Lockheed Martin’s Acquisition of NationScape Harvard Case Solution & Analysis

Summary

This report discusses the qualitative and quantitative aspects of NationScape Inc. (NS) as an acquisition target of Lockheed Martin’s (LHM). NS’s strategic feasibility is discussed along with evaluation of its value using WACC approach, discounted cash flow method and using multiples of recent relevant transactions to arrive at the fair price of firm’s equity.

This report includes following points which are discussed in detail;

  • Is NSI an attractive company compared to its competitors?
  • Is NSI a good strategic fit for Lockheed Martin? What are potential synergies from the acquisition?
  • How the strategic goal of such an acquisition would be characterized: consolidation, market expansion, adding volume/scale, or as an R&D play?
  • If NSI is acquired, how should it be integrated into Lockheed Martin? Should NSI continue as a standalone company with little to no integration into Lockheed Martin’s operations? Or should it be fully integrated into Lockheed Martin?
  • What is the value of NSI based on a discounted cash flow valuation, including the calculation of an appropriate weighted average cost of capital?
  • What is the value of NSI using a multiples valuation?
  • What price should Lockheed Martin offer for NSI if it decides to proceed with the acquisition?
  • What is the value of potential synergies that could result from the acquisition?

Introduction

The acquirer LHM is a public company involved in the business of defense related manufacturing and services, with major presence in the US markets and relatively very small presence outside the US market. LHM is focused on creating value for its shareholders by acquiring relatively small-sized entities with attractive strategic fit and lucrative growth potential. This forces LHM’s management to keep on analyzing various acquisition targets and allow the group to grow by adding several small but financially and strategically strong firms.

After analyzing various available options, LHM’s management considered NSI as an attractive opportunity for acquisition and thus moved forward for a detailed analysis of its strategic and financial aspects. NSI is a private company which is involved in the business of peace-keeping and support services on contract basis and the edge it possesses is its global presence. It has also proved its financial effectiveness growth potential in last couple of years however; a detailed evaluation is needed to determine the feasibility of acquisition, approach of integration and the value that could be offered by LHM to NSI’s owners.

Is NSI an attractive company compared to its competitors?

An effective comparison could be made by comparing core financial figures of various comparable companies in the industry for the last year. It should be noted that we would not include KBR and ESSI in the comparison as KBR has only 2005’s data available and hence it seems that it has just initiated its business so it would not be an effective comparison, whereas ESSI is the only loss-making company in the comparables’ set and also have data set very different from all the other industry players. Therefore, these two comparable companies are not included in comparison. We compared financial performance of NSI with its competitors for last year (2005) based on profitability, debt to capital ratio and current ratio.

Profitability:

Following graph presents an effective comparison of various profitability margins of NS and its competitors.

 

The graph is an effective representation of the fact that NSI possess an attractive profitability level close to the industry leader (Halliburton) and in case of EBIT margin, it is at the highest level, which is slightly higher than the leading firm Halliburton.

The profitability level of NSI is almost two to three times higher than the rest of industry peers, which is a reflection that being a private company, NSI managed to grow and manage its affairs more appropriately than the rest of firms, except the leading firm Halliburton.

Debt to Capital:

The debt to capital ratio graph is given below which shows effectively the comparative position of NSI as compared to its comparable companies.

 

Most companies, except DynCorp’s  87.2% (which is an exception) have a low level of debt portion in its capital, whereas it is observable that NSI and the industry leader both possess a debt value of close to each other that isNSI:44.8% and Halliburton:30.6% debt. This shows that both the leader and NSI could add higher debt on their balance sheet and still maintain better and profitable results. NSI has a 15% cushion available on the maximum acceptable 60% debt level in the corporate world.

Current ratio:

 

Current ratio level of NSI is also quite attractive at 1.5 times as the leader have a ratio of 2.1 which shows there are excess funds available for investment that are not utilized whereas NSI is utilizing its funds and assets in a good manner. Given the large size of Halliburton and being a public company, it is acceptable for it to carry a current ratio of more than two, but NSI is effectively managing its asset and liability base.

It is observed that NSI have an attractive ratio and financial base though it is a relatively small-sized company in the industry. Moreover, it is a small-sized company, which is a good fit for LHM as it is stated that LHM’s strategy is focused on acquiring strong companies, with strategic importance and having small size that are considered as pearls by LHM’s CEO.

Is NSI a good strategic fit for Lockheed Martin? What are potential synergies from the acquisition?

Strategic Fit:

For the purpose of analyzing the strategic importance of NSI for LHM, we could observe that the small-size of NSI is one of the primary metrics for acquisition as stated above. Various strategic areas linked with this deal are highlighted below..........

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