Bombardier-Adtranz

Integration Plan
SMGT 6050: Mergers, Acquisitions & Strategic Alliances

Ebube Anizor (209347741)

11/22/2010

Overview

OVERVIEW
Bombardier had evolved from its humble beginnings as a snowmobile manufacturer based in JosephArmanan Bombardiers garage to a global business in which its once core recreational products were overshadowed, on a revenue basis at least, by its offerings in transportation, aerospace, and capital. In every segment in which the company operated it was either number 1 or 2 globally. This was not the case for the Transportation group (BT) in Europe, where in 2001 it sat in fourth place behind Alstom, Siemens and Adtranz (AT). However, the AT acquisition presented the opportunity to vault BT to the forefront of the industry. At a price tag of US$715 million (23% of ATs 2000 revenue) AT was a bargain and an opportunity worth considering for several reasons: Revenue Growth: Unlike all other Bombardier businesses, BTs revenue was counter-cyclical so growth in the sector would provide better balance to its overall revenue (Figure C1 in Appendix C). With the addition of AT, BTs annual rail-related revenue could grow to US$7.6 billion in 2001 (up from US$2.2 billion in 2000) with a backlog of US$14.5 billion.1 While BT was a low margin business it was a cash generator that helped to finance other Bombardier businesses. Geographic Expansion: AT had a presence in a broader range of European markets and the region was viewed as the centre of technological development. Asia and South America utilized European engineering and practices so AT provided BT better access to future markets. Completion of Product Portfolio: BT lacked propulsion system and train controls competence. This had been mitigated by outsourcing to competitors and suppliers; however it was a competitive weakness as was exemplified by ATs exclusion from a key deal in the UK in 2000. AT excelled in these areas, and provided immediate cost synergies and long term strategic strength. Naturally the acquisition was not without its downside. There were many aspects of the deal that warranted consideration: Acquisition Size: While BT had a successfully track record of acquisitions it had never integrated a company of ATs size. Based on 2000 figures, AT had nearly 40% more employees, just under 50% more in sales, and operated in 60 locales. The differing company structures were also of concern. Financial Performance: AT posted net losses going back 4 years in spite of restructurings. Even at a bargain purchase price, an unsuccessful integration could threaten BTs income and cash flow. Due Diligence: AT was understandably reticent to let a competitor gain full access to its books should the deal not complete, so BTs diligence process was not comprehensive. Furthermore BTs European management had not participated in the deal; only amplifying the potential risks. Customer Loss: The acquisition could trigger the loss of customers or new contracts. Additionally, AT had earned a reputation for poor production and servicing that competitors could exploit. A comprehensive plan would be required to realize the projected synergies, tackle the above noted concerns, and - should the deal clear - anticipate and address regulator stipulations.

Bombardier Gets Adtranz for a Bargain. http://findarticles.com/p/articles/mi_m1215/is_9_201/ai_65805853/

Integration

INTEGRATION
While management at BT faced several integration issues that included leadership style, work environment and regulator stipulations (see Table B1 in Appendix B) the most pressing were defining an organizational structure that best suited its new global fully integrated operations, executing cost saving measures that addressed past inefficiencies and new opportunities, and developing a combined culture that fostered growth for the company and success for its employees. ORGANIZATIONAL STRUCTURE AND OPERATIONS Through experience gained by successfully integrating many acquisitions BT had developed expertise in product assembly and counted it (rather than manufacturing) as a core competency. Utilizing external suppliers and employing a just-in-time delivery resulted in substantial time and inventory savings. Accordingly, BT structured its operations primarily by geography, placing plants and maintenance facilities in strategic countries where customers and suppliers could readily be accessed. Under DaimlerChrysler AT underwent ongoing restructuring to wring out costs. The resultant structure was a company organized by product segment and function oriented towards standardization and modularization to save costs while still meeting the custom needs of global customers (see Figure A1 and Table A2 in Appendix A). The structures raised compatibility issues. The relative financial performance of the firms would naturally lead to the conclusion that BTs structure should be adhered to in the combined entity; however BT was now bringing new manufacturing expertise, product scope and market presence under its banner and this required some consideration in forming the best combined structure. Complements and Overlaps The core businesses of BT and AT were to some extent complementary. BT predominantly focused on producing the mechanical elements of railway vehicles and excelled in the subway, trams and light rail car segments. AT on the other hand possessed expertise in propulsion and signalling systems and excelled in the inter-city and growing high-speed car segments (see Figure 1). Therefore, in many markets there was no significant overlap in activities; in fact AT supplied propulsion technology to BT.
Services BT AT Combined Strength Propulsion and Controls Weakness Total Transit Systems Neutral Rail Control Systems Rolling Stocks Fixed Installations N/A

Figure 1: Individual and Combined Operational Competencies

There existed some overlap in activities that contributed to the value of the acquisition. BT and AT offered their own branded products in the regional trains, trams and light rail segments, Also, AT manufactured the mechanical parts of rolling stock.2 Since Fixed Installations were not consider a strategic business by BT and should be either excluded from the acquisition or sold post closing.

Bombardier/Adtranz Merger Procedure, http://ec.europa.eu/competition/mergers/cases/decisions/m2139_en.pdf

Integration

Combined Entity Homogeneous products were simply not a reality of the Rail industry; cars had to be built to meet specific customer demands which varied by country. Furthermore the role of transportation in Furthermore, ole society was also decidedly country specific. Public policy, fuel prices, and environmental sentiments affected travel behaviour and thus demand for trains. Because country/region specific product strategies were required, an organizational design that reflected BTs current structure was the most , appropriate for the combined entity (see Figure 2). The highlights of the structure are as follows: Assembly and Service: Train assembly would still continue in the noted regions, employing BTs rain JIT operations. ATs facilities in South America and Asia will be integrated. . Specialty Services: capital intensive and generic activities will be concentrated in specialized plants in strategic regions to optimize the use of resources. These sites will support BT globally.3 BT had a successful track record of integrating acquisitions into its structure and processes; although its none were of the scale of Adtranz (see Table C1 in Appendix C). By contrast ATs structure was in constant flux, and as earlier noted not proven from a profit perspective.
Bombardier Transportation

Manuf./Assem bly/Service

Specialty

North America

Atlantic Europe

North America / Europe

Cont. Europe

Mexico and South America

Total Transit Systems

Propulsion

China

Other Asia

Bogies

Cars

Figure 2 Integrated Organizational Structure of BT 2:

With the anticipated favourable trajectory of public transportation policy in Europe going ation forward and the fact that the majority of BTs revenue (52%) was generated on the continent, locating its headquarters in Europe (likely Germany) is also recommended. This footing also positioned BT well for growth in emerging markets where EU standards were embraced. Management Given the proposed structure, in the lines of business where BT expertise was stronger, BT , management should remain. In the cases where AT held the expertise (e.g. propulsion) their management should lead (pending the appropriate training in BT management philosophy and pending practices). Whereas AT management was responsible for a product or function across geographies, they would have a similar responsibility but with more narrow geographical ownership. ownership

Bombardier Sets http://www.allbusiness.com/company http://www.allbusiness.com/company-activities-management/company-locations/6187771 locations/6187771-1.html

Integration

COST SAVINGS The rail industry is an extremely competitive environment, characterized by overcapacity and pricing pressure resulting from the rationalization needs faced by railroad operators, particularly in Europe.4 This reality was borne out in ATs poor performance and the relatively low margins of Bombardiers transpiration business (5% in 2000). Consequently, immediate action needed to be taken to exploit BTs new scale, align ATs practices with that of BT and rightsize the combined company to a cost structure that makes sense given market demands and likely duplication of assets. The following key measures should be taken to ensure BT improves profitability: Strategic Sourcing: Upon completion of the acquisition BT should immediately renegotiate pricing with suppliers to take advantage of its new scale. Staffing: With AT, BT more than doubles its employees to 38,000, owns 42 plants, and has operations in 23 countries. Given overcapacity and margins, management, staffing and facilities will need to be rationalized across the company, but in particular in the earlier stated train segments where there was overlap. The pace at which employees can be reduced will be mitigated by EU regulator stipulations and prudent pacing given backlog, anticipated bumps during the integration and managing of employee morale. Project Management: ATs poor project and cost management practices amounted to almost 20 percent of expenses. BTs expertise in these areas should be shared immediately; first in the businesses where AT management will be leading and then throughout the operation. This should be positioned as in an investment in skills training and not a judgement of past practices. Bid and Quality Management: ATs growing revenues is an indication of it success in acquiring business. However its inability to consistently build quality products, manage production and support customers was not only damaging its reputation but rendering projects unprofitable. Clearly AT could benefit from BTs governance, manufacturing control and bidding systems. CULTURE AND ENVIRONMENT While under DaimlerChrysler, AT was not a strategic business, represented under 3% of revenue from 1997 through 2000 (see Table C1 in Appendix C) and was challenged by steady changes in ownership, processes and values. By contrast, with the acquisition, AT became an integral part of BT, doubled BTs revenue, and was under a management regime noted for protecting jobs, investing in people and open to adopting best practices from acquired companies. Given its operational struggles and the immediate need to manage costs AT may not be a full benefactor of BTs prior practices but this stark contrast in ownership nonetheless provided the grounds for a successful integration. Although BTs European management was unfortunately not involved in discussions with AT, the companys prior acquisitions in Austria, Belgium, France and Germany (Table C2 in Appendix C) mitigated some of the challenges that would normally be present in an international acquisition. Addressing the following areas will be integral in enabling a successful merger: Bid Team: In order to manage any bids that happen during integration a bid team should be formed with BT and AT staff, representing all areas of the business. This would present key AT

DaimlerChrysler 1999 Annual Report.

Integration

staff an opportunity to learn BT bid practices. Conversely, BT would benefit from ATs expertise in the areas where it had been traditionally weak An early win as a combined entity could be the weak. s launching pad for further successful collaboration and gelling of staff at all levels. levels Management Philosophy: In order to increase buy buy-in, BT management and manufacturing philosophies should be shared with AT staff by its own managers. AT management is naturally . better attuned to its own employees and can avoid mistakes made by prior ownership groups. groups

IMPLEMENTATION PLAN BT has 4 to 6 months before a decision from EU regulators is rendered. Given this timeframe BTs first task is to select an Integration Manager that will lead the due diligence process and manage postpost integration indefinitely. The Integration Manager would ideally be based in Europe and have been heavily involved in prior European transactions (more important given BTs CEO Lorties unfamiliarity with the Transportation business). Figure 3 details key integration projects on a cost cost-benefit basis.
1. Strategic Sourcing 2. Project & Cost Mgmt.

High $ Benefit

3. Plant Closures 4. Staff Reduction 5. Bid Management 6. Customer Communication 7. Integration Team 8. Due Diligence

Low $ Benefit

9. Organization Structure 10. Management Structure 11. Shared Goals and Vision 12. IT Integration

Short Execution Time

Long Execution Time

13. HR Integration

Figure 3: Integration Projects

Under the guidance of the Integration Manager and top management the following are highlights highli of an implementation plan, in priority order (further details provided in Table B1 of Appendix B). Before the deal closes decisions regarding organization structure, facilities, management and staff should be nearly complete. Following due diligence BT should be ready to implement these changes: lowing Organization structure: Decisions regarding the organization structure Management: Placement of BT and AT management and reporting relationships relationship Staffing: Layoffs and plant closing Post acquisition focus should be on reducing costs and creating a culture of combined success: Due Diligence: BT diligence team must be able to hit the ground running on day one Costing Cutting Measures: Strategic sourcing and project management training are quick wins trategic Bid Team: The cross-company bid team to address business opportunities during integration company Goals and Vision: BT management to integrate AT managers and form shared vision

Conclusion

CONCLUSION
The acquisition of Adtranz provided BT with access to complementary technologies that made them a full-fledged integrated player able to compete across the entire product line and in all markets.5 That being said, while Adtranz revenues were handsome it had not generated a net profit from 1997 through 2000 and, perhaps of greater concern, at best broke even operationally during the same period in spite of several efforts by DaimlerChrysler to restructure and streamline (see Figure C2 in Appendix C). Adtranzs performance pointed to systemic problems that BT needed to address in order to realize any post integration synergies. As highlighted in the implementation plan above, the first priority is to choose the Integration Manager and team so the 4 to 6 month window could be best utilized. The differing organizational structures demand priority attention in order to best decide plant and staff rationalization and position BT to manage growth. Although early cost cutting is contrary to BTs typical integration procedures it will be key given ATs past performance. While the integration plan is primarily inward looking consideration must be given to outward parties like regulators, competitors and most importantly customers. BTs favourable reputation should place the deal in positive light amongst existing and potential customers. The increase in market power will be of concern to regulators and BT must be willing to make concessions in order to move forward. The acquisition of AT fundamentally changes the competitive landscape in the rail industry globally; however BT will need to carefully integrate AT in order to realize its benefits.

Bombardier Gets Adtranz for a Bargain. http://findarticles.com/p/articles/mi_m1215/is_9_201/ai_65805853/

Appendix A: Stakeholders and Organizational Structure

APPENDIX A: STAKEHOLDER AND ORGANIZATIONAL STRUCTURE STAKEHOLDERS ATIONAL

STAKEHOLDERS
Stakeholder BT CEO Perspective Ensuring acquisition is smooth Protecting reputation as turnaround specialist Little experience in BT transportation business Job security Smooth and quick Integration uick Job security Growth Share price increase Job security Perception of skills Job security Stable ownership Job protection Anti-trust Increased market power of BT/AT Instability Delayed orders Quality Actions Build Integration Team lead by a BT manager based in Europe Decide on resultant management structure early in the pre-merger phase Decide on org. structure and staff levels early Purchasing AT helps to balance revenue streams (less dependence on cyclical Aerospace group) Keep AT management in place where BT expertise does not exist Keep AT staff in place where BT expertise does not exist. Invest in training where applicable. . Plant closures and layoffs will need to be in line with regulator stipulations and company needs Consolidation should reduce potential price wards; but BT should cut out costs in case of price battle BT must integrate quickly and communicate customers in order to fend off the potential loss of customers

BT Management BT Employees BT Shareholders AT Management AT Employees EU Regulators Competitors BT/AT Customers

Table A1: Stakeholders

ORGANIZATIONAL STRUCTURE
Bombardier Transportation

Adtranz
Market/Functional

Geoography

Product/Trains
North America Atlantic Europe Total Transit Systems

Function

High Speed
Cont. Europe Mexico

Subway

Bogies

Drives

China

Cars

Car Bodies

Figures A1a and A1b Current Organizational Structure of BT and AT a A1b:

In restructuring plans dated back to 1998 AT adopted a strategy common in the automotive and airline industries by reconfiguring its rail vehicle product line into seven distinct "platforms," or product lines, for local, regional, and intercity transport. The platforms, which incorporated and incorporate standardization and modular components, were part of a "market-driven" strategy intended to reduce driven" costs by up to 30%. The future aim was that 60 80% of its vehicles would be derived from these 60-80%

Appendix A: Stakeholders and Organizational Structure

pretested, standardized and modularized designs. Customers would then be able to tailor vehicles to ested, their specific needs through choices in exterior appearance and interior configurations.6 FACILITIES
Production BT AT Austria Australia Belgium Canada China Czech Republic Denmark Finland France Germany Hungary Indonesia India Italy Malaysia Mexico Norway United Kingdom United States Poland Portugal Romania South Africa Spain Sweden Switzerland Taiwan Thailand Table A2 Current BT and AT Facility Locations A2: Maintenance BT AT Other BT AT

OPERATIONS
Services Good reputation Cost efficient Propulsion and Controls No in-house expertise Outsourced Total Transit Systems Rail Control Systems No in-house expertise in switching and communications Rolling Stocks No in-house expertise in locomotives Expertise in assembly Fixed Installations Bombardier not in b/c non-strategic and different from other segments

Figure A2: Current BT Activities in the Railway Transportation Segments

Adtranz: Restructuring Based on Seven Product Lines. Railway Age, 00338826, Apr98, Vol. 199, Issue 4 roduct

Appendix B: Issues, Projects and Timeline

APPENDIX B: ISSUES, PROJECTS AND TIMELINE

ISSUES
Issue Area Financial Issue Best way to leveraged new size of BT Top line or bottom line approach to acquisition Proposed Solution Strategic Supply Pros Cheaper materials, immediate cost synergies Generates wins, feeling of success amongst new BT Easier to achieve, low hanging fruit like Overhead AT has posted a net loss the last 4 years, must be addressed immediately Cons

Top Line Bottom Line Staffing PM management Better bidding Sourcing Execute top and bottom line solutions proposed above Use ATs process Use BT process Build new quick response team Use GE approach and have a Integration Manager and Business Lead

Harder to achieve Often means cutting overhead, could hurt morale if timing and approach not right Heavy cost in cutting staff in Germany due to labour laws

Early Integration

Tailoring integration to balance revenue and cost initiatives Handling bids early in the integration. How to achieve success. Focussing management on operations (i.e. getting it right) and not finger pointing at AT Create an environment conducive to conducting thorough due diligence How and when should BT manufacturing philosophy be integrated into AT Instilling a project management culture

Poor record of bid/contract management BT structured process highly effective Opportunity for early wins and team building

Work environment

Communicate to AT staff early the benefits of BT ownership (as exemplified by prior acquisitions) Use GE approach deliver through AT management and not have BT dictate Indoctrinate AT on BTs PM processes since they are nonexistent or ineffective at AT Increase in acceptance

Operations

Opportunity for AT employees to learn new/refresh skills Immediate costs savings at AT

Staffing

Organization

Minimize tension and maximize teamwork with personnel changes on the way How should personal changes be made What senior management staff from BT or AT should be kept How should the decision on senior staff be made? Reconciling the differing organizational structures

Use BTs

Role of transportation was really country specific. Public policy, fuel prices, green movement affected travel behaviour. As a result country/region specific product strategies were required. (e.g. US trains incompatible with European) BT had successful track record of

Appendix B: Issues, Projects and Timeline

Issue Area Issue Proposed Solution Use ATs Change both Pros integration as is BT was already weird in geo split and functional split Change could be viewed as positive by AT BT had successful track record of integration as is Europe generates more revenue Trajectory of public policy in Europe positive for BT going forward Same as above Nobody is preferred Nobody is preferred Cons

10

Change both orgs may set smooth integration back (operationally)

Location of Headquarters

St. Bruno, Quebec Berlin

Other European city Other North American city

Leadership

What leadership style should be employed by CEO

Directive Participative

May be necessary to make the need cost changes quickly Including AT management in key positions and in key decisions increases buy-in

BT and AT employees need to both adjust/relocate Trains less important from a cultural/public policy perspective High cost of shipping overseas to majority of customers backlash from EU Could create an toxic environment

Regulators

Market share/power

Employment

Suppliers

Competition

Customer retention

May need to sell of non-strategic businesses Try and relocate staff where possible. Otherwise provide fair severance Keep existing suppliers for a defined period of time Communicate to customers the benefits of the new BT. Get a transition team in place early.

Table B1: Integration Issues

Appendix B: Issues, Projects and Timeline TIMELINE

Timing (months) Overall Plan
Pre-close Post-close

11

6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Pre-Acqusition Choose Integration Manager and Team Form Due Dilligence Team / Execute Form and Implement Org. Structure Assign and Transition Management Decide on Staffing/Adjust Levels Customer Acquisiton and Retention Form Bid Team / Manage early bids Communicate new BT to customers Cost Cutting Strategic Sourcing Plant closures and consolidation Project and Cost Management Training Cultural Form shared goals and vision IT IT integration strategy Implement IT integration plan Human Resource Harmonize HR policies Implement HR Plan Performance Checks 3 months 6 months 12 months 18 months

Figure B1: High Level Implementation Plan

Appendix C: Background Information

12

APPENDIX C: BACKGROUND INFORMATION ND

FINANCIAL PEFORMANCE
150% 100% 50% 0% 1992 -50% -100% -150% Figure C1: Bombardier Segment Growth Rates (source: case materials) 1993 1994 1995 1996 1997 1998 1999 2000 2001 Transportation Aerospace Recreational Capital Other

In euros
Daimler Revenue Revenue (% of Daimler) Operating Profit Net Profit Rationale

1997 117,572 3,262 (2.7%) -444 -308 In anticipation of increasing price pressure and with continued overcapacity, particularly in Europe, Adtranz dtranz sped up its restructuring programs in order to lower its cost base and to improve its competitiveness.

1998 131,782 3,316 (2.5%) -644 -632 Adtranz recorded a significant loss in 1998 because in previous years it had taken on contracts at prices that did not covercosts and suffered from technical problems. Comprehensive structural changes were made to increase sustainable earning power. streetcars, underground trains, regional and intercity trains all the way up to locomotives.

1999 149,985 3,587 (2.4%) N/A N/A (posted a loss) Operating improvements at Adtranz were partially offset by further burdens from the restructuring measures initiated during the year

2000 162,384 3,900 (2.4%) 0 (from case) N/A (posted a loss) Positive Operating profit resulting from restructuring

Table C1: Adtranz Revenue and Income (source: Daimler Annual Reports)

Appendix C: Background Information BOMBARDIER ACQUISITION HISTORY Rail Transportation - Key Acquisitions
Year 1971 Target Lohner Werke (Austria) Details

13

Notes First international acquisition. Tramway manufacturing.

1976 1984 1988 1989

MLW Worthington (Canada) Alco Power (U.S.) BN Constructions Ferroviaires et Mtalliques (Belgium) ANF-Industrie (France)

US$23.5 million

1990 1992

Procor Engineering (Britain) UTDC (Canada)

US$34 million

1992 1995 1998 2001

Constructura Nacional de Carros de Ferrocarril (Mexico) Waggonfabrik Talbot (Germany) Deutsche Waggonbau (Germany) DaimlerChrysler Rail Systems Adtranz (Germany)

US$27 million (plus US$54 million in debt)

Supplier of railcars and coaches to French rail industry Passenger and freight cars Light Rail Mass Transit Purchased from Ontario Govt Railyway rolling stock

US$715 million 22,000 employees Manufacturing in 23 countries

Rail transportation equipment Locomotives, rolling stock, controls, propulsion

Table C2: Bombardier Transportation Acquisition History