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7/28/2019 Hanson PLC
1/26
Hanson PLC:
Demerger and Analysis
Nick Gross Luke Skurman Ryan GallantJack Hsu Warit Achavanuntakul
Group 9
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Executive SummaryHanson PLC became an extraordinarily powerful company under the leadership of its two
founders: Sir Gordon White and James Hanson. Hanson oversaw the U.K operations, while SirWhite expanded the company by establishing a new base of operations in the U.S. Sir Whitebuilt his reputation as a corporate raider, one who overtakes large corporations both throughpassive buyout schemes and hostile ones. The company experienced an amazing growth periodfrom its inception until the early 90s, when it became apparent that Hanson PLC had become toolarge to subside by acquiring companies. In 1997, the company went through a demerger, inwhich the company was split into four different sectors: Energy, Tobacco, Chemical, andConstruction. The only splinter to maintain the Hanson name was the Construction one, whichbecomes the main academic focus of this paper.
Hanson (the construction splinter) faced a new challenge as a company: both foundershad retired and the company needed to take a new direction to continue profitability. It is withthis in mind, that three recommendations have been put forth to ensure continued success for thecompany. Those three are: Horizontal Market Expansion, International, and USexpansion. After extensive research (see attached), it was determined that Hanson represented a
very strong company, with solid profit margins and financials. The reason for such anaggressive strategy is simple; Hanson has a significant pool of liquid assets and expansionbecame necessary to remain competitive on a global level.
First off, lets examine the process of horizontal market expansion. It is recommendedthroughout this paper for Hanson to expand its construction materials scope to include glass,steel and lumber. In a sense, this allows the company to become a one-stop shop for industrialconstruction materials needs. Steel and lumber are two industries that are both in a downturnand subject to a relatively cheap overtaking; a strategy that has proven successful for Hanson inthe past. As forthe glass industry, it fits very nicely into Hansons profile, especially since it isan industry that is heavily dependent upon sand, one of Hansons most abundant resources.
Next, lets examine international and U.S. expansion as a whole. Hansons construction
competitors have begun to expand into areas such as South America, where the industry isblooming and offering numerous opportunities for growth. It becomes necessary for Hanson tomove into the region to realize global expansion and to push its new horizontal market expansionstrategy. Also within the U.S., Hanson has a weak hold on the marketonly working in thirty ofthe fifty states. It is recommended that Hanson expand its U.S. operations in concurrence withits horizontal market expansion to maximize the companys profits and to enjoy continuedsuccess for a storied corporation.
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Analysis of Demerger
Hanson PLC at one point in time was one of the biggest companies in the
world. Hanson was one of the biggest businesses in England and in America. The
tactic that Hanson used in its original business plan was to buy companies, split them
up, and make obscene amounts of profit off of their dismantling. Hanson grew into
one of the largest companies and to keep up with its own growth it became necessary
to acquire billion dollar businesses. In the world, there are only a finite number of
billion dollar businesses. Hansons shareholders demanded dividends because they
were accustomed to them for the previous 26 straight years.
Hanson had a real issue at hand, how were they going to continue to grow
when they had billions of dollars of debt and only a few companies left in the world
that would further enhance the existing businesses that they already owned. Thus,
Hanson decided to focus on four specific markets, Building, Chemical, Energy and
Tobacco. Hanson started to build each one of the four segments into huge billion
dollar businesses. Hanson was the enormous umbrella and these separate but huge
segments all fell under it. Hanson was making friendly and hostile takeovers at any
cost.
When the company was first formed the driving force of the company was by
two men, Sir Gordon White and Lord Hanson. Hanson was the man who stayed
mostly in England and would tinker with the companies once they had been acquired.
White was the acquisition mastermind. He had a vast array of contacts and could
sense an opportunity to make Hanson a more profitable company from miles away.
Together what Hanson and White set out to due was simple, make a great deal of
profit. It sounded simple but the way in which these two worked together was
remarkable and could hardly be replicated. The opportunities that attracted them the
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the tobacco into separate public companies. Their reasoning was that from 1990-1996
the companies stock had not really moved at all. It wasnt increasing or decreasing
because investors werent thoroughly impressed with the progress that Hanson had
achieved as of late.
The new management knew that they had to do something dramatic and the
demerger is the route that felt was best for many reasons. Other huge corporations
have used demergers in the past to lift up a stock price and to get analysts excited
about the stock again, examples of this include, Sears and AT+T. Thus, Hanson
decided after serious deliberation that the demerger was necessary and that it was a
good thing for the company. The other reason that Hanson felt that the demerger was
going to be essential was because the company was simply growing too large and the
chances of finding companies to acquire were becoming harder and harder to find.
After the demerger they became four separate public companies, Millenium
Chemicals, Imperial Tobacco, Energy Group PLC, Hanson PLC. Of the four publicly
traded companies only Hanson PLC is the only one that kept the name and turned its
focus to the building industry of the world. Hanson PLC in turn sold off the other legs
of the company to minimize some of its large amounts of debt.
Hanson picked the building aspect of their company to further push because
they felt they had the best chance at total domination of the market throughout the
world. Upon further looking into the demerger it is definitely clear that Hanson made
a wise move in splitting up the companies. Hanson was getting too big and the idea of
honing in their business into one specific sector seemed to make the most sense. The
only point in the demerger that is up for debate is if they sold Imperial, Millenium and
the Energy Group too soon and too cheaply. Some may argue that the three businesses
should have been held longer and if one were to look into each of the individual
companies financial performance, all have done well since being sold off. In
conclusion Hanson probably could have gotten more for each of the companies that
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they sold but in complete honesty, Hanson had so much debt that it was totally
necessary to liquid some of their companies and have a better financial position. The
companies were more valuable that what they were sold for but the time sensitivity of
when the demerger took place indicates that Hanson made the right move and now has
set itself up for a bright future in the building sector.
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Recommendations
Horizontal Market Expansion
Not only should Hanson expand its current aggregate construction material
market both domestically and internationally, but Hanson should also expand its
market horizontally into new product lines. One recommendation we came up with
was for Hanson Plc to look into other major construction material markets such as the
steel and glass industries. In essence, Hanson would be expanding their market to
include construction materials other than just bricks and cement, thereby turning the
company into a one-stop shop for all industrial construction needs. Not only will
this strategy lower the overall material cost for their clients, but it will also help
Hanson Plc expand into new markets and increase its profit margin. To accomplish
this goal, we recommend Hanson Plc considers buying companies from other
construction material industries. Not only does this option fit seamlessly with Hanson
Plcs bolt-on acquisition strategy but it would also offer a golden opportunity for the
company to immediately expand into these new markets.
We have selected three other major building materials industries that Hanson
Plc should consider immersing itself within, namely the steel, glass, and timber
markets. While these industries have somewhat different characteristics and
opportunities as will be further discussed in the next section of the paper, were
confident that Hanson Plcs distinctive competencies in company acquisition and
management will be able to bring these industries together and make it a profitable
business model. As shown throughout the history of the company, Hanson Plc has
been able to successfully acquire and manage major companies that have significantly
different product lines such as Tobacco and Typewriters. Nevertheless, acquiring
companies in the steel, glass, and timber industry will not make the company lose
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focus of its current aggregate construction material market, but rather strengthen it.
Currently, there is no company that offers such a selection of construction materials
on such a grand scale. Since the company will be focusing on construction
components that are essential to the industry, Hanson Plc will gain a substantial
advantage over its competitors when bidding for jobs.
The following three sections are brief examinations of each of the recommended
industries for expansion:
Steel I ndustry
Steel is the most basic and widely used metal in the construction world,
accounting for more than $57 billion in sales per annum. Currently the U.S. is the
largest steel producer in the world, accounting for 5% of the total U.S. manufacturing
GDP. The current US Steel industry is controlled by a handful of large firms, which
have substantial government subsidization. However, the industry has recently
experienced a production overcapacity resulting from economic slowing in Asia and a
global recession. Bethlehem Steel Corp., one of the biggest U.S. steel manufacturers,
filed for Bankruptcy on Monday, October 11, signaling a significant downtrend in the
industry.
While the steel corporations in the U.S. are facing a hard time from the global
recession, it might offer Hanson Plc a unique time and opportunity to buy steel
companies that are undervalued at a premium price. The stock prices of the steel
companies have been dropping more than 70% on average from the past two years.
(AK steel holding 26.14 vs. 9.25, Birmingham Steel 20.12 vs. 0.54, USX US Steel
20.75 vs.14.37). Since steel and concrete are the fundamental building materials of
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any construction project, steel companies would be a natural fit for Hanson Plc to
incorporate into their product line.
Timber Industry
Before the demerger of the company in 1990s, Hanson Plc was already
involved in a small lumber operation. However, Hanson Plc has lost this market
completely after breaking apart the company and selling much of its assets. Currently
there are numerous timber companies scattered throughout the world, each holding
their own specific lumber location area. Underdeveloped countries and North America
are the primary market for the majority of such companies. While there is no real
dominant firm that controls the timber market akin to the steel industry, 50% of the
world timber production comes from the top 50 lumber companies. The high-powered
firms, such as international paper, do not play such a big role in the construction
materials market but rather in sheet-paper. Local middle-size wood companies are
largely responsible for construction-grade lumber production. Considering the size
and financial power that Hanson Plc has, it should not present a large problem for
Hanson to acquire these companies and enter into the timber market.
Construction-grade lumber products represent a vital construction material for
small to medium-size construction project and any interior decorations. At present the
market is considered very large and has very few top suppliers. By being able to
bundle lumber with other construction materials, we feel that Hanson Plc will gain a
huge advantage over the existing players in the market. Take into consideration that
Hanson Plc has once run a company in this market before, the timber market will then
represent a very attractive market for Hanson to expand into.
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Glass I ndustry
The glass industry is a mature but still growing industry with a rate of 3%
annual growth. The industry includes both major corporations and small business
companies, accounting for more than $27 billion in annual sales. There are four major
distinct segments within the glass industry: glass containers, fiberglass, flat glass, and
specialty glass. While research and development of all glass sectors are closely tied
together, operations are mostly independent. Flat glass is the most widely used
product in any construction project. We then recommend that Hanson Plc should enter
only into the flat glass industry to maintain its focus on construction materials.
Similar to the steel industry, recent economic recession has forced many glass
manufacturers into a difficult position. Nevertheless, the recession seems to have less
effect on the glass industry than the effect it had on the steel industry, as most of the
glass companies have begun to recover from this economic downturn. One fact that
makes the glass industry an attractive market for Hanson Plc engage itself in, is the
fact that glass is made mostly from sand. Hanson Plcs current aggregate products also
depend largely on the sand supply. Hence, by having two operations using the same
line of supply material, Hanson then would be able to exploit its supply inventory to
the fullest extent. By being able to offer flat glass products to its clients in addition to
concrete, steel and wood material, Hanson Plc then will be able to establish itself as a
complete provider of all major construction material, giving the company a distinct
competitive advantage, which would in turn lead to a significant increase in profit
margins.
Expansion into South/Central American Market
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We feel that Hanson must maintain its strategy of expansion into new markets
through bolt-on acquisition. With the exception of Antarctica and Africa, Hanson has
operations in every other continent in the world, barring South America. The entrance
into South Western Hemisphere is the next logical step in Hanson maintaining its
competitive advantage. We feel that Hanson stands to see considerable gains through
expansion south of the US border.
The South/Central American markets are in their embryonic stage, due to the
fact that most of the countries in that region are poverty stricken. However, with the
implementation of NAFTA, and as more American companies relocate their plants
and operations into South America we feel Hanson stands to increase revenues by
entering into major contracts for road construction, factories, and other infrastructure
projects.
It must also be considered that the value of resources such as quarries has
consistently been increasing, even more so in recent years as regulations become
stiffer in countries such as the US and the United Kingdom. Many South American
nations lag behind America and Britian in this regulatory aspect. Therefore it is
conceivable to believe that South American quarries may be purchased at a
discount.
Currently, two of Hanson's major competitors, Vulcan and Martin Marietta
Materials, both have operations south of the US border. Additionally, two of the
world's top concrete producers, Cemex and Holderbank, also have operations in
Mexico and South America. It is our opinion that Hanson's failure to exploit this
opportunity is a major weakness.
We feel Mexico is the ideal place to gain a foothold in the Central American
market. Hanson PLC currently has operations in several border states with its biggest
plant in Texas. The purchase and integration of an existing company with a presence
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in the region will gain Hanson market share and "pave" the way for further southern
expansion.
The question of who to acquire is a difficult one. This is due to the relatively
immature and fragmented nature of the industry in Mexico as compared to Europe and
the United States. There are many private companies who own quarries and
plants. This makes it very difficult to find the right company to acquire. We feel that
Hanson should not look for only one company but possibly many small companies.
One particular company who seems to be a fit for Hanson is Grupo Cementos
de Chiuahua, S.A. de C.V.
"Currently it is a vertically integrated group, whose subsidiaries are engaged in
the production and sales of gray cement, mortar, ready-mixed concrete,
materials and aggregates for construction. The facilities include two cement
plants, two mortar plants, seven concrete plants, two terminals and installations
for the production and sale of construction materials and aggregates. The GCC
Group's cement plants are located in the cities of Chihuahua and Juarez,
fulfilling 95 percent of the market in the state of Chihuahua. The facilities to
produce ready-mixed concrete are distributed within the state of Chihuahua,
holding 75 percent of that
market." (http://www.mexicosi.com/business/busdir/company.htm#building)
We feel that by entering into the Chihuahua, Mexico's largest state, Hanson will gain
a strong presence in the Mexican region and be positioned to move closer towards the
equator.
It is our belief that Hanson should not be satisfied with simply a presence in
Mexico, we feel that they should continue expansion farther down Central America
and into South America.
It is our belief that Hanson should enter the Brazilian market place. Brazil is
the largest country in South America and one of the most developed; however, it is
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still an emerging market in most respects. Over the last ten years construction trends
in Brazil have shown growth. Although growth may have seen a slow down in recent
years one can partially attribute that to stagnant global economic growth, however, the
market still exists and the opportunity for Hanson to see large profits is most certainly
there. Additionally, the economic slowdown may in fact prove to be an advantage to
Hanson when attempting to acquire a company. We feel that by entering into the
Brazilian marketplace Hanson will be strategically positioned to enter into the
remainder of South America.
The question of who to acquire is even more complicated in Brazil than in
Mexico. Again, the industry is fragmented, even more so than in Mexico. Also,
finding information on potential companies to acquire has proven very difficult due to
language barriers. It is our recommendation that Hanson not look for simply one
company to acquire in Brazil, but many. We feel that Hanson can effectively enter
into the Brazilian/South American market by bolting on many small companies.
It is our recommendation that it is imperative that Hanson enter into the
South/Central American market. Considering two of its main competitors, Vulcan
and Martin Marietta Materials, have a South American presence, and the region is
generally in its embryonic stage, Hanson stands to realize considerable profits from
South American expansion.
U.S. Expansion Strategy
After a SWOT analysis, we have determined that Hansons primary strength is
its acquisition skills backed by an extensive credit line. Hanson has become a
dominant player in the building and construction industry, which makes a high
earning growth rate hard to achieve. The global economic slowdown gives Hanson the
opportunity to consolidate the building and construction industry.
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We recommend Hanson starts this consolidation by acquiring small companies
in areas of the United States where the locations offer strategic importance for
enhancing the internal strength of Hanson. Hansons management has identified many
of their priority concerns. Some of their recent acquisitions, such as Pioneer,
demonstrated their skill in successfully executing this strategy. However, we believe
Hanson is not paying enough attention to the opportunities in the United States. The
United States has long been the technology leader in the world. The management has
been trying to cut costs through the use of information technology and corporate
restructuring. Both of these endeavors are very expensive and represent long-term
commitments of resources, which make it essential to ensure the best possible
implementation while keeping maintenance costs low. To achieve this ambitious goal,
Hanson needs top notch companies with extensive innovative track records and
experience in the research and development of brick manufacture, cement and quarry
products. Hansons management has increased its investments in the research and
development area, but there is a concern that managements consideration set is
incomplete without a thorough search for companies in the United States.
The development of commercial real estate has been slowing due to lower
profit margins. This is not likely to improve over the short term as consumers become
more frugal in the slower business environment. To benefit from this adverse
situation, Hanson can initiate two main strategies. First, open up the emerging market
with its abundant cash flow and gain the location convenience, exclusive rights to the
distribution channel (wherever it is legal), and the brand recognition while other firms
are struggling to stay afloat. This was previously outlined in our international
expansion strategy. Secondly, reduce the variable unit costs in all of Hanson core
businesses. At Hansons current production level, even a penny saved per unit of brick
can result in millions of dollars. As the recession sets in and banks become more
reluctant in offering loans, this will become an important and sustainable income.
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Currently, the U.S. equity market environment offers good opportunities. First,
the interest rate of loans is at an all time low since the 1960s, which reduces the
downside loss of a wrong acquisition. Second, many firms are trading at a significant
discount relative to their market value two years ago. This is especially true for the
technology firms, which the management concurs to be a priority for cost reduction.
Investing in any type of technologies has inherent risks. However, if we compare the
relatively low cost with the high potential for gain, the risk seems justifiable.
Information technology and material science may be the right combination for
Hansons purposes.
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Risk And Assumption
Horizontal Market Expansion
Before we consider horizontal market expansion strategy for Hanson Plc, we
have looked into its current company structure and found that there are only two
viable options for the company. Either Hanson Plc has to keep on expanding or it has
to liquidate its debt position. Since we have agreed that Hanson Plcs foremost
proficiency is its ability and know-how to acquire and manage other companies, we
do feel strongly that it should continue on expanding. While Hanson Plcs debt
position was undeniably large, we feel that this was in a relatively strong ratio when
compare to its cash flow return from its bolt-on acquisition strategy.
Acquiring other building material businesses seems to fit perfectly with Hanson
Plcs new philosophy of bolt-on acquisition[1]since it will help the company gain a
new advantage in its construction material market. Nevertheless this strategy also
presents some new risks that have to be taken into serious consideration. First of all,
there can be some hidden internal risk in each industry and company that Hanson Plc
acquires which can make this business model turns out to be unprofitable as a whole.
Yet, Hanson Plcs long history and experience in acquiring companies in a total
different market lines and successfully manage them into profitable investments
seems to make this a less threatening risk.
Another risk in this horizontal market expansion lies within the amount of
investment that Hanson Plc has to commit in buying companies in these market. Steel
industry seems to represent the biggest problem in this case since few large
corporations control most of the steel production. Nevertheless, the recent drop in
steel industry presents Hanson Plc a unique opportunity in acquiring them without
http://www.angelfire.com/wizard/warit/MSWork/Strat/HansonPaper.htm#_ftn1http://www.angelfire.com/wizard/warit/MSWork/Strat/HansonPaper.htm#_ftn1http://www.angelfire.com/wizard/warit/MSWork/Strat/HansonPaper.htm#_ftn17/28/2019 Hanson PLC
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spending large amount of investment. Glass and timber industry presents less trouble
since they are control by relatively smaller firms. The speed in the acquisition of
companies in these industries then will be a challenge that Hanson Plc has to taken
into the account.
Expansion into South/Central American Market
When entering into a potentially profitable business venture there are always
risks involved. When considering expansion into the Central American region there
are a few risks to consider. The first being market share. Currently, several of the
world's top concrete producers already operate in Mexico and South America. The
risk is attempting to gain market share away from companies such as Cemex. The
assumption we make when addressing this risk is that when Hanson finds a company
to bolt-on, the strategy in choosing that company will be much the same as the
previous acquisition strategy Hanson has used effectively. We assume that Hanson
will choose the right company to gain a strong foothold and market share. Another
associated risk is a lack of companies to acquire, or the companies Hanson would like
to acquire are selling at a premium. The assumption we make with this is at some
point in time in the near future the opportunity will present itself.
Another risk when entering into the South American market is government
stability and regulation. This is a risk that Hanson, with its global scope, manages
everyday. We assume that currently the governments in Mexico and Brazil are stable,
as well as there is less regulation in those countries as opposed to the US and
UK. Additionally, we assume that Hanson is very experienced in entrance into new
markets through acquisition and will continue to utilize its controls, be aware of
events in the region, and remain profitable at the end of the day.
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Despite the risks, we feel that due to Hanson's global scope and expertise in
entrance into new markets via acquisition, they will have little difficulty succeeding in
the South/Central American market place. We feel that this is an extremely large and
potentially profitable opportunity.
U.S. Expansion Strategy
We assume that Hansons excellent credential and global leadership attracts
enough talents, who understand which technologies can add enough potential value to
Hanson to justify the tech firms cost plus the expected value of the potential loss.
Hansons long history in traditional industries may also make it harder for the
company to achieve high level of technology adoption, which is usually a
precondition for realizing the gains.
Supporting Analysis
Distinctive Competencies
Hanson Plc has the size, the money and know-how experience in takingcompanies over. This gives them a unique opportunity in implementing their
bolt-on acquisition strategy, which turns out to be their most profitable business
models.
Hanson Plc has very strong cash flow. In 2001, the company reported an
f189 million cash generate from operation. (58% growth rate from previous
year.) This cash flow makes Hanson Plc a very strong company financially
even though it has considered amount of debts.
Given its size and strong cash flow, Hanson Plc has a stable company
structure that enables its client to trust to make deal with. Since it is also the
biggest player in the aggregate construction material market, it has a huge
amount of power.
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SWOT Analysis
Strengths:
Hanson PLC has been able to improved and enlarged asset allocation by
acquiring companies and sell off the ones that dont fit into the companys core
business. The acquisition process has been a quick way to expand geographically
allowing better global diversification. The recent purchase of Pioneer has given
Hanson a much stronger presence in several developing and emerging markets.
Pioneer also contributes strongly to the talent pool of Hansons management, which is
a long term asset for continuing success. Hansons management has been known forits exceptional ability to acquire companies at excellent prices and profit from them
through integration or selling each pieces after fixing up the inefficiencies through
management restructuring. For Hanson to agree to the price of 1.73 billion dollars,
Pioneer must be very good. The annual report suggests that Pioneer is already adding
to the earnings of Hanson despite the global downturn.
Smart use of information technology enables Hanson to share efficiently
information developed and used in different departments, which helps cutting down
the research and development costs. The fast transfer of information through various
methods of organizing and mining data helps capacity planning, which reduces
inventory levels and shorten customer response time. An efficient operation with good
management helps keep the customers happy by giving them quality products that
meets their needs.
Hanson has traditionally organized its various companies and divisions into
autonomous units and give each unit a separate management. While this has worked
well while Hanson had 150 businesses in its portfolio, we believe as the company
become much more concentrated in a few businesses all related to the constructions of
infrastructures, it is good strategy to start this more centralized form of managementfor best utilization of cross company/division resources and knowledge bases.
Hansons operations and earnings has shown improvements over the last five years
despite the Asian Crisis and the troubling economy. As one of the largest ready-mix
cement, brick and quarry manufacturer of the world, Hanson enjoys good economy
scale that gives it significant cost advantage. The cost advantage and solid financial
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position enables Hanson to take the lead in the pricing of its products without much
worry about price wars from the smaller competitors in the industry.
Weaknesses:
The integration and sharing of various types of information through out the
company may present a risk for the loss of information as some of these get sell off.
The information asymmetry between different departments also may embark political
plays, which leads to another operation inefficiencies. If Hanson has designed the
companys information flow well and offer adequate incentives for team-based
performance, this weakness can be alleviated.
The other potential weakness of growing through acquisition is the cultural and
focus fit of the acquired with the buying company. This risk can be minimized withexperience and research.
The more difficult weakness to cure is that as the company gets big and
focused, the risk of high losses resulting from one industry downturn becomes larger,
which often leads to low stock price and cash flow. This combination makes a
company a vulnerable target for hostile takeovers. Hanson has grown for years by
doing this to others, so it may be more skilled in avoiding this unfortunate scenario.
Nevertheless, we see this as a weakness for concern.
Opportunities:
China, Indonesia, Barcelona and Madrid are all going through significant
restructuring and developments. These foreign operations help diversify Hansons
portfolio. While Hanson is the leading supplier in the industry in Britain, there are still
plenty of opportunities pursue, as the government undertakes many long-erm building
projects of large public infrastructures. If Hanson succeeds, it may also boost its brand
recognition in Britain.
Threats:
Australia, UK, North Carolina, Texas are facing weakening markets, while the
costs of natural gas has increased significantly. So far, this threat has been alleviated
through continuing expansion of markets. However, if the condition worsens, Hanson
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will need to better utilize its strengths and apply them to additional opportunities to
maintain the earnings and its shareholders confidence. Otherwise, Hanson may die by
its own sword.
Value Chain
We feel that a value chain analysis was not a very applicable business analysis
tool for Hanson Plc simply because Hanson has too many independent businesses.
While value chain provides a good analytical tool to identify the business processes in
each company, it is rather hard when applying this to a large diversified conglomerate.
Even though after the demerger, Hanson Plc only focused on constructional materials,
their characteristics can still be described as a large umbrella company that hosts
many different construction companies. The only reasonable way to apply the model
is to analyze each of their internal company processes individually and we feel that
this was outside the scope of this paper and would bring little value to the argument as
a whole.Porters Five Forces
The Risk of New Entry by Potential Competi tors:
When one were to analyze the potential for new competitors in the building and
construction segment in the way in which Hanson is currently positioned, it is highly
doubtful that new competition would put up. Hanson is a billion dollar business and
has a stranglehold on the entire construction business, namely the concrete business
all over the world. There will always be new competitors but the chances of newcompetitors that would compare in size to that of Hanson is minimal.
The Degree of r ivalry among established companies with in an industry:
The degree of rivalry among the established players in this industry is pretty
significant. When one were to consider the fact that each of these contracts that can
get for concrete, in a market like China the competition for that contract is high
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competitive. There are price wars to lowball the competition there are several tactics
always being used to land these highly coveted highly profitable contracts.
The Bargaining Power of Buyers:The bargaining power of the Buyer, namely huge corporations or governments
usually have the power in this relationship. In the case of Hanson, the government will
issue a bid and indicate how much they are willing to pay for the work to be
completed. If Hanson cannot make it for the bid price they simply will not get the job.
But in the case of their competition it is necessary to sometimes make a marginal
profit to continue to gain market share and get high profile clients.
The Bargaini ng Power of the Suppli ers:The supplier in this case would be Hanson and they have to succumb the bid
prices of the buyers. Therefore they dont have a lot of power in the relationship. The
bargaining power that they do have is in their overall business plan. When then have
successful operations in all countries and have a great track record thats where the
bargaining power of Hanson can come in, great reputation and price cost leader,
Hanson is able to attract businesses in this facet.
The Threat of Substi tute Products:
Hanson is a company that sells the actual items to the construction companiesthat allow them to complete their jobs. Therefore it is unlikely that a company will
produce a material that will replace concrete or steel or quarries. The threat of
substitute products is minimal to non-existent.
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Financial Analysis
Over the six months ending on December 31, 2000 Hanson enjoyed a profit
margin of 11.7%, revenue growth of 69.1%, and a sales growth of 63.3%. Over the
course of the year Hanson saw gains from many sources, its strongest source of cash
flow was its operations. Hanson's total operating cash flow was $554.9
million. Considerable amounts of cash have also been received from selling
businesses, fixed assets and investments, $104.5 million. At the beginning of 2000,
Hanson had a total debt obligation of $2,927.1 million.
Over the course of 2000 Hanson increased this number considerably to $4,569
million. This was predominantly due to the acquisition of Australian-based building
materials company Pioneer International Limited on April 26, 2000. This represented
the largest single transaction for Hanson since the demerger in 1997. The acquisition
is considered to be very beneficial to Hanson because it strengthens Hanson's existing
positions in its current markets, while providing a foothold in the Australian market.
The cost of the acquisition was 1,542.8 million or roughly $2,268.8 million at
a .68 pounds for dollars exchange rate. Hanson paid for this acquisition by an upfront
cash payment of 1,161.7m to Pioneers shareholders and also, by issuing 82.4m
Hanson shares valued at 381.1m to make up the balance of the acquisition cost. Over
the course of the year Hanson has also increased its borrowings in order to rebuild
their cash position.
It is one of Hanson's priorities that they generate enough cash in order to
manage their high level of debt. Sales of existing subsidiaries, such as their waste
management business in 2000, will provide cash flow for Hanson, however, they still
must maintain their revenues and profit margins. Hanson uses an interest cover ratio,
which measures the amount of interest that they pay against the cash earnings
generated by the company to set a maximum amount of debt we are comfortable
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with. Over the cycle Hanson believes this ratio to be about five times, and is currently
at that level.
Hanson's balance sheet (below) is strong. In order to maintain its past success,
Hanson must maintain a strong cash position in order to continue its strategy of bolt
on acquisitions. To do this Hanson must maintain both its operating revenues and
profit margins, as well as continuing to sell off sectors of the company they believe to
not be as profitable as other possible ventures.
ANNUAL BALANCE SHEETIn Millions of U.S. Dollars(except for per shareitems)
As of12/31/00
As of12/31/99
Restated12/31/00
As of12/31/98
Restated12/31/99
As of12/31/97
As of10/01/96
Cash 1,331.2 1,882.0 2,356.6 2,609.1 6,018.1
Short Term Investments 597.8 667.6 74.0 9.4 27.6
Cash and Short TermInvestments
1,929.0 2,549.6 2,430.6 2,618.6 6,045.7
Trade AccountsReceivable, Net
846.9 450.2 580.6 523.1 4,541.9
Other Receivables
Total Receivables, Net 846.9 450.2 580.6 523.1 4,541.9Total Inventory 531.1 365.5 309.7 496.2 959.9Prepaid Expenses 331.3 213.1 232.5 0.0Other Current Assets 242.2 254.0 Total Current Assets 3,880.6 3,832.4 3,320.9 3,870.4 11,547.6
Property/ Plant/Equipment, Net
4,455.2 3,206.2 2,901.7 2,985.1 9,244.6
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Goodwill, Net 1,625.3 427.0 102.5 0.0 Intangibles, Net Long Term Investments 445.7 99.9 191.6 181.4 290.3Total Assets 10,406.7 7,565.5 6,516.7 7,036.9 21,082.4
Accounts Payable 522.6 267.3 208.9 275.2 888.0Accrued Expenses 641.7 589.4 643.7 660.7 2,288.5Notes Payable/ ShortTerm Debt
2,197.7 1,467.5 1,427.6 5,195.9
Current Port. LT Debt/Capital Leases
893.5
Other Current Liabilities 99.7 87.1 82.7 75.6 0.0Total Current Liabilities 3,461.7 2,411.3 1,828.7 2,439.0 8,372.4
Long Term Debt 2,371.7 1,459.7 1,461.5 1,495.9 4,452.4
Capital Lease
Obligations
Total Long Term Debt 2,371.7 1,459.7 1,461.5 1,495.9 4,452.4
Total Debt 4,569.4 2,927.1 2,355.0 2,923.5 9,648.3
Deferred Income Tax 236.3 231.3 661.8 0.0Minority Interest Other Liabilities 828.6 782.4 915.4 1,167.9 4,577.9Total Liabilities 6,898.3 4,884.8 4,205.7 5,764.7 17,402.8
Redeemable Preferred
Stock Preferred Stock - NonRedeemable, Net
Common Stock 2,134.0 1,892.6 1,891.7 1,890.9 1,889.8Additional Paid-In Capital 2,165.7 2,165.5 2,165.0 2,164.3 2,164.0Retained Earnings(Accum. Deficit)
(1,105.2) (1,377.4) (1,745.7) (2,783.0) (613.6)
Treasury Stock -Common
Other Equity 313.9 0.0 0.0 0.0 239.5Total Equity 3,508.4 2,680.7 2,311.0 1,272.1 3,679.7
Total Liability &Shareholders Equity
10,406.7 7,565.5 6,516.7 7,036.9 21,082.4
Shares Outs. - CommonStock
735.16 651.73 651.73 651.40 651.07
Total Common SharesOutstanding
735.16 651.73 651.73 651.40 651.07
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Employees (actualfigures)
27,000 14,000 14,000 16,000
Number of CommonShareholders (actual
figures)
74,613 134,576
Currency Exchange Rate(most recent)
0.689 British Pounds / U.S. Dollar
ADR Information 5 Share(s) Per ADR