CFO Roundtable – M&A Strategy
September 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
CFO Roundtable, September 2010
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Esterline 1997
• Conglomeration!!!
Commercial Aerospace
17%
Defense
Telecommunications
Computers
Automotive
Electronics
Agriculture
Utilities
Truck & Rail
Process Industries
Marine
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Mergers/Acquisitions/Integration
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ESL Acquisitions 1996-present
Acquisitions: 1996 - Present
$350.0
CMC
$300.0
Racal
Acoustics
$200.0
FRMC (TNO)
Wallop
Armtec CM
(BAE)
$150.0
ATI
Armtec CM
Leach
Sagem
Mason
Mason
(BAE)
Dupree
Kirkhill
Weston
Dupree
Traxsys
Surftec
Weston
Traxsys
Janco
Janco
Kennard
Kennard FRC
AIS
Muirhead
Muirhead
AIS
Burke
BVR
Burke
Avista
FRC
1996
Darchem
1997
1998
NMC
M-Tec
Kirkhill
ITW
Kai
R. Kuhl
Sagem
ITW
ATA
Planar
ATI
$50.0
$-
ATA
Memtron
KaiMemtron
R. Kuhl
Wallop
Leach
FRCM (TNO)
Planar
M-Tec
$100.0
CMC
Duraswitch
$ Millions
$250.0
Palomar
Avista
Darchem
Palomar
BVR
1999
2000
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2001
2002
2003
2004
2005
2006
2007
2008
2009
4
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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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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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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Mergers/Acquisitions/Integration
• Kinds of Forecasts
Lucky
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Lousy
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Mergers/Acquisitions/Integration
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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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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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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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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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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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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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Pricing The Deal
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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%
CFO Roundtable, September 2010
Commercial Aerospace
Defense
Telecommunications
Computers
Automotive
Electronics
Agriculture
Utilities
Truck & Rail
Process Industries
Marine
40%
40%
Commercial
Aerospace
Defense
20%
High-end, non-aero
applications
17
Esterline: 2007 - 10 Years Later
• The company has grown
40%
40%
Commercial
Aerospace
Defense
$155M
20%
High-end, non-aero
applications
$1.5B
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Esterline: 2007 - 10 Years Later
• Global orientation has increased…
15%
Int’l
53%
Int’l
47%
U.S.
85%
U.S.
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Esterline: 2007 - 10 Years Later
• Global orientation has increased…
5%
Int’l
34%
Int’l
95%
U.S.
CFO Roundtable, September 2010
66%
U.S.
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Questions?