The figures, despite increasing after a slump should still be adjusted. Since Northrop acquired a substantial amount of assets from TRW, clearly, new profits are being compared against a larger number (the value for total assets has increased), inevitably reducing the R.O.A percentage. Nevertheless the figures should be higher. The merger has definitely not helped this measure. Viewing the changes in the gearing level of the company will provide very useful in assessing the merger. Indeed, many of the concerns regarding the acquisition emerged on the grounds that Northrop would become to debt entrenched. The debt/equity ratio, which measures the proportion of a company’s long term liabilities to its equity will illustrates this.
The figures are much a surprise. However, the explanation for this (which Northrop had planned) is that the spin-off of the unwanted businesses (like TRW’s automotive section) raised a substantial amount of money which greatly aided the debt reduction. The final ratio we will discuss is a again, a widely used one. The current ratio “gives you a sense of a company’s ability to meet all short-term liabilities with liquid assets, should it need to. A ratio of 1 implies adequate current assets to cover current liabilities, and the higher above 1, the better.” The ratios do not show a great deal of variance throughout the years. Although there is a decrease between 2002-2003 suggesting a negative impact of the merger.
Assessing The Takeover – Long Term Market Comparison We have previously compared Northrop to the market index and its sector. However, this was done for a focused time frame and for the purpose of relating the events throughout the takeover battle and the price shifts. In order to assess the success of the merger, under investors view point, a long-run comparison should be performed against the sector (not the S&P 500 as it is not a good benchmark). Long Term Market Comparison
The graph clearly shows that Northrop has caught up all of the gap against the sector index owing to its acquisition strategy carried out throughout the years. Even though from 2003 it starts to slightly fall behind, perhaps due to merger integration lapse. So, Good Fit or Fake Jewels? An apprehensive analysis of various factors seem to give evidence that the merger was beneficial. The financial analysis is fairly neutral, shareholder value has not been greatly damaged. The market share gains and market performance are definitely encouraging, likely to favour capital gains for shareholders in the future.
Academic Theory Throughout the investigation we have described where a typical “merger-related” trend was occurring. It is therefore unnecessary to carry out an extensive analysis to establish how well and why this case reflects empirical evidence on mergers & acquisitions. Although it is worthwhile recapping on a few typical trends. First of all, a principle motive for acquiring new companies is to gain market share. Secondly, when a bid is announced the acquirer’s share price typically decreases and the target company’s price increases. Thirdly, the acquirer always has to pay a substantial bid premium to convince the target company to sell its shares. Finally, when the merger is completed, the new company will suffer a depressed stock price for a while owing to integration costs.
Books Arnold G, Corporate Financial Management, 2nd Edition, Prentice Hall 2002 Journals & Databases Business Week Online, “From retirement to a takeover battle” (March 25, 2002) Carson I, The Economist, “Odd industry out” (July 18, 2002)