Acquisition Plastics Company (Non-Defense Related)Attract Equity Capital by forming a closed corporationBoard of Directors wvith Wallace as Chairman and President of the new corporate entity.With respect to operations little changed. Wallace continued direct operational control over the Electronics Group. As holder of 60% of the stock, he maintained effective control over policy and operations. However, because of his personal interests, the Plastics Group,Progress reports - Plastics Group continue its profitable operationthis acquisition required a public stock offering, with most of the funds going to payoff debts incurred by the three groups, especially the Chemical Group
countermeasure tactical lockon radar
Both involve the creation of tactical display systems for aircraft being built by Lombard Aircraft for the Navy and the Air Force.Future potential sales from these efforts could amount to approximately $56 million over the next five years. (Dependent on testing of the final product)
Total profits earned along the value chain to determine the primary sources of profits
FinanceSecretarial/LegalMarketingIndustrial RelationsGroup LevelElectronics, Chemicals, Plastics GroupsElectronics GroupPlastics GroupChemicals Group
Host communitiesWant companies willing to be long-term employers and providers of tax revenues while minimizing demands on public support services
Decreasing dividends despite increased profitNet income increase is misleading: income after tax last year is much higher than that two years ago, while the pre-tax income is almost the same. This might be due to deferring tax.Long-term debt increased significantly without a corresponding increase in total assets. Probably borrowed funds were used to finance losses.
Profit Margin increase is misleading (deferred tax)ROI, ROE, WC and Debt Ratio are all OK, but how about the future (short-term versus long-term).
Customized systems business model: solutions are designed and manufactured based on specs provided by customer, no economies of scale.Commodity = many suppliers with little quality differences – differentiator is price.Many unresolved problems: which lead to the bankruptcy of the original company.
Wallace: an disliked leader with poor vision, short-term focus rather than long-term, a majority shareholder managing the business.Workforce Problems: low employee morale, low salaries, high job specs, inability to attract good staff, workers union pressures, resources drain (e.g. the 6 engineers lent from electronics to chemicals), no management development programs, demanding managers … etc.
Agency CostsThe sum of incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by shareholders, because governance mechanisms cannot guarantee total compliance by the agent.Executive CompensationUse of salary, bonuses, and long-term incentives to align managers’ interests with shareholders’ interests
Redundancy between corporate roles and business unit roles shouldn’t be allowed.
The Road of Acquisitions<br />Product Diversification Initiative within the electronics industry to gain a foothold in the private markets via product development and line extensions.<br />Electronics<br />(Sole Proprietorship)<br />Total dependence on defense-related contracts<br />Plastics<br />(Sole Proprietorship)<br />Group<br />(Closed Corporation)<br />Chemicals<br />(Sole Proprietorship)<br />two-thirds business defense-dependent <br />40%<br />Investors<br />60%<br />HAL<br />Electronics Group<br />(Publicly Traded)<br />40%<br />Investors<br />45%<br />HAL<br />10%<br />IPO<br />5%<br />J.L.<br />Chairman & President<br />
Business Portfolio<br />Consolidated Sales = $70 mill<br />Chemicals Group<br />Electronics Group<br />29%<br />50%<br />21%<br />Plastics Group<br />Principal sales are to large contractors in governmental and automotive markets. <br />
ELECTRONICS<br />microelectronics, electromagnetic sensors, antennas, microwave, and minicomputers. <br />Engineering and manufacture of countermeasure equipment for aircrafts. <br />
“Developmental” PROGRAMS<br />Development of New Display Systems <br />Upgrading Existing Display Systems<br />Army Department Contracts<br />Minor Programs:<br />Army-LG <br />OBT-37<br />Defense Department Contracts<br />Major Programs<br />The Navy-A Program: Tactical Aircrafts<br />Air Force-B Program: Observation Aircrafts<br />
PLASTICS<br />Plastic components utilized by the electronics, automotive, planes, etc.<br />switches, knobs, keys, insulation materials, and other components used in the manufacture of electronic equipment<br /><ul><li>Manufacturing problems have forced the group to raise its prices.</li></li></ul><li>CHEMICALS<br /><ul><li>Supplies bulk chemicals to the Plastics Group and other companies.
These chemicals are then injected into molds or extruded to form a variety of finished products.
Manufacturing problems have forced the group to raise its prices.</li></li></ul><li>Vertical Integration & Profit Pool<br />
Corporate Level Management<br />Shareholder’s Cost - -><br />Does It Create or Destroy Value? Competitive Advantage?<br />
Business Performance: Groups<br />Electronics<br />Accounts for 70% of group’s net income and 50% of groups revenues.<br />Small growth despite large potential.<br />Narrow Focus: countermeasure equipment for aircrafts for defense sector.<br />Customized systems business model.<br />Preference to supply from sister companies despite higher prices.<br />Plastics<br />Chemicals<br /><ul><li>25% of group’s net income
Make-to-Order business model.</li></ul>5% of group’s net income <br />21.4% of groups revenues<br />Main customer is the Plastics BU<br />A commodity.<br />Not profitable.<br />Many unresolved old problems.<br />
Corporate Governance<br />Separation of Ownership & Managerial Control (Modern Public Corporation)<br />Separate Risk-bearing from Decision-making<br />Response to Managerial Opportunism:<br />establish governance and control mechanisms to prevent managerial opportunism.<br />
Use of salary, bonuses, and long-term incentives to align managers’ interests with shareholders’ interests</li></li></ul><li>Governance Costs<br />External Governance Mechanism<br />Market for Corporate Control<br /><ul><li>Becomes active when the firm’s internal controls fail
Takeover of the company if underperforming relative to industry rivals in order to improve the its firm’s strategic competitiveness</li></ul>Costly Takeover Defense Tactics<br />
Corporate Strategy<br />Goals<br />Value<br />Proposition<br />Product Market<br />Focus<br />CoreActivities<br />The goal should be:<br />Profit Maximization of the group as a whole.<br />Sustainability<br />