CFO Roundtable – M&A Strategy September 10, 2010 Bob George, CFO.
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Transcript of CFO Roundtable – M&A Strategy September 10, 2010 Bob George, CFO.
CFO Roundtable, September 2010
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
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CFO Roundtable, September 2010
Esterline 1997
17%
Commercial Aerospace
Defense
Telecommunications
Computers
Automotive
Electronics
Agriculture
Utilities
Truck & Rail
Process Industries
Marine
• Conglomeration!!!
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CFO Roundtable, September 2010
Acquisitions: 1996 - PresentAcquisitions: 1996 - Present
Mason
Kirkhill
AIS
Muirhead
CMC
Wallop
Darchem
LeachArmtec CM
(BAE)
Weston
Burke
Kennard
PalomarAvistaFRC
ATI
Memtron
Kai R. KuhlJanco
Traxsys
ATA
FRCM (TNO)
Planar
M-Tec
Dupree
ITW
Sagem
BVR
$ M
illi
on
s
ESL Acquisitions 1996-present
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CFO Roundtable, September 2010
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
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CFO Roundtable, September 2010
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
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CFO Roundtable, September 2010
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
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CFO Roundtable, September 2010
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
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CFO Roundtable, September 2010
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
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CFO Roundtable, September 2010
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
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CFO Roundtable, September 2010
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
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CFO Roundtable, September 2010
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
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CFO Roundtable, September 2010
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?
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CFO Roundtable, September 2010
Esterline Segments: 2007 - 10 Years LaterThen Now
Automation
Aerospace/Defense
42%
32%
Instrumentation 26%
Avionics & Controls
Sensors & Systems
51%
21%
Advanced Materials 28%
Defense
20%
40%40%Commercial Aerospace
High-end, non-aeroapplications
Commercial AerospaceDefenseTelecommunicationsComputersAutomotiveElectronicsAgricultureUtilitiesTruck & RailProcess IndustriesMarine
17% 17%
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CFO Roundtable, September 2010
• The company has grown
Esterline: 2007 - 10 Years Later
Defense
20%
40%40%Commercial Aerospace
High-end, non-aeroapplications
$155M
$1.5B
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CFO Roundtable, September 2010
Esterline: 2007 - 10 Years Later
• Global orientation has increased…
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85%U.S.
15%Int’l
53%Int’l
47%U.S.
CFO Roundtable, September 2010
Esterline: 2007 - 10 Years Later
• Global orientation has increased…
21
95%U.S.
5%Int’l
34%Int’l
66%U.S.