential shareholder, with 23 percent of the shares, to retain control over KTM’s future direction.

Although the company’s share price never dipped below its issue price, external pressure for consistent growth from analysts and investors, along with a potential takeover bid by Harley Davidson in 1998, convinced Pierer and Knünz to take the company private again. In 1999, BC European Capital helped Knünz and Pierer execute a buy-out, investing capital in return for a 49 percent stake in the company. Knünz described the relationship between KTM and BC European Capital as amicable and mutually beneficial. The venture capitalist helped management acquire new skills and business contacts when needed but, in general, BC European Capital was very hands-off, allowing management to carry out business strategies for the company independent of external pressure. In return for their trust, BC European Capital had been rewarded with a cumulative average growth rate at KTM of 31 percent in revenues and 50 percent in profits from 1999 to 2002.


As shown in Exhibit 8, the performance of the major stock indices in the United States and Europe had been struggling since the third quarter of 2000 when the “tech bubble burst” and was slow to recover because of events like 9/11. Knünz recognized that although equity prices had rebounded recently, they were still relatively low compared to the levels they were at a couple of years previously. He wondered what implications this had on his options. Knünz also considered the general state of the economic environment around the world. He remembered a recent CSFB Global Economics report that said that the analyst consensus was for 2003 global GDP growth to be three percent, up from 2.6 percent in 2002. Knünz recognized that there seemed to be vast differences in economic growth between different regions around the world. For example, in the European Union, GDP growth in 2002 had been a dismal 0.7 percent. Economists agreed that the European Union was slowing down due to increasing unemployment, weakness in the financial sector and a strong Euro currency that was expected to be sustained despite weakening exports. The 10 new countries joining the European Union in 2004 were expected to spark the economy, but 2003 forecasts for GDP growth were still at a disappointing 1.3 percent. Inflation in the United States was expected to be around 2.2 percent in 2003, compared to one percent in the European Union. On the other hand, the United States was expected to experience healthy economic growth. Recent demographic trends, the commercial application of information technologies and the proposal by the Bush administration to eliminate all tariffs on manufacturing by 2015 were set to accelerate the manufacturing and services industries. Furthermore, there was an expected pick-up in consumer spending being driven by the low-interest rates in the United States, which were expected to hold for 2003.

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