Hanson Case A

Group 2 :

Bahrudin Yusuf .T
Ika Sekartaji
MM UGM AP-14 YOGYA
 History Timeline

Hanson was built up by James Hanson, later Lord Hanson, and Gordon White in the late 1950s.

By 1973, the British economy had a big trouble :

stock market had collapsed; labor disputes; inflasion increasing rapidly there was no need to

split up. Hanson would run the British Operation and White tried to build operation in USA.
By 1974, White managed his first acquisition of J. Howard Smith Company, a New Jersey based

processor of edible oils and animal feed that was later renamed Seacoast Products.
In 1984 :

Whites first hostile takeover : the US Industries (USI). The acquisition of USI was followed by

3 other hostile takeover bid : SCM Corp, Kaiser Cement, Kidde.

Hanson takeover the London Brick (Britains largest brick manufacturer), Imperial Company

(largest tobacco company), Consolidated Gold Fields.

 Acquisition Philosophy
Whites Philosophy (Hanson Industries, US Subsidiaries) :
Target characteristics
companies based in mature, low technology that show potential
improving performance.
Research
Hansons staff routinely investigates companies undertaking
leveraged buyouts.
Risks assesment
give considerations to what can go wrong and the likely
consequences of a worst case scenario.
Funding
the British acquisitions have been funded by a mix of cash, equity,
convertible securities and loan stock.
Disposal to reduce debt
typically sells off the parts of the acquired company that cannot
reach Hansons stringent profitability targets.
 Contd
Elimination of excess overhead
closing down the companys headquarters, eliminating
staffs, sending other staff down to operating level.
The creation of incentives
Achieved by :
decentralization designed to give operating managers
full autonomy for the running of their businesses.
motivating managers by setting profit targets
giving managers large pay bonuses if they hit or exceed
Hansons profit targets
 Contd
Hansons philosophy (Hanson PLC, British Operations):
Decentralization
all day to day operating decisions are decentralized to operating company
managers.
Tight financial control
achieved by :
operating budgets
capital expenditure policies
Incentives systems
a major elements of the pay of operating managers is linked directly to
operating companys performance.
Board structure
no operating company managers are ever appointed to the board of ether
Hanson PLC or Hanson Industries
De-emphasizing operating synergy
in contrast to many diversified companies, Hanson has no interest in trying
to realize operating synergy.
 Organizational Structure
Hanson Industries
Hanson PLC (UK)
(US)

Building Brewing &

Consumer industrial
products food

UK UK UK
Allders UK Lindustries Imperial foods
British Ever Ready Hanson Brick
Imperial Tobacco Crabtree
USA USA
USA USA USI furniture & Hygrade food
Carisbrook USI Lighting & industrial Durkee food
Footwear building products SCM industrial Lea & Perrins inc.
Smith corona
 SCM acquisitions
SCM profile :
Diversified manufacturer of consumer and industrial products
Had 22 operating companies based in 5 industries
( chemicals; coatings & resins; paper & pulp; foods;
typewriters)
The worlds leading manufacturers for portable typewriters
The worlds third largest producer of titanium dioxide
The sixth largest paint manufacturer
A major force in th US food industry Durkee Famous Foods

Attraction to Hanson
Poor financial performance
Beginnings of a turnaround
Mature businesses
Low risk
 Contd
Titanium dioxide was dominated by global oligopoly
2 favorable trends that made high returns likely :
- a worlwide demand was forecasted to exceed supply for the next
few years
- input costs were declining because of the currency weakness of
the major raw material source, Australia.
Corporate overhead
 Result after SCM acquisition

4 business were sold off in as many months for a total

amount that recouped Hanson the original purchase and
left Hanson with the 2 best business in SCMs portfolio :
Smith Corona typewriters
titanium dioxide business

2 main reasons to retain the titanium dioxide business :

industry operating at close to 100% capacity & with
projections indicating an increase in demand through 1989.
two thirds of world production of titanium dioxide is in
the hands of global producers.
 Contd

In the 2 years prior to the acquisition, SCMs management had

undertaken the following steps :
a new line of electronic typewriters had been introduced to match
the increasingly sophisticated Japanese models.
capacity had been reduced by 50% & 6 US production facilities had
been consolidated into a single assembly plant.
As a result of automation, economies of scale, labor agreements,
productivity at the New York plant had increased fourfold since 1984,
and unit labor costs had declined by 60%.
The manufacture of electric models had been moved offshore to a
low cost facility in Singapore.
Smith-corona typewriter had just introduced the first personal word
processor.
 The Imperial Acquisition
Company profile :
One of the ten largest firms in Britain
Britains leading tobacco manufacturer
The third largest tobacco company in the world
Its Courage Brewing Company was one of the big six beer
company in UK

Attraction to Hanson
Mature business, low technology industries
There is little prospect of radically changing fashions or
technological change in tobacco, brewing & food industries.
Low risk
high brand recognition in Britain
 Contd
Tobacco cashflow
had a classic cash cow
Failure of Imperials deversification strategy
Inadequate returns in brewing & leisure
 Contd

Results :
Things began to go wrong for Hanson in the 1980s, as growth
began to slow and Hanson attempted to maintain high share
dividends. In the past, the problem was easily overcome by
acquiring new businesses. But now Hanson PLC had become a
victim of its own success. The size of the necessary acquisitions
to meet the dividend requirements of shareholders was growing
ever larger. This raised the problem not only of finding large
potential acquisitions to meet the companys requirements, but
also of funding them.
Hanson was criticized to fail to add value to the companies they
acquired (Imperial Chemical Industry acquisition in 1990), even
they got profit of 45 million ($70 million) when sell its stocks in
1991.
 Hanson PLCs Strategy

Make sure that value is being added to every business in the

portfolio by identifying ways in which each can be helped to
achieve major improvements in performance.
Restrict the portfolio to activities in which a constructive fituseful
skills attuned to the needs of the businessesexists at the center.
If growth prospects appear limited, try reinvention, moves into
related businesses, new ideas, or acash-cow strategy.
Focus effort and investment on areas in which the company have
demonstrable skills: dont diversify into unknown areas.
When substantial and discernible value is not being added, change
the portfolio.
 Conclusion from the overall acquisition strategy

As a result of Hansons acquisition strategy, it had become reliant

on natural resource companies which operated with weak cash
flows. As a consequence, funds for further acquisitions could only
be raised by selling existing business assets, usually the most
profitable ones. The difficulty was that Hansons portfolio of
businesses was steadily weakening over time, as the best-
performing stock was sold to purchase low-performing assets.

However, Hanson's individual management style had multiplied the

negative effects of the changed business environment, leaving it
less well prepared than most of its counterparts to adapt. Its short-
term focus on earnings, pattern of acquisitions and disposals, lack
of direct internal investment, obsessions with high dividends,
labyrinthine accounting and tax management, and culture of
financial engineering, brought it to a relatively weak pre-demerger
position in 1996.