Rationalizing business lines in satellite production

Satellite Co. was a leading manufacturer of satellites. The satellite industry was global and included two large market segments: government and commercial. The satellite market was growing at less than 1%. There was significant production overcapacity in the industry, forcing consolidation. The organization was cash-flow positive, but it was eroding its position quickly as it was not earning its cost of capital. The objective was how to remain competitive in a consolidating industry given the company’s large cost structure, its large base of fixed assets, and required continued investments

Recommended combining the Commercial Telecom Satellite and Military Telecom Satellite business lines into one to extract value

  • 8% cost reduction ($230 million)
  • Large asset reduction $213 million)
  • 2% price increase
  • EBIT profitability improvement from 7% to 11%
  • Improvement in Asset leverage (Revenue / Average Net Operating Assets) from 0.5 x Revenue to 1.0 x Revenue
  • Overall Return on Net Assets achieved 11%, meeting its cost of capital of 11%

In addition, recommended testing buyers’ interest in a potential sale

  • Selling the combined Commercial and Military Telecom satellite business to a competitor
  • Synergies included asset consolidation, improving Asset Leverage from 1.0 x Revenue to 2.3 x Revenue
  • However, the deal would be expensive as acquisition Aerospace & Defense multiples had risen from 0.3 x Revenue to 1.5 x Revenue as industry consolidation was approaching an end-point

We analyzed the industry, its financial determinants, and various scenarios for the company to earn its cost of capital.



Estimated overall industry structure and level of consolidation
Estimated market size, historical growth, and breakdown by segment
Estimated segment share by competitor
Assessed the competitive landscape, including key issues by competitor



Determined the industry cost of capital and overall Return on Invested Capital (ROIC)
Analyzed various industry scenarios based on the number of players (5, 4, and 3)
Determined that a 3-player industry scenario would be the only feasible option for companies to earn their cost of capital



Analyzed company profitability, cash flow, and growth by business line, including

  • Civil and Military Space
  • Commercial Telecom
  • Military Telecom

Identified Commercial Telecom as particularly weak and Military Telecom having limited growth opportunities



Determined feasibility of combining Commercial Telecom unit with Military Telecom unit, including

  • combined capabilities
  • combined benefits, including
    – rationalization of production facilities
    – cost savings (one time, recurring)
    – rationalization of investments
  • overall financial position



Developed detailed profiles by competitors, including

  • Financial performance
  • Product lines
  • Customer sales
  • Existing relationships with satellite operators
  • Services
  • Distinctive skills

Determined feasibility of alternative deals based on the following metrics

  • market share
  • combined capabilities
  • combined contributions
  • combined benefits, including
    – rationalization of production facilities
    – cost savings (one time, recurring)
    – rationalization of investments

For each M&A deal, determined financial implications for the company, including the total amount of shareholder value creation



Determined best opportunity based on two factors

  • strategic end game
  • financial value