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TransDigm In 2017 The Beginning Of The End Or The End Of The Beginning Case Solution

Solution Id Length Case Author Case Publisher
2239 1570 Words (6 Pages) Benjamin C. Esty, Daniel Fisher Harvard Business School : 720422
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TransDigm was engaged in manufacturing of range of vastly customized aerospace components. The company was facing intense competition from key pleyers in original equipment manufacturer (OEM) segment since maintenance, repair and overhaul (MRO) segment prefers OEM supplier for procurement. As part of value creation strategy, most component manufacturers including TransDigm target high profitability which was largely derived in aftermarket since spare parts were more profitable with healthy margins. However, becoming a OEM supplier requires huge capital investment and was a pre requisite in order to provide spare parts in aftermarket and attain sustainable growth. In this regard, TransDigm’s operating strategies for creating value for the shareholders focused on building aftermarket business with numerous contracts to provide spare parts.

Following questions are answered in this case study solution

  1. How does the company create value for the shareholders?    

  2. Does the company aggressive acquisition plan sustainable given its huge debt?

  3. What are the challenges facing the company?

  4. Should the company continue its strategy? Give your recommendations?

Case Analysis for TransDigm In 2017 The Beginning Of The End Or The End Of The Beginning Case Solution

Becoming a OEM supplier requires rigorous certifications from Federal Aviation Authority which could span over multiple years followed by strict monitoring and enforcement of property rights (intellectual property rights). In this regard, TransDigm value focused strategy was to acquire companies with already secured OEM contracts. Acquisition strategy allowed them to avoid all the hassle of going through the FAA certifications process, securing property rights and benefiting from growing brand equity. TransDigm targeted private equity like returns for their shareholders with the liquidity of a public market. The key principles which were defined by the company to achieve these goals include products, operations, acquisitions and finance. TransDigm compete on design, manufacturing and marketing with access to proprietary aerospace business and growing aftermarket content. They have built long-term suppliers relationship on account of reliability, security, timely delivery, availability of their product and consistently meeting customer’s requirements. 

TransDigm formulated standard procedures to make its operations more efficient and create value on account of three elements improvement in cost structures, acquisition of growing and profitable new businesses and value based pricing. The acquisition strategy was very disciplined and the company targeted a niche whereby significant evidence for value creation exists. Further capital structure was another important element for aligning values while optimal mix of capital (both debt and equity) allows strong return for the investors. The said principles were supported by strong supplier’s relationships, intellectual property and decentralization while allowing employees to act like entrepreneurial managers and assume responsibility with a sense of ownership. In this regard, in order to grow its profit, the company acquired 58 companies since its inception. The focus of acquisitions remained on aftermarket suppliers with access to expansion in content across various platforms and opportunities for significant value creation. However, in the OEM segment, relatively weak margins were observed. 

2. Does the company aggressive acquisition plan sustainable given its huge debt?

TransDigm was aggressively perusing acquisition as part of its operating strategies with objective to create value through value based pricing, cost rationalization (productivity enhancement) and new product development (incremental volume) for sustainable growth. Over the past several years, TransDigm has made capital investment to acquire 58 key players while the company achieved substantial success in restructuring and turning around the new business. For example, the company acquired Aerosonic and Arkwin with a pre-acquisition stock price of $67 and $972. TransDigm created identifiable value through requisite restructuring and the post-acquisition stock price reached to $271 and $1950 respectively. Similarly, three other business namely Harco, Skurka and Whippany were bought by TransDigm with pre acquisition stock price of $1837, $310 and $654 respectively which followed a price appreciation of 328%, 258% and 736% respectively. 

Debt remains a major component of the total capital structure of TransDigm and also constitutes a major element of balance sheet. The total short term debt amount to $200M in 2015 with no change in 2016. The company used the short term debt essentially to meet the working capital requirements including raw material procurement, salaries, administrative, utilities and other expenses. The company reported long term debt of $8,502M in 2015 which increased to $10,279M in 2016. The long term debt allows the company to buy target companies and increase its markets share over the last many years. As a result of aggressive borrowing, the company also incurs huge financial cost which amounted to $419M in 2015 and $484M in 2016 respectively. The Debt to total capital ratio of the company 114% and 107% respectively in 2015 and 2016 respectively. The leverage of the company is 121% which is on higher side as compared to the peers whereby median leverage of 10 aerospace part mfgs is 44%. 

Despite the higher level of debt and interest expense on its financial statement, the coverage ratios seem satisfactory. The interest coverage ratio of the company remains 2.65 and 2.74 in 2015 and 2016 respectively showing the company has sufficient liquidity to meet its financial expense. Similarly, the return on invested capital also 11% which is higher than median of 10 aerospace parts manufacturing companies. This shows that despite higher cost of debt of debt the company is generating returns to cover the overall cost of capital. Therefore, there is sufficient evident to suggest that the growth strategy through aggressive growth can be sustained despite huge levels of debt. 

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