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Learn about Esterline's M&A strategy for global growth in the aerospace and defense industry. Discover the factors associated with successful acquisitions and the barriers to entry in this market.
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CFO Roundtable – M&A StrategySeptember 10, 2010 Bob George, CFO
Overview • Esterline is . . . • A global manufacturer specialized in three distinct business segments, all focused on custom engineered solutions primarily for the Aerospace and Defense industry Advanced Materials Sensors & Systems Avionics & Controls
Commercial Aerospace Defense 17% Telecommunications Computers Automotive Electronics Agriculture Utilities Truck & Rail Process Industries Marine Esterline 1997 • Conglomeration!!!
ESL Acquisitions 1996-present Acquisitions: 1996 - Present $ Millions CMC Wallop FRCM (TNO) ATA Armtec CM (BAE) Planar Leach ATI M-Tec Kirkhill Memtron Weston Darchem Dupree Traxsys Kai R. Kuhl Janco ITW Kennard Sagem AIS Burke Mason Avista Muirhead Palomar FRC BVR
Mergers/Acquisitions/Integration • Value Creation • Do mergers create wealth? “The sad fact is that most major acquisitions display an egregious imbalance: They are a bonanza for the shareholders of the acquiree; and…they usually reduce the wealth of the acquirer’s shareholders, often to a substantial extent. That happens because the acquirer typically gives up more intrinsic value than it receives.” (e.g. overpays) ‒ Warren Buffett Berkshire Hathaway Letter to Shareholders ‒ 1994
Factors Assoc. with Successful Acquisitions • Easily explainable strategy • Management stays • Demonstrated management success in this field • Cost savings rationale • Enhanced position on supply contracts • Gap filling (product, distribution, etc) • Mergers of direct competitors aimed at dominating a market • International market share expansion • Broader geographic coverage
Why Acquisitions Fail • Pay too much • Poor strategic rationale • Poor industry characteristics • Attempt to engineer a major redefinition of business through M&A • Inadequate due diligence • Unrealistic expectation of synergies • Poor post merger integration • Failure to move quickly • Culture clashes • Big egos • Poor timing
Mergers/Acquisitions/Integration • Kinds of Forecasts Lucky Lousy
Barriers to Entry • Economies of scale (production, R&D, marketing, service) • Proprietary product differences • Brand identity (brand recognition) • Switching costs • High capital requirements • Access to distribution channels • “Prime cost” advantages • Proprietary learning curves • Access to raw materials • Proprietary low cost product design • Competitors retaliation • Government policy • “First mover” advantages • Favorable locations • Government subsidies
Substitute Product • What substitute products are available? • What is their relative price? • What are switching costs? • Buyers propensity to substitute? • Price vs. performance of alternate products • Disruptive technologies • Trivial technologies
Customer Power • Purchases in large volumes • Products are not highly differentiated • Our product is a significant cost item (encourages shopping) • Customers have low profitability • Our product is unimportant to the quality of buyers product • Our product does not save the buyer money • Buyers may integrate backwards to make our product
Supplier Power • Switching costs are high • Threat of forward integration • High concentration ratio in supplier’s industry • Product is unique • Few substitutes exist • Our industry is important to the supplier
Intensity of Rivalry • Slow industry growth • Over-capacity periods • High exit barriers • Corporate stakes • Personal egos • Limited mobility of executives • Numerous (or equally balanced) competitors • High fixed costs • Capacity additions occur in large increments • Little product differentiation • Low switching cost
Tough Questions for a Corporate Parent • Do we add value to every business unit? • Do we add more value than any other corporate parent? • Do we add more value than the cost of corporate activity?
Commercial Aerospace Defense Telecommunications Computers Automotive Electronics Agriculture Utilities Truck & Rail Process Industries Marine Esterline Segments: 2007 - 10 Years Later Then Now Automation 42% Avionics & Controls 51% Aerospace/Defense 32% Sensors & Systems 21% Instrumentation 26% Advanced Materials 28% 17% 17% 40% 40% Commercial Aerospace Defense 20% High-end, non-aeroapplications
40% 40% Commercial Aerospace Defense $155M 20% High-end, non-aeroapplications Esterline: 2007 - 10 Years Later • The company has grown $1.5B
Esterline: 2007 - 10 Years Later • Global orientation has increased… 15% Int’l 47% U.S. 53% Int’l 85% U.S.
Esterline: 2007 - 10 Years Later • Global orientation has increased… 5% Int’l 34% Int’l 66% U.S. 95% U.S.