Presentation on theme: "Lincoln Electric Team."— Presentation transcript:
1 Lincoln ElectricTeam
2 What is the Best Way to Enter India?
By acquisitionBy Joint ventureBuilding a new plant on its ownIf Lincoln Electric were to enter by acquisition, it is necessary for Lincoln to develop some type of valuation to apply to any of the Indian incumbent companies.In India in 2006, the market was booming and any significant welding acquisition would likely require paying an acquisition premium greater than Lincoln Electric had been used to paying in the past.If the Lincoln Electric were to enter by joint venture, the question is: How can Lincoln ensure its ability to make key business decisions?If the Lincoln was to build its own plant, the question is: Would the cost of starting from scratch be more than sufficiently compensated by the total control the company would enjoy?
3 Operation Red Elephant: Entering India
The Ador Welding Joint VentureIf Lincoln Electric were to enter by acquisition, it is necessary for Lincoln to develop some type of valuation to apply to any of the Indian incumbent companies.In India in 2006, the market was booming and any significant welding acquisition would likely require paying an acquisition premium greater than Lincoln Electric had been used to paying in the past.If the Lincoln Electric were to enter by joint venture, the question is: How can Lincoln ensure its ability to make key business decisions?If the Lincoln was to build its own plant, the question is: Would the cost of starting from scratch be more than sufficiently compensated by the total control the company would enjoy?
4 Outline PEST Strengths and Weaknesses Organizational Structure Culture
6 Strengths & Weaknesses
7 Key Points Core Competencies Financials Culture & Leadership
Product mixTechnical Developmentsinnovation,technology.Customer Relations & MarketingQualityServiceOperationsspeedProductivityefficiencyLogisticsFinancialsCulture & LeadershipManagementOrganizationDecision-making abilitiesA core competency is a potential foundation for any new or revised strategy.Assessment of the current financial strength of the organization must be done before thinking about strategy. A new strategy may be costly to implement, especially if it involves the purchase of assets or the acquisition of some other business.Management competence and organizational culture are required for successful strategic change.Minor attention should be given to leadership and decision-making abilities, innovation, speed, productivity, quality, service, efficiency, and applied technology processes.
8 Product MixLincoln could solve customers’ process problems and improve process productivity with its ability to combine both equipment and consumables development needs into one integrated package.Lincoln was one of only a few worldwide broad-line manufacturers of both arc welding equipment and consumable products.
9 Tech Development Strengths
Technological innovation allows the company to earn a price premium for many of its products.Industry leader in new market introductions and quality performance.The most aggressive, comprehensive, and successful R&D program in the welding industryAward-winning engineers were responsible for Lincoln Electric’s technological leadership in welding, and the company spent approximately 2% of sales on research and development (R&D).
10 Tech DevelopmentMore than 50% of Lincoln Electric’s equipment sales in 2005 were generated by welding machines introduced in the previous five years.Known as “The Welding Experts,” vs. its leading competitors who chose to diversify their resources far away from welding.In 2004 began building regional engineering development centers worldwide.Shanghai and Poland in addition to its existing training and demonstration centers in Australia, Canada, Italy, Mexico Netherlands, Singapore, and Spain.
11 Costumer Relations Strengths
Product support and guarantees, allows the company to earn a price premium for many of its products.Customer supportTrainingConsultationGuaranteed Cost Reduction ProgramThe company believed that it had a competitive advantage because of its highly trained technical sales force and the support of its welding research and development staff, which allowed it to assist the consumers of its products in optimizing their welding applications.As part of the sales process, Lincoln employees visited prospective customers, evaluating their welding requirements, and made specific product recommendations together with a return-on-investment projection.The company guaranteed that the user would save money in its manufacturing process when it utilized Lincoln’s products.
12 Costumer Relations Weaknesses Geographical distance; logistics
The company did not have any market access at the commodity end of the market, and the company had limited in-country demonstration or after-sales support capability, which is critical in high-tech sales.
13 Marketing Strengths Strong brand identity Weakness
Brand recognition in the company is strong; this is reflected in the performance of the companyHowever, in region where the company is not recognized is posses a weakness
14 Operations Strengths Efficiency Weaknesses Solutions oriented
Supply chain and FANUC RoboticsHarris Colorific acquisitionWeaknessesMaintaining operational efficiency internationallyIncompatible power sourceLincoln was one of only a few worldwide broad-line manufacturers of both arc welding equipment and consumable products. The benefits of producing both equipment and consumables were tied to the value of providing welding “solutions” rather than just individual products.Lincoln could solve customers’ process problems and improve process productivity with its ability to combine both equipment and consumables development needs into one integrated package.Many of Lincoln’s most advanced equipment products were produced through its supply arrangement with FANUC Robotics. These products combined a robotic arm, a welding power source, and a wire feeder to automatically produce welds using various computer software, welding fixtures and fasteners, and accessories.In 1990, the company expanded its arc welding line by purchasing Harris Calorific, a manufacturer of gas-cutting and gas welding equipment. Starting in the early 1990s the company began growing sales in the North America retail channel. In 1999 the company completed the divestiture of its motor business.In 2003 Lincoln complemented its successful line of retail products with the acquisition of the Century and Marquette welding and battery-charged brands, which had leading positions in the automotive and retail channels.In 2005, the company broadened its metal joining base when it acquired J.W. Harris Company, a privately held brazing and soldering alloys business based in Mason, Ohio. J.W. Harris was a global leader in the production of brazing and soldering alloys with about $100 million in annual sales. Harris products could be sold to Lincoln’s existing set of customers, and vice versa. Also, the introduction of Lincoln’s management system and purchasing and logistics capabilities had led to cost savings at the Harris plants. As a result, theacquisition had produced synergies on both the cost and revenue sides by 2006Due to a combination of challenges in day-to-day manufacturing management and the lack of a strong distribution channel for its domestically produced products.Lincoln’s welding machine requirements were complicated by the power supply situation in Japan, where there were two voltages and frequencies in use. The one that caused the problem was the common use of 200 volt 3-phase power. While some Lincoln power sources ran adequately on this, the performance was impaired and Japanese customers were reluctant to pay a price premium for a product that was not optimized for their application.
15 Logistics Weaknesses Local production presence
Once high-end demand increased, Lincoln needed to meet the challenge of providing prompt product delivery and complete technical support without any local production presence. Lincoln was still shipping its high-end machines to Asia from Cleveland and faced long lead times to ship the products.
16 Is Your Unique Competency a Sound Basis for an Effective Strategy?
17 Inimitability 5 4 3 2 Product mix Technical Developments
Customer Relations & MarketingOperationsLogisticsIt must be hard to copy. Don’t try to base along-term strategy on something that your competitors canquickly copy.1(bad) – 5(good)
18 Durability 3 4 5 Product mix Technical Developments
Customer Relations & MarketingOperationsLogistics3 4 5Durability refers to the continuing value of thecompetence or resource. Some brand names, like Disney’s orCoca Cola’s, have enduring value. Some technologies, however,have commercial value for only a few years; then theyare swept aside by new and better technologies.
19 Appropriability 5 4 Product mix Technical Developments
Customer Relations & MarketingOperationsLogistics5 4This test determines who captures the valuecreated by your competency or unique resource. In some industries,the lion’s share of profits goes to retailers, not to thecompanies whose ingenuity developed and produced the actualproducts.
20 Sustainability 3 4 2 Product mix Technical Developments
Customer Relations & MarketingOperationsLogistics3 4 2Can your special resource by trumped by asubstitute?
22 Ador Welding Ltd.$50 million in sales in 2005 with a 15% operating margin, and a portion of its shares traded on the local stock exchange.Cost-adjusted annual revenue growth rate at 20% over the next two years, which should continue with a return on capital employed at over 40%.
23 Ador Welding Ltd.The company has shifted some production to Silvassa, a government-created tax-free zone, and by concentrating production at a smaller number of facilities Ador had realized both economies of scale as well as tax savings.In July 2006 the company’s publicly traded shares were valued at 10.9x FY07 estimated net earnings per share, and EBITDA per share was predicted by the same local analyst to grow at a CAGR of 29% and net earnings per share to grow at a CAGR of 23% over the next two years.
24 Ador Welding Ltd.Ador had annual sales of crore (large values of India’s currency, the rupee, are counted in terms of crore, with one crore the same as 10,000,000 rupees).The company had produced 17,217 MT of consumable welding products in FY06, and Ador had previously constructed plant lines that could produce far more than that should the market continue to grow. Ador had in FY06 paid a dividend of 15 rupees, equal to a 4% yield on the stock.
25 ESAB India Over $50 million in sales in 2005.
18% operating margin in 2004Newly RestructuredNew $4.6 million, 50,000 square foot, greenfield manufacturing plantThe company introduced current technology, strict internal controls, staff changes, and reorganized and expanded their distribution channels.
26 EWOC Allows Ltd.$30 million in revenues in 2005
27 Smaller Competitors D & H Sécheron Indo Matsushita Anand Arc
$3.5 million in sales in 2005Indo MatsushitaAnand ArcManufactures full range of welding consumablesClaims that it produces the highest-quality electrodes in India
28 Competitive Superiority
Lincoln ElectricAdor Welding Ltd.Esab IndiaProduct mixTechnicalDevelopmentsCustomer Relations & MarketingOperationsLogistics-Is your special competence or resourcetruly superior to those of competitors? As Collis andMontgomery warn, “Perhaps the greatest mistake managersmake when evaluating their companies’ resources is that theydo not assess them relative to competitors’.” So always rateyour strength against the best of your rivals.
29 Since a new strategy is the point of our internal analysis, it is necessary
to assess the current financial strength of the organization. After all, anew strategy may be costly to implement, especially if it potentiallyinvolves the purchase of assets or the acquisition of some other operatingcompany or unit.Financials
30 CashflowLong-term company financial targets included sales growth at double the rate of growth in worldwide industrial productionOperating margins over 15%Earnings growth of 10% annuallyReturn on equity exceeding 20%
31 Cashflow To what extent are cash flows from current operations
sufficient to support a new initiative? A fast-growing companyusually gobbles up cash flow from operations and then hasto go hunting for outside capital to finance growth. A mature,low-growth company, in contrast, can often finance a new initiativefrom operating cash flow from current operations.
32 Access to Outside Capital
India market booming so credit may be easily accessible.Still, any significant welding acquisition would likely require paying an acquisition premium greater than Lincoln Electric had been used to paying in the pastIf cash flow is insufficient to finance anew strategy, the company will have to look to outside creditorsand/or investors. So determine the company’s (1) borrowingcapacity, (2) ability to float bonds at a reasonable rate ofinterest, and (3) in the event of a major initiative, its ability toattract equity capital through a sale of company stock.
33 Other Scheduled PlansAs of 2005 the company spent approximately two-thirds of free cash flow for international expansionYour company mayhave already approved other capital spending projects. If it has,those might absorb all available capital. Get a list of thesescheduled projects and determine the extent to which they willcompete for resources with any new strategy.
34 Hurdle RateA minimum internal rate of return, based upon total investment, of an initial 10% increasing to a minimum of 18% over the first 3–4 years (with synergy credits)The acquisition price was less than 8x EBITDAThe hurdle rate is the minimumrate of return expected from new projects that require substantialcapital investments. It is usually calculated as the enterprise’scost of capital plus some expectation of profit.
35 Other Data2005: operating income was $153.5 million and net income was $122 million on sales of $1.6 billion.
36 Other Data Domestic Reliance Over-forecast and spending
Extensive resources requiredHuman capitalManufacturingThe company set a series of ambitious financial goals, but meanwhile growth in its primary market of the United States would be far from sufficient to meet these goals. The company was still dependent on North America for approximately 60% of its sales, and yet other markets for welding products and consumables were growing significantly faster.The new acquisitions in Europe and Latin America that had cost $325 million suffered large operating losses, and in 1992, while the U.S. operation continued to be strongly profitable, the losses internationally were so serious that the company faced a stark choice.8 In order to pay its U.S. employees their annual bonus, the company had to borrow the moneyLincoln did not enter the Japan market with sufficient resources early enough to establish an effective presence against strong local competitors.
37 Regional Performance Region Year ROA Total Sales (USD millions)
Total Assets (USD millions)USA and Canada20050.281077.5652.5Mexico and Latin America0.16121.483.0Europe0.07426.3313.3Asia and Astrailia0.05125.098.1Clearly the further LE is from home,the weaker the company’s performance.LE invested in Europeonly to have a .07 in ROA
38 Acquisition Feasibility of Ador Welding, India
# of Publicly Traded Shares5,995,933.00% of shareholding44.09%Total Number of Shares13,599,303.70Earnings Per Share (in Rupees)29.45CAGR for Net EPS (2007 projected)23%Projected FY07 Net EPS (in Rupees)Ador's public share valuation (P/E)*10.7*-Based on Ador's FY07 projected EarningsAdor's Price per Share
39 Acquisition Strategies Total # of Shares % Ownership Required
Price Per ShareAcquisition PremiumTotal Acquisition Cost in Indian RupeesTotal Acquisition Cost in US DollarsLeveraged Buyout Options80% - Commercial 20% -LE Financing via cashInterest ExpenseTotal Acquisition13,599,303.70100%10%5,798,071,222.79$127,557,566.90$102,046,053.52$8,673,914.55$25,511,513.38Majority ownership51%2,957,016,323.63$65,054,359.12$52,043,487.30$4,423,696.42$13,010,871.82Joint Venture50%2,899,035,611.40$63,778,783.45$51,023,026.76$4,336,957.27$12,755,756.69Public Takeover (Purchase all Public Shares)44%2,556,369,602.13$56,240,131.25$44,992,105.00$3,824,328.92$11,248,026.25Strategic Alliance30%1,739,421,366.84$38,267,270.07$30,613,816.06$2,602,174.36$7,653,454.01
40 2005 Revenue for Largest Competitors in $13 Billion Welding Market
Lincoln Electric’s main competitors are ESAB (European based company) and ITW (Illinois Tool Works).Lincoln Electric also owns assets in Air Liquide, the fourth largest competitor in the market.Total revenue is important, but the total net income far more important.
46 Industry Benchmark and Competitors
Note: ITW and EASB India earned $1.3 billion, while Lincoln Electric earned $1.6 billion.In 2005, ESAB India gain more capital from investor causing higher ROE. A huge increase of £123.6 million.
47 Organizational Structure
50 Structural DimensionDivisionalFunctionalMatrixNetworkEfficiency of resource utilizationPoorExcellentModerateGoodEfficiency of time utilizationResponsiveness to the environmentAdaptability over timeAbility to hold people accountableEnvironment for which best suitedHeterogeneousStableComplexVolatileStrategy for which best suitedDiversifiedFocus/low costResponsive-nessInnovative
51 Lincoln Electric Structural Dimension Divisional
Efficiency of resource utilizationPoorEfficiency of time utilizationGoodResponsiveness to the environmentModerateAdaptability over timeAbility to hold people accountableExcellentEnvironment for which best suitedHeterogeneousStrategy for which best suitedDiversified
52 Coordination of Mechanisms Hierarchical plans & procedures
FunctionalDivisionalMatrixNetworkDivision of LaborBy inputsBy outputsBy inputs & outputsBy knowledgeCoordination of MechanismsHierarchicalplans & proceduresDivision Gen. Mgr. &corporate staffDual reporting relationshipsCross-functional teamsDecision RightsHighly centralizedSeparation of strategy &executionSharedHighly decentralizedBoundariesCore/peripheryInternal/external marketsMultiple interfacesPorous & changingImportance of Informal StructureLowModestConsiderableHighPoliticsInter-functional
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