Lincoln Electric

Team

What is the Best Way to Enter India?

By acquisition
By Joint venture
Building a new plant on its own

Operation Red Elephant:

Entering India
The Ador Welding Joint
Venture

Outline

PEST
Strengths and Weaknesses
Organizational Structure
Culture
Strategy
Recommendations

PEST

STRENGTHS &
WEAKNESSES

Key Points
Core Competencies
Product mix
Technical Developments
innovation,
technology.

Customer Relations & Marketing

Quality
Service

Operations
speed
Productivity
efficiency

Logistics

Financials
Culture & Leadership
Management
Organization
Decision-making abilities

Product Mix
Lincoln could solve customers
process problems and improve
process productivity with its ability to
combine both equipment and
consumables development needs
into one integrated package.

Tech Development
Strengths
Technological innovation allows the
company to earn a price premium for
many of its products.
Industry leader in new market
introductions and quality performance.
The most aggressive, comprehensive,
and successful R&D program in the
welding industry

Tech Development
More than 50% of Lincoln Electrics
equipment sales in 2005 were generated
by welding machines introduced in the
previous five years.
Known as The Welding Experts, vs. its
leading competitors who chose to diversify
their resources far away from welding.
In 2004 began building regional
engineering development centers
worldwide.

Costumer Relations
Strengths
Product support and guarantees,
allows the company to earn a price
premium for many of its products.
Customer support
Training
Consultation
Guaranteed Cost Reduction Program

Costumer Relations
Weaknesses
Geographical distance; logistics

Marketing
Strengths
Strong brand identity
Weakness
Strong brand identity

Operations
Strengths
Efficiency
Solutions oriented
Supply chain and FANUC Robotics
Harris Colorific acquisition

Weaknesses
Maintaining operational efficiency
internationally
Incompatible power source

Logistics
Weaknesses
Local production presence

Is Your Unique Competency a

Sound Basis for an Effective Strategy?

Inimitability
Product mix
Technical
Developments
Customer Relations &
Marketing
Operations
Logistics

5
4
3
3
2

Durability
Product mix
Technical
Developments
Customer Relations &
Marketing
Operations
Logistics

3
4
5
4
4

Appropriability
Product mix
Technical
Developments
Customer Relations &
Marketing
Operations
Logistics

5
5
5
4
4

Sustainability
Product mix
Technical
Developments
Customer Relations &
Marketing
Operations
Logistics

3
3
4
3
2

COMPETITION

Ador Welding Ltd.

$50 million in sales in 2005 with a
15% operating margin, and a portion
of its shares traded on the local stock
exchange.
Cost-adjusted annual revenue growth
rate at 20% over the next two years,
which should continue with a return
on capital employed at over 40%.

Ador Welding Ltd.

The company has shifted some production to
Silvassa, a government-created tax-free zone,
and by concentrating production at a smaller
number of facilities Ador had realized both
economies of scale as well as tax savings.
In July 2006 the companys publicly traded
shares were valued at 10.9x FY07 estimated net
earnings per share, and EBITDA per share was
predicted by the same local analyst to grow at a
CAGR of 29% and net earnings per share to
grow at a CAGR of 23% over the next two years.

Ador Welding Ltd.

Ador had annual sales of 241.6 crore (large
values of Indias currency, the rupee, are
counted in terms of crore, with one crore the
same as 10,000,000 rupees).
The company had produced 17,217 MT of
consumable welding products in FY06, and
Ador had previously constructed plant lines
that could produce far more than that should
the market continue to grow. Ador had in FY06
paid a dividend of 15 rupees, equal to a 4%
yield on the stock.

ESAB India

Over $50 million in sales in 2005.

18% operating margin in 2004
Newly Restructured
New $4.6 million, 50,000 square foot,
greenfield manufacturing plant

EWOC Allows Ltd.

$30 million in revenues in 2005

Smaller Competitors
D & H Scheron
$3.5 million in sales in 2005

Indo Matsushita
Anand Arc
Manufactures full range of welding
consumables
Claims that it produces the highestquality electrodes in India

Competitive Superiority
Product mix
Technical
Developments
Customer Relations &
Marketing
Operations
Logistics

Lincoln
Electric

Ador
Welding
Ltd.

Esab
India

FINANCIALS

Cashflow
Long-term company financial targets
included sales growth at double the
rate of growth in worldwide industrial
production
Operating margins over 15%
Earnings growth of 10% annually
Return on equity exceeding 20%

Cashflow
Net Income
140.0
120.0
100.0
80.0
60.0
40.0
20.0
86
(20.0)
(40.0)
(60.0)

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

Access to Outside Capital

India market booming so credit may
be easily accessible.
Still, any significant welding
acquisition would likely require
paying an acquisition premium
greater than Lincoln Electric had
been used to paying in the past

Other Scheduled Plans

As of 2005 the company spent
approximately two-thirds of free cash
flow for international expansion

Hurdle Rate
A minimum internal rate of return,
based upon total investment, of an
initial 10% increasing to a minimum
of 18% over the first 34 years (with
synergy credits)
The acquisition price was less than
8x EBITDA

Other Data
2005: operating income was $153.5
million and net income was $122
million on sales of $1.6 billion.

Other Data
Domestic Reliance
Over-forecast and spending
Extensive resources required
Human capital
Manufacturing

Regional Performance
Region

Year

ROA

Total Sales
(USD
millions)

Total Assets
(USD
millions)

USA and Canada

Mexico and Latin
America

2005

0.28

1077.5

652.5

2005

0.16

121.4

83.0

Europe

2005

0.07

426.3

313.3

Asia and Astrailia

2005

0.05

125.0

98.1

Acquisition Feasibility of Ador Welding, India

# of Publicly Traded Shares
% of shareholding
Total Number of Shares

5,995,933.0
0
44.09%
13,599,303.
70

Earnings Per Share (in Rupees)

CAGR for Net EPS (2007 projected)
Projected FY07 Net EPS (in Rupees)

29.45
23%
36.2235

Ador's public share valuation (P/E)*

*-Based on Ador's FY07 projected
Earnings
Ador's Price per Share

10.7
387.59145

Acquisition Strategies

%
Total
Owners
Acquisit Acquisition
hip
ion
Cost in
Total # of Require Price Per Premiu
Indian
Shares
d
Share
m
Rupees
Total
Acquisition

Majority
ownership

Joint Venture

13,599,303
.70

100%

387.59145

10%

13,599,303
.70

51%

387.59145

10%

13,599,303
.70

Public Takeover
(Purchase all
13,599,303
Public Shares)
.70

50%

387.59145

10%

44%

387.59145

10%

Total
Acquisition
Cost in US
Dollars

Leveraged
Buyout
Options
80% Commercial
Funding
@8.5%
20% -LE
Financing
via cash

Interest
Expense

5,798,071,22 $127,557,566. $102,046,05 $8,673,914.

2.79
90
3.52
55

$25,511,513.
38

2,957,016,32 $65,054,359.1 $52,043,487. $4,423,696.

3.63
2
30
42

$13,010,871.
82

2,899,035,61 $63,778,783.4 $51,023,026. $4,336,957.

1.40
5
76
27

$12,755,756.
69

2,556,369,60 $56,240,131.2 $44,992,105. $3,824,328.

2.13
5
00
92

2005 Revenue for Largest Competitors

in $13 Billion Welding Market
In $ Millions
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0

In $ Millions

Lincoln Electrics main competitors are ESAB (European based company) and
ITW (Illinois Tool Works).
Lincoln Electric also owns assets in Air Liquide, the fourth largest competitor in
the market.
Total revenue is important, but the total net income far more important.

Lincoln Electric's Profit Margin

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%

-2.00%

-4.00%

-6.00%

-8.00%

Lincoln Electric's Return on Assets

14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
1995.0

1996.0

1997.0

1998.0

1999.0

2000.0

2001.0

2002.0

2003.0

2004.0

2005.0

Lincoln Electric's Return on Equity

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%
1995.0

1996.0

1997.0

1998.0

1999.0

2000.0

2001.0

2002.0

2003.0

2004.0

2005.0

Lincoln Electric's Debt Ratio

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%
1998.0

1999.0

2000.0

2001.0

2002.0

2003.0

2004.0

2005.0

Industry Benchmark
and Competitors

Note: ITW and EASB India earned $1.3 billion, while Lincoln
Electric earned $1.6 billion.
In 2005, ESAB India gain more capital from investor causing
higher ROE. A huge increase of 123.6 million.

ORGANIZATIONAL
STRUCTURE

Introduction

Structural
Dimension

Divisional

Functiona
l

Matrix

Network

Efficiency of
resource
utilization

Poor

Excellent

Moderate

Good

Efficiency of
time utilization

Good

Poor

Moderate

Excellent

Responsivenes
s to the
environment

Moderate

Poor

Good

Excellent

Good

Poor

Moderate

Excellent

Ability to hold
people
accountable

Excellent

Good

Poor

Moderate

Environment
for which best
suited

Heterogene
ous

Stable

Complex

Volatile

Strategy for
which best
suited

Diversified

Focus/low
cost

Responsiveness

Innovative

Adaptability
over time

Lincoln Electric
Structural Dimension

Divisional

Efficiency of resource utilization

Poor

Efficiency of time utilization

Good

Responsiveness to the environment Moderate

Adaptability over time

Good

Ability to hold people accountable

Excellent

Environment for which best suited

Heterogeneous

Strategy for which best suited

Diversified

Functional

Divisional

Matrix

Network

Division of
Labor

By inputs

By outputs

By inputs &
outputs

By
knowledge

Coordination
of
Mechanisms

Hierarchical
plans &
procedures

Division
Gen. Mgr. &
corporate
staff

Dual
reporting
relationships

Crossfunctional
teams

Decision
Rights

Highly
centralized

Separation
of strategy
&
execution

Shared

Highly
decentralize
d

Boundaries

Core/periph
ery

Internal/exte
rnal markets

Multiple
interfaces

Porous &
changing

Importance
of Informal
Structure

Low

Modest

Considerabl
e

High

Interfunctional

Corporatedivision &
Interdivision
al

Along
matrix
dimensions

Shifting
coalitions

Positional &
functional

Gen. Mngt.
responsibilit

Negotiating
skills &

Knowledge
& resources

Politics

Basis of
Authority

Lincoln Electric
Central Issues

Divisional

Division of Labor

By outputs

Coordination of Mechanisms

Division General Manager &

corporate staff

Decision Rights

Separation of strategy &

execution

Boundaries

Internal/external markets

Importance of Informal Structure

Modest

Politics

Corporate-division &
Interdivisional

Basis of Authority

General management
responsibility & resources

CULTURE

Culture
Strengths
Industry-leading productivity
advances through innovative human
resource and incentive systems.
stock ownership
incentive bonuses via merit ratings
Employee Advisory Board
employee suggestion system

Culture
annuities for retired employees
group life insurance.
No lay-off policy

The entrepreneurial spirit

Piecework
Work days
Merit ratings

Trusting relationships

Culture
Weaknesses
Competent executive management
Synergies of acquisitions
Competent operational/functional
management
Incentive and bonuses

Culture
Trust issues

STRATEGY

Introduction
Many executives argue that brilliant execution is
more important than brilliant strategy. The
reasonis simple: doing is harder than dreaming,
and poorly executed strategy is merely a vision of
what could be. Effective implementation can
prove difficult, as it requires the coordinated and
appropriateefforts of individuals throughout an
organization. Thus the critical task for senior
managers is to define the key success activities
for their organization's strategy and develop an
organizational system that promotes those same
activities.

Structure and Strategy

The Joint Venture

NEGOTIATION STAGE

Equity Structure
Control of a joint venture is not
something surrendered easily

Technology Transfer
Important aspects include defining precisely
what technologies (possibly including
technologies not yet developed by either side)
are to be covered in the agreement and the
terms under which they are to be made
available to the venture.
The developing country partners hope to set
bounds on the royalties and fees they will have
to pay providers, especially as the technology
becomes older, and to broaden the joint
ventures control over its use.

Valuation problems
Each partner brings financial and
other assets to the joint venture, and
it is often not easy to determine what
these assets are worth.

Transparency.
Getting accurate data upon which to
base valuations and other decisions
can be very difficult in some
countries, especially where
accounting standards are quite
different from international
standards.

Conflict resolution.
Disputes are virtually inevitable in a
relationship as complex and dynamic
as a joint venture.
Spell out how disputes are to be
resolved

Division of management responsibility

and degree of management
independence

Attempts by parent companies to

micromanage an enterprise that may
be thousands of miles away are
doomed to failure.
A better strategy is for them to set
up clear operational parameters and
then let the ventures management
succeed or fail on its own.

Changes in ownership
shares
How should the ownership structure
be changed as a joint venture
matures?

Dividend policy and other financial

matters
Dividend policy goes to the heart of
why companies enter into joint
ventures, with some companies
hoping to expand and gain market
share rapidly while others are
striving to achieve quick increases in
cash flows that they can use to
support other operations.

Marketing and staffing

issues
The multinational company (MNC)
partner may see the joint venture as
only part of a larger strategy to enter the
developing country market.
As a result, insistence by the MNC
partner on control of key positions in the
joint venture may be seen by the local
partner, first, as overly expensive and,
second, as an effort to marginalize it.

OPERATIONAL STAGE

Multinationality
Many joint ventures undertaken in
developing countries involve large MNCs
that participate in a variety of other joint
ventures and run wholly owned
subsidiaries elsewhere in the world. The
developing country firms that are their
joint venture partners, though they may
be quite large by local standards, are
often dwarfed by their MNC partners.

Multinationality
Export rights Typically, the MNC would prefer not to allow the joint
venture to export products, which may be of inferior quality
(compared with those it manufactures elsewhere), into markets
already served by other manufacturing points in its own system
Tax issues An MNC generally wishes to minimize its worldwide tax
burden. This objective can dramatically affect its relations with a joint
venture
Dividend and investment policies The MNC partner may have global
investment programs that involve transferring of funds from one
region to another. It might, therefore, prefer to receive dividends
from the joint venture instead of reinvesting earnings, a position not
necessarily compatible with that of its domestic partner
Differences in partner size The local partner is likely to be
considerably smaller than the MNC partner, a difference that can
have important consequences for operating the joint venture

Ownership and control

problems
One problem that frequently arises in
the management of joint ventures
occurs when an owners attitude
changes

Ownership and control

problems

Product line disputes

Material and component sourcing
Technology utilization
Cultural problems

Changing relationships
Joint ventures involve dynamic relationships,
and it is almost impossible to foresee at the
time of agreement just how underlying
conditions might change. For example, learning
takes place, and it can modify how one partner
views the contributions of the other. A
developing country partner often is seen at the
outset as mainly contributing knowledge of
local practices, and the perceived value of its
contribution can decrease as the MNC partner
learns more about the local setting

RECOMMENDATIONS

Strategic Alliance/Greenfield
Investment Hybrid
First Best Strategy

 Creating a strategic alliance with Ador would give

Lincoln Electric instant access to the company with
the largest market share in India for welding
equipment and consumables.
Projected revenue growth for Ador is 20% per year for
the next 2 years, with a Return on capital of 40% over
the same period. Shares of the company are available
on the market, the company is obviously well run, and
getting a minority stake (25%) in the company should
allow Lincoln Electric to utilize the excess production
Ador has available in their Silvassa facility. This would
enable the production of consumables locally while a
greenfield facility for research, development, and
equipment production is constructed.

Lincoln Electric
Structural Dimension

Network

Efficiency of resource utilization

Good

Efficiency of time utilization

Excellent

Responsiveness to the environment Excellent

Adaptability over time

Excellent

Ability to hold people accountable

Moderate

Environment for which best suited

Volatile

Strategy for which best suited

Innovative

Network Structure

 Advances in technology, specifically inverter technology,

will be necessary in India, given their limited access to
such technology, the efficiency of this technology, and the
high cost of electricity in India. This provides a huge
opportunity for Lincoln Electric to capitalize on its
previous technological achievements in a new market
while developing newer technologies for more developed
markets.
Considering the levels of expansion in the countries GDP
growth, the projected level of governmental
infrastructure projects, and the development of several
thousand miles of new oil and gas pipeline, the Indian
market will be profitable through at least 2015, and most
likely beyond, as these infrastructure improvements
encourage further build-out.

Acquisition
Not a First Best Strategy

 An acquisition would prove overly costly for Lincoln Electric,

as the enhanced performance of the welding market would
push the costs of the acquisition outside of the boundaries
commonly used in justifying the acquisition of a target
company.
Even if the rules of acquisition were relaxed, there could be
several issues in this method. The only viable acquisition
target would be a large scale target, as consolidating
enough of the 300 smaller competitors into a force sizable
enough to rival ESAB and Ador would take far longer and be
more logistically and capital intensive than other more
practical strategies. Also, given Ador's organizational
structure, there is no guarantee that acquiring this
company would result in similar performance under LE's
ownership, as the management and HR styles are different.

 It has already been demonstrated, by ESAB

India, that entry into the market based
solely on acquisitions is not profitable in the
short term. Their acquisitions strategy,
started in 1988, only turned profitable in
2005 (+17 years from entry) and this was
due to massive restructuring, increased
capital funding, and accounting write down;
for that level of capital investment a
greenfield investment would be a better use
of capital in both the near- and long-term.