Summary of Findings
Tomkins has changed its shareholder value creation strategy from financial to business focus. It also diverted its concentration from short-term value creation to sustainable one. This resulted to increase in dividend pay-outs in 2004 and 2005 despite acquisition regimes. This means that Tomkins is capable to integrate its resources and its subsidiaries efficiently. As a result, shareholders are granted with short-run benefits through dividend pay-outs and unrealized capital gains as Tomkins shares accelerate its market attractiveness. However, despite this, it is recommended that the firm continuously evaluate its subsidiaries particularly in the areas of their debt. Also, it must try to place investments (in portfolio form) on unrelated businesses to minimize industry risk coupled with investments in R&D to prevent risk of overly focus in acquisitions.
Creating Shareholder Value of Tomkins from 2001 to 2005
In the year in the initial years of this half decade operations, Tomkins had focused increasing the unrealized capital gains of its shareholders through buyback programs. Especially in the years 2001 and 2002, this strategy was set to calm down shareholders amidst its disposal of some of its relatively unrelated subsidiaries like gardening products to concentrate in its core businesses and minimize its debts. In effect, earnings per share increased that made its shares attractive for investors. The buyback program suggested that the firm is confident in the future cash generating capability of a lean but mean business.
In 2002, a new CEO was promulgated. This happening onwards started the abrupt acquisition strategies of Tomkins that was intended to purchase highly related companies to obtain synergy and strengthen available technology. Year after year, earnings per share and share price increased beyond the level of disposal periods in 2001 and 2002. Dividends that had remained flat at 12 pence from 2001-2003 had dramatically increased for the next two years. This indicated that the less speculating shareholders were paid off in favor of long-term gains with the company.
Within this half decade, sales and profits remained constant. This is rather atypical for a firm that had lost some of its good performing subsidiaries during the initial years of disposal. However, as Tomkins ignored short-term attractiveness of a diversified and unrelated portfolio in favor of its core businesses, it exemplified an ongoing concern for shareholders to support its acquisitions. It became long-term strategist wherein geographic expansion had not shaken its concentrated portfolio rather enforced its competencies by obtaining related businesses with technologies it can integrate to its existing businesses.
Shareholder returns at Tomkins surpassed the FTSE Engineering and Machinery sector by a huge margin. It could be suspected that the success of the firm to protect the trust of its shareholder was derived early in its disposing tactics. It had not only slashed the risks of its portfolio by doing this due to horizontal integration and economies of scale but also provide the cognition that it is focusing on long-term gains. As a result, its return had also increased making its share more attractive year-after-year.
At the onset of 2003, the corporate scandal at Enron changed how Tomikins reported its annual performance. Share price was not presented at single price rather a range of pricing for the past four quarters. This can be translated as to discourage false financial promises for prospected investors. However, even this lost opportunity for abrupt marketing of its share did not shaken the performance of the firm. It even served as motivation to undermine financial for business strategies. This situated Tomkins to create shareholder value within the veil of long-term relationship but with continuous (even increasing) dividend pay-outs.
Other Extraneous Report Analysis
It had acquired related businesses Selkirk, NGR and L.E. Technologies as well as sold its subsidiary that produces helmet (Gutter). This strategy of Tomkins proved that it acquires for faster transfer of technology and to support its manufacturing/ supply chain. Also, it is selling subsidiaries that are not within its core businesses like industrial, automotive and building materials. It aimed for highly horizontally integrated business which makes investors minimized the risk of costly integration as Tomkins and the acquired firm resources are highly similar. This cost savings will be allocated for geographical expansion instead.
http://www.investor.reuters.wallst.com/stocks/key-developments.asp?rpc=66&ticker=TKS×tamp=20060301143600
As the CEO admitted, the firm is volatile in industrial developments like oil prices hikes and increase in metal prices. As the business of the firm becomes concentrated in highly related businesses, the volatility increases as it cannot offset such input hikes in other unrelated businesses, say, in food products where the adverse effects of industry and general environment forces are low. Although shareholders are confronted with greater returns and sustainable growth, it is offset by higher risk of the firm’s volatility.
http://www.forbes.com/markets/feeds/afx/2006/05/03/afx2716293.html
Recommendations
The firm must continue its business strategy focus. This will provide investors the long-term relationship with the firm. However, at times when strategies do not arrive at intended value creating results to shareholders, the 2001-2002 disposing regimes and buyback programs can serve as contingency actions. In effect, balancing business and financial strategies attributable to shareholders should be maintained. The need for this intensifies as Tomkins prefer a concentrated portfolio which means that it becomes volatile in every industrial bottleneck.
In the last few years of the half decade it deepened its acquisition with highly related businesses. However, acquisition threats are just around the corner. The risk of acquisition ended with integration difficulties and large debt must be taken in consideration. As a result, diligent evaluation in the pre-acquisition stage becomes crucial. At present, shareholders may exercise confidence in this expensive strategy, but if the firm fails to equate this sacrifice into profits at due time, it could threat the equity financing.
To minimize industry risk (like oil prices and metal material hikes), the firm should diversify, at least, in portfolio investments. It could place a stake in other companies not with different environments and risks compared to its own. Shareholders value can be created when their risk is carefully calculated and spread especially at times when the cost of inputs are extraordinary compared with previous operations. Fund management should be obtained in order to provide shareholders the option to diversify their investments to companies in which Tomkins is spreading its own risk.
The firm must not overly focus on acquisitions. This may halt its innovative capabilities since research and development feats are waived through buying companies which had already made them. Yes, transfer of technology would be fast but can be offset by stagnant learning curve and employee urge to internalize innovation. This situation departs to the firm’s commitment on long-run shareholder value since the risk of leaking the knowledge and loosing the knowledgeable people in the acquired firm are not minimized. The advantage would turn out to be only temporary.
Appendices
2001
2002
2003
2004
2005
Financial Issues
Dividend payout
Constant at 12p
increased
Buyback Programs
Yes
Yes
none
Earnings per share
Normal range
Share price
Increased
No basis since it is a quarter performance
Business Issues
Highlight
Disposal of subsidiaries
New CEO
Acquisitions; geographical growth
Sales
Constant
Profit before tax
Constant
Note: Refer to financial statements for comparison http://www.tomkins.co.uk/docs/investor/reports.jsp
Bibliography
Tomkins Website; London; viewed on 2 June 2006; www.tomkins.com.uk
Credit:ivythesis.typepad.com
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