Acquisition of Northrop Grumman - Term Paper Example

 Acquisition of Northrop Grumman Executive summary This paper has been prepared in order to study performance of Northrop Grumman along with its present, past and future endeavors and to critically decide whether Embry Investment Group (EIG) should acquire Northrop Grumman for acclaiming rights on its technology patents. This involves analyzing the firm from different angles and examining its performance with a view to decide whether such a venture would be profitable or otherwise. Hence, the aspects considered are; the financial stability of Northrop Grumman, the firm’s future plans and the strengths and achievements of the same over the past years. The primary objective of this paper is to recognize the overall structure of the company and whether acquiring it in order to obtain the company’s technological patent rights is a profitable venture or not. This paper has been formed by also considering the long-term future perspectives of the firm. Background of Northrop Grumman Northrop Grumman was formed in the year 1994, by way of purchase by Northrop. It is headquartered in Virginia, United States (Northrop Grumman, 2014). Northrop Grumman is one of the largest companies dealing in defense and aerospace technology. The main business sectors of the company are Aerospace systems, Electronic systems, Information systems and Technical services. The core values on which the firm is based on are quality, customer satisfaction, leadership as a company and as individuals, integrity in all actions as well as valuing employees and suppliers as effective members of the firm. Excellence, speed, collaboration and open communication are some of the key elements of behavior observed in this company. The firm gives adequate importance to its corporate responsibilities, ethics and business conduct. It uses advanced technology to deliver best performance and to provide high quality service for clients located across the globe. The security solutions provided by Northrop Grumman are highly innovative and is developed keeping in mind the importance of security and freedom for nations worldwide. Delivering such service is considered by them as not only a part of business goals, but also a moral responsibility. Such values and philosophies make this company stand tall. Northrop Grumman aims at delivering technology solutions at maximized cost efficiency. They also pay attention towards developing innovative technical solutions for which they have formed an effective team of researchers and scientists who work towards discovering new and effective ways of dealing in aerospace and defense. One of the most acclaimed achievements for the company is development of operation IMPACT, which aims to provide career support to injured military men, who have suffered injury in war. This program also covers career support for the injured military personnel’s immediate family members. All these aspects make Northrop Grumman a world class company with high values, delivering quality performance. Research design The report has been created by analyzing Northrop Grumman from the perspective of general conduct of the firm, past performance and achievements, business ventures and projects, innovation measures and financial stability. Special emphasis has, however, been put on analyzing the financial position of the firm as an acquisition mainly involves studying the profit structure of the firm (Shelton, 2006). A description of the company’s future performance Northrop Grumman has shown remarkable performance over the years. Some of the key aspects of analysis for the future are described below, keeping in mind the current scenario of performance. The company relies hugely on one client, the U.S government. Changes in government policies and contracts effect performance of the company majorly as almost 90% of the company’s revenue comes from the U.S government. Although this has huge advantages, but relying one major client has its own drawbacks. So, the firm presently and for the future aims at catering to clients across the globe with various technological needs centering not only upon defense, but also on other areas. The company has developed effective schemes, whereby it can compensate the cost of temporary changes or stoppages of contracts given by the U.S government (V. R. Petrescue & I. F. Petrescue, 2013). Northrop Grumman understands that being a technology driven company, its success solely depends on performance of its workforce. Hence, a qualified team of experts is mandatory. The company imparts training for development of its employees and will continue to so in the future (Reynolds & Stair, 2009). The company undertakes projects based on future estimates. If there are any changes in the estimates taken by a large margin, it may affect profitability and cash flows of the company. Hence, to ascertain a more likely scenario, while calculating estimates, it is necessary for the firm to undertake thorough study of present and future market conditions, changes in economy and trade related regulations as well as changes in political scenario. The firm relies hugely on its suppliers and subcontractors for different raw materials and components. So, it becomes important for the firm to analyze credibility of these suppliers. For this, it relies on appraisal reports and other technical analysis strategies. To strengthen such endeavors, the firm has chosen to develop long-term ties with its existing suppliers for their future endeavors. Northrop Grumman is a company operating in the technology field, which is always changing. Therefore, pertaining to the growing technical needs, it must undertake vigorous research and development. Only through this can it sustain competition and retain clients. Analysis methodology Selected data relating to the financial position of Northrop Grumman for the year ended 2013: Figure 1: Operating margin rate table. Operating margin rate table Aerospace systems 12.1% Electronic systems 17.1% Information systems 9.6% Technical services 9.2% (Source Nasdaq, 2014) There was a considerable decline in the operating profit of Aerospace, Information and Technical systems compared to the year 2012. This was due to low volume of unmanned programs, low funding and low modernization levels. Nonetheless, considerable rise was noticed in Electronic systems due to high sales. Hence, it is essential for the firm to consider broadening of their innovation projects as well as gathering more funding for the same. In 2013, total cash from operating activities amounted to $2.5 billion. Northrop Grumman invested $364 million in capital expenditures (Nasdaq, 2014). Its financing activities included – $2.4 billion for repurchasing common stock (Nasdaq, 2014). $2.8 billion net proceeds from issuance of long-term debts (Nasdaq, 2014). $877 million for redemption of long-term debt (Nasdaq, 2014). $545 million for dividends (Nasdaq, 2014). Figure 2: Overall financial position analysis. (Source: Money CNN, 2014) Inference from the above data From the above data, it can be deduced that the firm has taken valuable steps in financing activities so as to enhance modernization, which in turn will augment revenue, leading to growth in the operating profit. This will also result in a rise in free cash flows for the firm. However, the firm in its coming financial years should target at increasing capital expenditures as well, because it might not be possible for the company to grow or modernize unless investment in capital equipments and facilities is bettered. Also, there has been low growth in earning per share of the firm owing to little growth of profit. By increasing turnover, the firm can effectively capture market position. Figure 3: Index Analysis. (Source: Marketwatch, 2014) Overall, the rate of profit margins has been quite satisfactory. The ups and downs pertaining to each financial year is mainly due to fluctuations in sales and in the economy. There are many factors that are under the firm’s control and considerable changes and developments can help to counter these issues easily. The uncertain factors affecting the firm cannot really be tamed, but their impact can be reduced to a large extent by taking preventive measures. Northrop Grumman’s strengths and its accolades to fame Strong values and visions- The firm has a very strong set of values, behaviors and visions. Well-integrated business sectors- The four broad business sectors of the company, namely technical, information, electronic and aerospace systems, are managed most efficiently. Each sector has its special business structure and mode of operation, which is integrated in a manner that suits the overall business needs. Strong innovation network and initiatives- The success of a firm depends largely upon research and innovation activities. This helps to develop new business ideas and products, thereby allowing to tap a greater portion of the market or to develop new markets. Northrop Grumman realizes this concept well and has engaged itself in a lot of research work. It has tie ups with other smaller firms and institutions in this aspect. State-of-the-art supply chain management- It has a well-established chain of logistics that effectively meets all business end-to-end requirements, making sure that raw materials, components and finished products are delivered on time. Business ventures and acquisitions- Cutting edge optronics, M5 security network, astro aerospace, microelectronics are some of the featured ventures of Northrop Grumman. Apart from this, the firm’s business acquisitions include Grumman, Westinghouse Radio, California Microwave, Federal Data Corporation, Ryan Aeronautical, Sterling's Federal Systems Group and many more. Corporate responsibility efforts- Northrop Grumman is aware of its responsibility towards the environment and community and also the value of conservation and safety. The company has developed many organizations to ensure that these criteria are met with. Acquisition decision: Recommendations and findings From the above analysis of Northrop Grumman’s performance and its forecasted plans, we can infer that the company proves to be a profitable venture. It is one of the leading giant firms that operate in this specialized field of technology catering to defense and aerospace. A major portion of the firm’s asset comprises goodwill. It is known that goodwill is estimated on the basis of a firm’s profits in previous financial years. When goodwill is high, we can consider the profits to be high too. Therefore, the firm has adequate capacity of earning profits and sustaining the same. Certain factors to be considered before such venture can be are as follows- Firstly, developing more means for increasing funds by way of issuance of shares and long-term debts. Secondly, maintaining sustained growth in profits and sales. Thirdly, investing more on equipments and training facilities that will facilitate better deliverance. Fourthly, the firm should take adequate measures to invest in research and development as that is the only way for the firm to meet the high competition existing in the market. Fifthly, it is important that the firm to not neglect the environmental factors, while conducting research and manufacturing end products. Sixthly, since the firm caters to defense requirements, it is essential to develop such equipments and technology that ensures high degree of protection. In order to do so, the company must study the defense needs of the nation (Fry & Nystrom, 2009). Apart from all these; Northrop Grumman being a company that is completely focused on technology, can broaden the business categories in which it deals. It can incorporate catering to smaller businesses that although might not generate much revenue, but can certainly help in overcoming time lag when major contracts are stopped. Furthermore, there is a never ending requirement for advanced technology in several fields. If the company can tap these markets, it may help to generate valuable revenue. While deciding whether a company should acquire Northrop Grumman in order to get hold of their technology patents, all the above factors need to be carefully considered. So, investors and experts in this regard may put up a green flag for such a venture. This is because technology based firms are never really a bad investment in contemporary world, considering the growing need in this regard. However, major re-construction needs to be administered in the research department and also in diversification. Overall, from the analysis, it is quite clear that Northrop Grumman is a pioneer in its field of operation. Therefore, acquiring their patented rights can prove to be a profitable venture. Given that, if Embry Investment Group (EIG) decides to gain acquisition of Northrop Grumman, the former must make sure that they are able to support the latter’s business strategies effectively as well as develop new strategies for the long-term. Contents Executive summary 1 Background of Northrop Grumman 2 Research design 3 A description of the company’s future performance 3 Analysis methodology 4 Inference from the above data 5 Northrop Grumman’s strengths and its accolades to fame 6 Acquisition decision: Recommendations and findings 7 References 10 References Fry, C. & Nystrom, M. (2009). Security Monitoring. Sebastopol: O'Reilly Media, Inc. Northrop Grumman. (2014) About Northrop Grumman. Retrieved from http://www.northropgrumman.com/AboutUs/Pages/default.aspx Marketwatch. (2014). Northrop Grumman Corp. Retrieved from http://www.marketwatch.com/investing/stock/noc Money CNN. (2014). Northrop Grumman Corp. Retrieved from http://money.cnn.com/quote/quote.html?symb=NOC Nasdaq. (2014). Northrop Grumman Reports Strong Fourth Quarter and 2013 Financial Results. Retrieved from http://www.nasdaq.com/press-release/northrop-grumman-reports-strong-fourth-quarter-and-2013-financial-results-20140130-00224 Petrescue, V. R. & Petrescue, I. F. (2013). Northrop Color. Norderstedt: Books on Demand. Reynolds, G. & Stair, R. (2009). Principles of Information Systems. Conneticut: Cenage Learning. Shelton, M. L. (2006). Strategic business fits and corporate acquisition: Empirical evidence. Strategic Management Journal, 9(3), 279-287. Read More