Corporate Finance: Business Valuation in


Tomkins Plc


 


Introduction


            There are different kinds of companies and businesses existing in the global market. There are companies which are owned solely by an individual and there are those companies owned by group of individuals or partners.  In this regard, the company is said to have obligations with the owners through the creation of business value.


Business value is known as a collective growth in one or more of the following aspects in a business such as direct benefits which compromises the growth of revenue or reduces costs; indirect benefits like the client relationships; flexibility enhancement such as alertness in response to market changes and risk reduction (Aggarwal, 1997). These elements encompass the organizational value parameters such as quality, cost, speed, innovation and relationship.  In addition, business value are being created to the five different functions of a business such as the inbound logistics, operations, outbound logistics, marketing and sales and customer services.  Primarily, the main goal of this paper is to analyze how Tomkins Plc has created value for its owners in the last 10 years. In addition, this will also provide some recommendation on how the company can improve their wealth creation record.


 


 


Overview of the Company


Tomkins Plc is a group of companies consisting of different subsidiaries which are presently organized into two larger segments: the Industrial & Automotive Segments and Building Products.  Consequently, both of these segments have a strong competitive position in the market environment as well as technical leadership. The company’s brands are well-recognized in the global market. Tomkins Plc is listed in both New York and London stock exchange with the revenue of  USD 2.9 m during the first half of 2008 with approximately 33,000 employees in the global scale which means they have 21, 635 employees in the 73 production facilities in the first segment and 11, 817 employees with 65 production facilities  for the latter segment. it can be said that the group revenue during those period is quite impressive considering that financial crisis is ongoing that affects most operations and financial performance of other industries.


Tomkins plc is a company that is engaged in engineering and manufacturing business in the global market. Formerly, the company is known as F.H. Tomkins Buckle Company, which was established in 1925 and is headquartered in London, the United Kingdom. The company has grown to be a competitive industry in the market offering different products under various segments.  The company’s  Power Transmission segment has been able to provide V-belts, synchronous drive belts, tensioners, pulleys, electromechanical drive systems, engine modules, motion control components, polyurethane timing belts, powder metal power transmission, planetary carrier systems  and pump components, and engine and transmission oil pumps. On one hand, Tomkins Plc’s fluid Power segment are offering a line of hose and tubing for industrial and automotive customers, and it also provides ring cutting, flared coupling systems, sealing elements, weld nipples, and hydraulic systems solutions. The second segment of the company also offers remote tyre pressure monitoring approach; automotive thermostats, gas and closure caps, tire valves and gauges, refueling vapor recovery valves, air conditioning components, fuel delivery system components, air-conditioning and injection valves and connectors, automotive chassis components, industrial valves, tire repair pieces and inflating gauges.


Tomkins Plc’s automotive and industrial segment are providing frames, trailers, axles and wheels, automotive accessories, power steering hose assemblies, grease guns, air line products, brass, tire repair products, and plastic fittings, brake lines, as well as oils and greases. While the company’s Air Systems Components segment provides the market air handling components for the ventilation, heating, and air conditioning markets. The other building products of the company offers whirlpool baths, steam baths, tub/showers, door enclosures, shower bases, aluminum and vinyl windows and doors, bathroom fans, exhaust hoods, roof vents, and monitoring systems.


 


Financial Analysis: Value Creation for Owners


            Accordingly, business valuation is an approach or a set of procedures which are being used to estimate the economic value of the interest of owners in a business. Valuation is utilized by the participants in the financial market to identify the price they are willing to receive or pay to consummate a sale of a specific business. It can be said that the management of the company are interested in measuring the operating performance in terms of profitability and return on invested capital. If they are not owners, managers must still satisfy the same expectations of owners in this regard. As managers, they must focus themselves in measuring operating efficiency, asset turnover, and liquidity or solvency. These will help them manage everyday activities and evaluate potential credit customers and key suppliers. Manager ratios serve as cash management tools by focusing on the management of inventory, receivables and payables. Accordingly, these ratios tend to focus on operating data reflected on the profit and loss statement and on the current sections of the balance sheet. The value the can be provided to the owners and shareholders of the company are considered in the financial statement.


Financial statements are annual statements that summarize a company’s activities for over the last year (Fried, Sondhi & White, 2003). They are audited by certified public accountants (CPAs), who interpret whether or not the firm’s financial conditions have been fairly presented in the statements.   Balance sheets provide the details of the company’s assets, liabilities and owner’s equity at a particular date, which is usually the last day of the accounting period.  Most people describe it as the “snapshot” of the financial condition of a company.


            It is said that the shareholder is regarded as the central stakeholder of each industry. Placing the shareholder at the focal point of business activity is simply recognizing the fact that firms that do not satisfy shareholder requirements increase their risk of capital flight, higher interest rates and pressure from the board of directors, takeovers, and lower productivity. Organizations that create long-term shareholder value simultaneously create relatively greater value for all stakeholders. Thus, value-creating organizations appear to operate with the following objective function in mind: Maximize shareholder wealth subject to satisfying remaining stakeholder requirements. And in order for Tomkins to meet such requirement the company has been able to identify an effective way for this concept.


            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. 


            However, this situation was far from the situation faced by the company after 10 years of operation. It can be said that for the last 10 years of operation, Tomkins, despite of major downturns has been able to progress and continue to emerge as competitive in the engineering and machinery industries.  In order to understand this more, financial analysis of the company for the last 10 years will be considered.


Financial Analysis



  • Dividends and Share Price


Table 1.  Dividend Information


 


1997


1998


1999


2000


2001


Apr-02


Dec-02


2003


2004


2005


2006


2007


Interim (GBp per Share)


3.06


3.5


4


4.6


4.6


4.6


8


4.6


4.83


5.07


5.32


5.32


Final (GBp per Share)


8.39


9.67


11.15


12.85


7.4


7.4


0


7.4


7.77


8.16


8.57


8.57


Source: http://www.tomkins.co.uk/tomk/ir/shservices/divinfo


Figure 1



Source: http://www.tomkins.co.uk/tomk/ir/shservices/divinfo/


Based on the table and graph above, it shows that the dividend for Tomkins Plc’s shareholders reach their peak in year 2000-2002 and have been sustained throughout the years.  As can be seen in their financial status, the dividend can be considered to show positive future even if there are environmental factors that affect the business which include the financial crisis in the global market. Year 2007 was not a good year for Tomkins as compared to the half-decade years, but it still shows potentialities for the performance of the company.


Figure 2. Share Price: Tomkins PLC 2009



Last Trade: 16:35  02/03/2009


In line with the share prices, Tomkins Plc is said to be experiencing the effect of the financial crisis due to subprime mortgage with a downfall of 1.5 in London Stock Exchange and 0.24 in New York Stock Exchange. This shows major effect in the performance of the company, hence, Tomkins group must be able to find ways in improving their sales and profits.


 



  • Income Statements


As shown in Figure 3, the net profit margin of Tomkins fell .4% as of 2007.  It can be seen also that the sales of the company decreases as well as the administrative and generals costs. Basically, given the figures from the previous years, Tomkins Plc is not showing any progress.


 


Figure 3.  Summary of Revenue and Net Income of TOMKINS PLC



Source: http://www.tomkins.co.uk/tomk/ir/finfactsheet/


 


Analysis shows that Tomkins Plc has been able to gain profitability 2005 and shows little and slower progress in the coming years. Although this is the trend, it is still safe to say that as of 2009, the company is still showing improvement despite of major economic downturn of various institutions in the global market.


From this situation and with the result of the net income and revenue of the company, it can be said that the company is not performing well in the market. Hence, the management of Tomkins must be able to evaluate all their operations and market activities to know which factors affect their growth.


 


·                                         Balance Sheet and Cash Flow


            In accordance with the gathered financial information, it shows that the company has shown inconsistencies in their progress. The financial figures provided shows that the company, although, performed in 2005, are performing and progressing slowly for the next two years and this is forecasted to happen in 2009.  Looking at the company’s cash flow, we can conclude that Tomkins Plc is not performing well as compared to their great performance in 2005.  In which, part of their earnings have been used in development and expansion projects in 2006.  One of the attributed factors for their market fall is because of the current marketing approach of the company.


 


Figure 4.  Summary of Cash Flow of TOMKINS PLC



Source: www.ft.com


 


Accordingly, one way of analysing a business is through their balance sheets. This includes the reports of the company in line with their financial ration.  The main purpose of financial rations is to determine the profitability of the company.   The calculation of this can also be used to know whether the company has enough liquid sources to pay their debts, finance charges and their employees. Likewise, it is useful for the owners or shareholders to know their shared values (Riahi-Belkaoui, A 1998).


In the course of 10 years the company has incurred several changes in its financial profile. Based on the data presented, the company has incurred a higher state of liquidity as compared on its previous performance. This means that the company has a greater capacity to pay its debts when it comes due. This is shown in the increase in their current assets shown in the data presented in its deposited cash in the bank and its profit coming from the company’s operation. It could also be asserted that the company obtained a positive change in the profit and loss account. This presents the company’s stability in terms of it financial obligations.  However, it is also important to note that the increase in the company’s net current liabilities is very alarming. Likewise, the company’s payables and expenses have also increased dramatically providing over than half of the previous year’s liabilities. This shows that most of the company’s operation is financed predominantly       


Figure 5.  Summary of Liquidity Ratios of TOMKINS PLC



Source: www.ft.com


 


As can be seen in the figure above, Tomkins must be able to utilize their assets to grow and develop more in the future. The management must be very keen in observing their financial ratios and they must ensure that they do not experience too low financial returns in order to drive creditors away in line with the level of risk present. Based on the given financial statements, it shows that Tomkins Plc can still be considered to have stability when it comes to financial matters.  


 


Other Extraneous Report Analysis


            The company has been able to use different strategy in order to stay competitive and at the same time to maintain its performance for creating shareholder value. One of the strategies used is the process of acquisition. Herein, the company 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.


            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.


 


 


Recommendation


Since the company has been able to sustain its competitiveness and great performance, the company must continue its business strategy focus. Through this, the company may be ensured of having long-term relationship with their potential investors.  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.  Hence, this means that in order to become successful in gaining shareholder value, the firm must be able to have the ability to think of effective ways to solve issues which cannot merely solve by focusing on their strategy.


            In the last few years of decades of operations 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.


It can be said that the gain to shareholders is based on achieving synergies from cost savings, revenue enhancement, process improvement and financial engineering. The revenue enhancement is the most important factor to
create synergies in acquisition approach. However, t
he 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 and the company must realize this context.


 


 


Conclusion


Financial evaluation is very vital to the development of a certain organisation since it is the distinction whether the certain organisation are growing or not (Atril & Mclaney, 2004). With these the management should have a good collaboration to their internal auditor.  In the case of auditing fraud, the management may conduct an investigation with the help of forensic accountant. Through this, the company may know how the company is doing and how it sustains its competitive advantage. One of the primary goals of every industry is to maximize shareholder wealth, by ensuring that the business is having good performance in the marketplace. At first, the shareholder value approach of Tomkins is noted to be financial focus. However, as the company realizes the value of having effective business performance in gaining efficient shareholder value, the company 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.        


            As can be seen in the financial analysis, the Tomkins Plc is seen to have weaker performance in the last two years. In order to gain more effectiveness in terms of financial performance, the Tomkins Plc should be able to maximize its assets and profits and minimize its expenses.  In the financial statement presented it can be seen that the financial performance of the company is weaker compared to its financial stability on the previous years.  In this manner, the company should be able to provide certain ways in order to increase their profit and minimize their expenses. The provided recommendation can be used to ensure that shared values for owners or shareholders are provided efficiently.  The company must continue having efforts that will show that they value their shareholders.   By and large, it can be concluded that in the last 10 years, Tomkins have its ups and downs in terms of financial aspects, the only way to make it stable is to find strategic and effective ways to sustain competitive advantage.


 


Reference


Aggarwal, S., 1997. Flexibility management: the ultimate strategy. Industrial


            Management 39 (1), 26±31.


 


Atrill, P. & McLaney, E. (2004) Financial Accounting for Decision Makers, 4th edn., Prentice-Hall, New Jersey.


 


Fried, D. Sondhi A. & White, G. (2003) The Analysis and Use of Financial Statements, 3rd edn, John Wiley & Sons Inc., New Jersey.


 


Neely, A. & Adams, C. (2000). Perspectives on Performance: The Performance Prism. Centre for Business Performance, Canfield Business School, UK.


                                                                                                  


Tomkins Plc (2009). Online available at http://www.tomkins.com.uk.  Retrieve March 5, 2009.


 



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