CFO Roundtable – M&A Strategy September 10, 2010 Bob George, CFO.

CFO Roundtable – M&A StrategySeptember 10, 2010Bob 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

2


Esterline 1997

17%

Commercial Aerospace

Defense

Telecommunications

Computers

Automotive

Electronics

Agriculture

Utilities

Truck & Rail

Process Industries

Marine

• Conglomeration!!!

3


Mergers/Acquisitions/Integration

4


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

5



• 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

6


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

7


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

8



• Kinds of Forecasts

Lucky Lousy

9



10


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

11


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

12


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

13


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

14


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

15


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?

16


Pricing The Deal

17


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%

18


• The company has grown

Esterline: 2007 - 10 Years Later

Defense

20%

40%40%Commercial Aerospace

High-end, non-aeroapplications

$155M

$1.5B

19



• Global orientation has increased…

20

85%U.S.

15%Int’l

53%Int’l

47%U.S.



• Global orientation has increased…

21

95%U.S.

5%Int’l

34%Int’l

66%U.S.

Questions?

CFO Roundtable – M&A Strategy September 10, 2010 Bob George, CFO.

Documents

Transcript of CFO Roundtable – M&A Strategy September 10, 2010 Bob George, CFO.