Lincoln Electric

Team

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 Electric’s 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

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 aSound Basis for an Effective Strategy?

InimitabilityProduct mixTechnical DevelopmentsCustomer Relations & MarketingOperationsLogistics

54332

DurabilityProduct mixTechnical DevelopmentsCustomer Relations & MarketingOperationsLogistics

34544

AppropriabilityProduct mixTechnical DevelopmentsCustomer Relations & MarketingOperationsLogistics

55544

SustainabilityProduct mixTechnical DevelopmentsCustomer Relations & MarketingOperationsLogistics

33432

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 company’s 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 India’s 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 Sécheron– $3.5 million in sales in 2005

• Indo Matsushita• Anand Arc– Manufactures full range of welding consumables– Claims that it produces the highest-quality

electrodes in India

Competitive SuperiorityLincoln Electric

Ador Welding

Ltd.

Esab India

Product mix

Technical

Developments

Customer Relations & Marketing

Operations

Logistics

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----------

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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

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

(60.0)

(40.0)

(20.0)

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Net Income

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 3–4 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

Regional Performance

Region Year ROATotal Sales

(USD millions)Total Assets

(USD millions)

USA and Canada 2005 0.28 1077.5 652.5

Mexico and Latin America 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

2005 Revenue for Largest Competitors in $13 Billion Welding Market

• Lincoln Electric’s 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 El

ectric

ESAB

ITW W

elding

Air Liquide

Kobelco

Therm

yadyn

e

Boher-Th

yssen

Fronius

Daihen

/OTC

Panaso

nic

Sichuan

Atlantic

Hyundai

0200400600800

1,0001,2001,4001,6001,800

In $ Millions

In $ Millions

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

Lincoln Electric's Profit Margin

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 20050.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Lincoln Electric's Return on Assets

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 20050.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Lincoln Electric's Return on Equity

1998 1999 2000 2001 2002 2003 2004 20050.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Lincoln Electric's Debt Ratio

Industry Benchmarkand 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

Overview

Structural Dimension Divisional Functional Matrix Network

Efficiency of resource utilization

Poor Excellent Moderate Good

Efficiency of time utilization

Good Poor Moderate Excellent

Responsiveness to the environment

Moderate Poor Good Excellent

Adaptability over time

Good Poor Moderate Excellent

Ability to hold people accountable

Excellent Good Poor Moderate

Environment for which best suited

Heterogeneous Stable Complex Volatile

Strategy for which best suited

Diversified Focus/low cost

Responsive-ness

Innovative

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 LaborCoordination of MechanismsDecision Rights

Boundaries

Importance of Informal StructurePolitics

Basis of Authority

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

STRATEGY

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.