Lockheed Martins Acquisition of NationScape Inc. Harvard Case Solution & Analysis

Answer: 01

For an evaluation of NSI being an attractive company for Lockheed Martin, financial data from comparable companies has been used; such as revenues, equities, current assets, trade receivables and current liabilities where NIS has the lowest value of $356M, $46M, $129M, $69M and $89M respectively. Hence, the lower values of NSI suggest that Lockheed would be acquiring a company with high growth potential at a lower acquisition price. The strategic benefits of acquiring NSI are far more beneficial for Lockheed, because the acquisition of NSI has an operation that will be a best fit with the Lockheed such as the support service that NSI can provide in defense operations of Lockheed. However, there are a number of other synergies that NSI will bring in such as NSI will provide access to some new international markets due to its global presence. Meanwhile, Lockheed will be able to use the support services of NSI in order to introduce its own product using NSI’s infrastructure. Additionally, NSI access to remote areas and its capabilities to operate in hazardous conditions will allow Lockheed to enhance its supply chain services.

Answer: 02

The acquisition of NSI is expected to expand its business operation due to the global presence of NSI, meanwhile, the acquisition will enable Lockheed to use the clientele of NSI, which will increase the customer base and hence, the sales volume will increase. However, since the prime objective of Lockheed is to increase shareholder value through expansion of business operations, therefore, the acquisition of NSI will increase Lockheed’s shareholders’ value through expansion of business operations and increase sales volume.

Answer: 03

However, since the organizational and management structure of the two companies varies widely. NSI is an informal and flexible management style with no stringent rules, meanwhile, the powers and authorities have been delegated widely. On the other hand, Lockheed has completely different management culture and organizational structure which follows a centralized approach and formal management structure with proper designations assigned. Meanwhile, the business culture of Lockheed is documented and is governed by the standard rules and procedures in order to maintain the efficient controls. Therefore, Lockheed should continue as a standalone company, because the two companies have different characteristics.

However, the integration of the process and facilities of the two companies would bring additional benefits to Lockheed, meanwhile; NSI would be able to perform better in a standalone position, which means NSI being fully integrated into Lockheed.

Answer: 04

The DCF valuation method requires the projection of future cash flows of NSI, which has been extended to next six years based on the 10% increase in sales volume of NSI, meanwhile, the EBITDA, depreciation, working capital requirement, capital expenditure and tax rate has been forecasted using the historical percentage of previous year’s financial data. Additionally, the DCF valuation method required the calculation of an appropriate discount rate; hence, in order to calculate the WACC of Lockheed, the average of unlevered beta values of comparable companies has been re-geared with the gearing ratio of Lockheed. Hence, re-geared beta of Lockheed has been reached at 1.03, meanwhile, the risk free rate of 30 years’ Treasury note and equity risk premium on 30 years’ Treasury bond has been used in order to calculate the cost of equity of 6.9%.

Further, the cost of debt has been calculated from the previous payment of interest percentage and after tax cost of debt of 3.23% has been calculated in order to be used in WACC calculation. Additionally, using the debt to equity ratio of 1.28%, this is based on the long term debt and current portion of long term debt as the percentage of equity. Hence WACC has been calculated as 6.82%, which has been used in order to discount the forecasted cash flows of NSI. Further, the terminal values have been calculated in order to incorporate the cash flows after the year 2011 and a growth rate of four terminal values has been assumed to 1.5%. Therefore, based on the DCF valuation technique NSI has been valued at $843.197 million.

Answer: 05

Multiple valuation has been calculated by multiplying the sales, EBITDA and EBIT of NSI in the year 2006, with the benchmark multiples of industry comparators. Hence, the valuation of NSI calculated through sales revenues, EBITDA and EBIT multiples of DSI transaction during 2006 gave a fair value of NSI at $1,218 million, $1,136 million and $1,183 million respectively. However, all these multiples gave a higher value than the value derived from the DCF valuation of $843.2 million, meanwhile, the average and median multiples of the three comparable companies has also been used which yield an average value of $800.52 million and $715.35 million respectively. In addition to this, the valuation of NSI based on the book value has been calculated at $46.41.................

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The defense is big business, especially for companies such as Lockheed Martin. Lockheed Martin, was founded in 1995 by the merger of Lockheed Corporation and Martin Marietta, was one of the largest defense contractors of the world, employs about 140,000 worldwide. Lockheed Martin is considering buying NationScape, Inc, a firm that supports U.S. military readiness, diplomatic and development efforts, as well as peacekeeping, stabilization and state-building activities in more than 65 countries around the world. The acquisition could potentially increase Lockheed Martin overseas support operations and expand its defense capabilities to provide diplomatic and development of services in addition to its existing business of defense. Corporation needed to determine the appropriate price for the acquisition and to assess whether the acquisition would be a good strategic and cultural fit for the corporation as well. "Hide
by Susan A. White Source: North American Case Research Association (NACRA) 21 pages. Publication Date: November 1, 2012. Prod. #: NA0178-PDF-ENG

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