Hanson Case A

Group 2 :

Bahrudin Yusuf .TIka Sekartaji

MM UGM AP-14 YOGYA

History Timeline

• Hanson was built up by James Hanson, later Lord Hanson, and Gordon White in the late 1950’s.

• By 1973, the British economy had a big trouble :

stock market had collapsed; labor disputes; inflasion increasing rapidly there was no need to split up.

Hanson would run the British Operation and White tried to build operation in USA.

• By 1974, White managed his first acquisition of J. Howard Smith Company, a New Jersey based processor of

edible oils and animal feed that was later renamed Seacoast Products.

• In 1984 :

White’s first hostile takeover : the US Industries (USI). The acquisition of USI was followed by 3 other

hostile takeover bid : SCM Corp, Kaiser Cement, Kidde.

Hanson takeover the London Brick (Britain’s largest brick manufacturer), Imperial Company (largest

tobacco company), Consolidated Gold Fields.

Acquisition PhilosophyWhite’s Philosophy (Hanson Industries, US Subsidiaries) :• Target characteristics

companies based in mature, low technology that show potential improving performance.

• ResearchHanson’s staff routinely investigates companies undertaking leveraged buyouts.

• Risks assesmentgive considerations to what can go wrong and the likely consequences of a worst case scenario.

• Fundingthe British acquisitions have been funded by a mix of cash, equity, convertible securities and loan stock.

• Disposal to reduce debttypically sells off the parts of the acquired company that cannot reach Hanson’s stringent profitability targets.

Cont’d• Elimination of excess overhead

closing down the company’s headquarters, eliminating staffs, sending other staff down to operating level.

• The creation of incentivesAchieved by : decentralization designed to give operating managers full autonomy for the running of their businesses. motivating managers by setting profit targets giving managers large pay bonuses if they hit or exceed Hanson’s profit targets

Cont’d

Hanson’s philosophy (Hanson PLC, British Operations):• Decentralization

all day to day operating decisions are decentralized to operating company managers.• Tight financial control

achieved by : operating budgets capital expenditure policies

• Incentives systemsa major elements of the pay of operating managers is linked directly to operating company’s performance.

• Board structureno operating company managers are ever appointed to the board of ether Hanson PLC or Hanson Industries

• De-emphasizing operating synergyin contrast to many diversified companies, Hanson has no interest in trying to realize operating synergy.

Organizational Structure

Hanson PLC (UK) Hanson Industries (US)

Consumer Building products industrial Brewing & food

UKAlldersBritish Ever ReadyImperial Tobacco

USACarisbrookFootwearSmith corona

UKHanson BrickCrabtree

USAUSI Lighting & building products

UKLindustries

USAUSI furniture & industrialSCM industrial

UKImperial foods

USAHygrade foodDurkee food

Lea & Perrins inc.

SCM acquisitionsSCM profile :• Diversified manufacturer of consumer and industrial products• Had 22 operating companies based in 5 industries ( chemicals; coatings &

resins; paper & pulp; foods; typewriters)• The world’s leading manufacturers for portable typewriters• The world’s third largest producer of titanium dioxide• The sixth largest paint manufacturer• A major force in th US food industry Durkee Famous Foods

Attraction to Hanson• Poor financial performance• Beginnings of a turnaround• Mature businesses• Low risk

Cont’d• Titanium dioxide was dominated by global oligopoly

2 favorable trends that made high returns likely :- a worlwide demand was forecasted to exceed supply for the next few years- input costs were declining because of the currency weakness of the major raw material source, Australia.

• Corporate overhead

Result after SCM acquisition

• 4 business were sold off in as many months for a total amount that recouped Hanson the original purchase and left Hanson with the 2 best business in SCM’s portfolio : Smith Corona typewriters titanium dioxide business

• 2 main reasons to retain the titanium dioxide business : industry operating at close to 100% capacity & with projections indicating an increase in demand through 1989. two thirds of world production of titanium dioxide is in the hands of global producers.

Cont’d

In the 2 years prior to the acquisition, SCM’s management had undertaken the following steps :• a new line of electronic typewriters had been introduced to match the increasingly sophisticated Japanese models.•capacity had been reduced by 50% & 6 US production facilities had been consolidated into a single assembly plant.•As a result of automation, economies of scale, labor agreements, productivity at the New York plant had increased fourfold since 1984, and unit labor costs had declined by 60%.•The manufacture of electric models had been moved offshore to a low cost facility in Singapore.•Smith-corona typewriter had just introduced the first personal word processor.

The Imperial Acquisition

Company profile :• One of the ten largest firms in Britain• Britain’s leading tobacco manufacturer• The third largest tobacco company in the world• Its ‘Courage Brewing Company’ was one of the big six beer company in UK

Attraction to Hanson• Mature business, low technology industries

There is little prospect of radically changing fashions or technological change in tobacco, brewing & food industries.

• Low riskhigh brand recognition in Britain

Cont’d• Tobacco cashflow

had a classic cash cow• Failure of Imperial’s deversification strategy• Inadequate returns in brewing & leisure

Cont’d

Results : Things began to go wrong for Hanson in the 1980s, as growth began to slow

and Hanson attempted to maintain high share dividends. In the past, the problem was easily overcome by acquiring new businesses. But now Hanson PLC had become a victim of its own success. The size of the necessary acquisitions to meet the dividend requirements of shareholders was growing ever larger. This raised the problem not only of finding large potential acquisitions to meet the company’s requirements, but also of funding them.

Hanson was criticized to fail to add value to the companies they acquired (Imperial Chemical Industry acquisition in 1990), even they got profit of £45 million ($70 million) when sell its stocks in 1991.

Hanson PLC’s Strategy

• Make sure that value is being added to every business in the portfolio by

identifying ways in which each can be helped to achieve major improvements in

performance.

• Restrict the portfolio to activities in which a constructive fit—useful skills attuned

to the needs of the businesses—exists at the center.

• If growth prospects appear limited, try reinvention, moves into related businesses,

new ideas, or acash-cow strategy.

• Focus effort and investment on areas in which the company have demonstrable

skills: don’t diversify into unknown areas.

• When substantial and discernible value is not being added, change the portfolio.

Conclusion from the overall acquisition strategy

• As a result of Hanson’s acquisition strategy, it had become reliant on natural resource companies which operated with weak cash flows. As a consequence, funds for further acquisitions could only be raised by selling existing business assets, usually the most profitable ones. The difficulty was that Hanson’s portfolio of businesses was steadily weakening over time, as the best-performing stock was sold to purchase low-performing assets.

• However, Hanson's individual management style had multiplied the negative effects of the changed business environment, leaving it less well prepared than most of its counterparts to adapt. Its short-term focus on earnings, pattern of acquisitions and disposals, lack of direct internal investment, obsessions with high dividends, labyrinthine accounting and tax management, and culture of financial engineering, brought it to a relatively weak pre-demerger position in 1996.