Bombardier Adtranz

Case BOMBARDIER /ADTRANZ

Question 1

Two very important reasons for an acquisition are:

1 Possibility to expand internationally;

2 The potential to transform a company and to enrich a firm.

What is the Why Rationale?

With the cross border acquisition of Adtranz by Bombardier Inc. (BBD) it enabled Bombardier Transportation (BT) - a division of BBD - to enter the local European markets, obtain know-how and access to European engineering concepts needed in emerging markets like Asia and South America and other markets or influential groups demanding European equipment and technology. Apart from this, it would clearly strengthen BTÐŽ¦s global reach.

With this acquisition it wanted to balance revenue streams in the different groups within BBD and to create a healthy balance against BBD Aerospace Group.

BBD is a Canadian corporation engaged in design, development, manufacture and marketing in the aircraft, rail transportation equipment and recreational product industries. In addition, the company offers services related to its core products and core businesses and is, through subsidiaries, involved in financial services and the development of real estate interests. Although BBDÐŽ¦s acquisition strategy was focusing to complement or strengthen businesses, they had been growing predominately through acquisition of companies in poor shape. They have been very successful in turning around companies with poor performance by implementing tight controls. BBD was also strong in product costing and tendering, as opposed to Adtranz.

ADtranz, which is wholly owned by DaimlerChrysler AG, is engaged in the

manufacture and distribution of rail transportation vehicles (Propulsion Systems and Train Controls). Its current activities cover the manufacture and sale of rolling stock equipment as well as fixed installation and signalling equipment.

Although the turnover of Adtranz was in excess of $ 3.3 billion, Adtranz was not the core competence of DaimlerChrysler. Adtranz was a relatively new company (in existence since 1995) build from a collection of many different companies where each newly acquired company brought in its own business philosophies, they never had the chance to develop their own homorganic culture.

When we look at both companies, I feel there is a definite potential for BT however there are quite a number of potential pitfalls.

At first look it seems like the opportunity of a lifetime.

For BT to establish itself in the European market is very difficult. The industry BT is in, is rather specialized and requires large amounts of funding. If starting greenfield next to this, Adtranz already has a customer base and is very aware of European regulations and customer requirements. For BT to enter the European markets where railway and train products are fundamentally different (BT had no experience in propulsion systems, high speed and inter-city cars and signalling systems), they almost always need to create an alliance with one of their ÐŽ§competitorsЎЁ.

As transport equipment and propulsion equipment have a high degree of complexity, a complementary acquisition such as this one enables a company to grow faster and develop markets and products.

BBD has a long and extensive track record of buying companies with a strong track record of integration acquisitions. BBD has a strong reputation as assembling company, however they are weak in development.

Arguments for the merger

„« Faster growth of market share

„« Increase market power

„« Vertical integration

„« Opportunity to neutralize a competitor

„« Access complementary competences ( equipment vs. vehicles propulsion)

„« Access to the European market (this market has many local characteristics as products

and rules can be different between different countries); geographic scope

„« Creating an economy of scale and scope: increase global reach

„« Expand revenue base

„« Complementary business and complementation of product portfolio

„« BBD can be patient when integrating companies

„« Government support due to EU policy in promoting reduction in congestion, pollution, etc.

„« Big growth potential due to acceptance of European standard as international standard in Asia and South America

„« Big upside potential due to more privatisation

„« Direct increase in cash flow due to nature of the business (advance payments etc.)

„« Quick gains due to better and more streamlined control (>20% decrease in cost)

„« Interesting acquisition price: due to the fact that DaimlerChrysler needed to quickly unload non core assets, BBD was able to acquire against low cost

Arguments against the merger

„« Different organisational structures: both organisations were incomparable

„« Difference in reporting allocation of responsibilities

„« Different growth strategy

„« Adtranz is as a company not in poor shape, as previously acquired companies, so this is not a comparable scenario as BBD was used to in the past

„« As BT becomes rather large, BBD might be at risk as the business is contra-cyclical and thus vulnerable for external uncontrollable influences

„« Limited potential in synergy as individual requirements by nationals make standardisation very difficult; this however is something BBD has been looking for in previous acquisitions

„« Protectionism by national governments can limit accessibility of the markets

„« Risk that the deal will not be approved by EC regulating bodies (government interference)

„« Major cross cultural differences (no organisational and cultural fit)

„« Limited