Merger feasibility and valuation
Satellite Co. was a leading manufacturer of satellites, including commercial satellites with revenue of $1.5 billion. The satellite industry was global and included two large market segments: government and commercial. The satellite market was growing at less than 1%. As well, the industry was plagued with significant production overcapacity in the industry, forcing consolidation. While the business had made significant improvements in profitability, the company was not able to earn its cost of capital. The objective was to remain competitive in a consolidating industry given the company’s large base of fixed assets and required continued investments going forward.
Determined the value and the feasibility of a merger with a strong competitor, including Hughes Satellites or Loral Corporation.
VALUE
• The value of the consolidation was estimated at $670 million.
• The consolidation would raise the stand-alone company value of $490 million to a combined value of $1.2 billion.
FEASIBILITY
Although the acquisition would be profitable, it would be difficult for the company to afford the merger given the company’s weak financial position and the high price of the acquisition.
Another option would be to sell the business to a competitor. The sale would encounter two issues:
• An expensive price given the high A&D multiples, and
• The likelihood that a Hughes/Boeing relationship would take precedent
We analyzed the industry, its financial determinants, and various scenarios for the company to earn its cost of capital.
INDUSTRY AND MARKET ANALYSIS
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
SCENARIO ANALYSIS
Determined the industry cost of capital and overall Return on Capital Employed (ROCE)
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
FINANCIAL ANALYSIS
Analyzed company profitability, asset utilization, cash flow, and growth by line of business, including
• Commercial Telecom
• Military Telecom
COMPARATIVE VALUATION OF POTENTIAL M&A DEALS
Determined feasibility of combining the company with competitors, including
• combined capabilities
• combined benefits, including
• – rationalization of production facilities
• – cost savings (one time, recurring)
• – rationalization of investments
• overall financial position
COMPETITOR ANALYSIS
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
FINAL DETERMINATION
Determined best opportunity based on two factors
• strategic end game
• financial value
