Bombardier Adtranz Acquisition Case Study

 

1Overview

OVERVIEW

Bombardier had evolved from its humble beginnings as a snowmobile manufacturer based in Joseph-Armanan Bombardier’s garage to a global business in which its once core recreational products wereovershadowed, on a revenue basis at least, by its offerings in transportation, aerospace, and capital.In every segment in which the company operated it was either number 1 or 2 globally. This was notthe case for the Transportation group (BT) in Europe, where in 2001 it sat in fourth place behindAlstom, Siemens and Adtranz (AT). However, the AT acquisition presented the opportunity to vault BTto the forefront of the industry. At a price tag of US$715 million (23% of AT’s 2000 revenue) AT was abargain and an opportunity worth considering for several reasons:

Revenue Growth

: Unlike all other Bombardier businesses, BT’s revenue was counter-cyclical sogrowth in the sector would provide better balance to its overall revenue (Figure C1 in Appendix C).With the addition of AT, BT’s annual rail-related revenue could grow to US$7.6 billion in 2001 (upfrom US$2.2 billion in 2000) with a backlog of US$14.5 billion.

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While BT was a low marginbusiness it was a cash generator that helped to finance other Bombardier businesses.

Geographic Expansion

: AT had a presence in a broader range of European markets and theregion was viewed as the centre of technological development. Asia and South America utilizedEuropean engineering and practices so AT provided BT better access to future markets.

Completion of Product Portfolio

: BT lacked propulsion system and train controls competence.This had been mitigated by outsourcing to competitors and suppliers; however it was acompetitive weakness as was exemplified by AT’s exclusion from a key deal in the UK in 2000. ATexcelled in these areas, and provided immediate cost synergies and long term strategic strength.Naturally the acquisition was not without its downside. There were many aspects of the deal thatwarranted consideration:

Acquisition Size:

While BT had a successfully track record of acquisitions it had never integrateda company of AT’s size. Based on 2000 figures, AT had nearly 40% more employees, just under 50%more in sales, and operated in 60 locales. The differing company structures were also of concern.

Financial Performance:

AT posted net losses going back 4 years in spite of restructurings. Evenat a bargain purchase price, an unsuccessful integration could threaten BT’s income and cash flow.

Due Diligence:

AT was understandably reticent to let a competitor gain full access to its “books”should the deal not complete, so BT’s diligence process was not comprehensive. Furthermore BT’sEuropean management had not participated in the deal; only amplifying the potential risks.

Customer Loss:

The acquisition could trigger the loss of customers or new contracts. Additionally,AT had earned a reputation for poor production and servicing that competitors could exploit.A comprehensive plan would be required to realize the projected synergies, tackle the above notedconcerns, and - should the deal clear - anticipate and address regulator stipulations.

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“Bombardier Gets Adtranz for a Bargain”.http://findarticles.com/p/articles/mi_m1215/is_9_201/ai_65805853/ 

TORONTO -- Bombardier Inc., the Montreal aerospace and transportation-equipment concern, said it agreed to acquire DaimlerChrysler AG's Adtranz rail unit for $725 million in a move to diversify Bombardier's core activities.

Bombardier said that under terms of the deal, which is subject to regulatory approval, it will assume Adtranz's long-term debt of about 30 million euros ($27.2 million) and will also share proceeds from the planned sale of Adtranz's fixed installations and signaling businesses.

The Adtranz acquisition will make rail-car design, manufacture and distribution a much bigger part of Bombardier's activities. In the latest fiscal year, ended Jan. 31, rail cars generated 3.4 billion Canadian dollars (US$2.29 billion), or about 26.5% of Bombardier's C$13.6 billion total revenue, while its aerospace businesses generated about 60%. With Adtranz's C$5 billion in 1999 revenue, rail cars would have generated more than 40% of Bombardier's income, said Robert E. Brown, president and chief executive officer.

"Passenger trains are key to Bombardier's diversification," he said, adding that acquiring Adtranz "will improve the balance between our sectors." Demand for trains is strengthening as traffic congestion plagues more and more cities, Mr. Brown said.

Adtranz's train-control and propulsion-system technologies will transform Bombardier's transportation division into "a full-fledged integrated player" able to compete with train-making giants such as Germany's Siemens AG and France's Alsthom SA, said Jean-Yves Leblanc, Bombardier Transportation president and chief executive officer. Bombardier must outsource some train-control, electric-locomotive and propulsion work because it lacks the technology to perform it in-house.

Moody's Investors Service said the acquisition wouldn't alter Bombardier's debt ratings, and said the rating outlook is stable. While the acquisition weakens Bombardier's balance sheet in the short term, "the combination of the two businesses will make Bombardier one of the world leaders in activities of the rail transportation sector."

Bombardier stock rose 55 Canadian cents, or 2.33%, to C$24.20, in 4 p.m. Toronto Stock Exchange trading Friday.

Write to Elena Cherney at elena.cherney@dowjones.com

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