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This report presents the information gathered in the process of analysis of Taylor Wimpey Plc.as a target acquisition for Kohlberg Kravis Roberts & Co. Taylor Wimpey Plc. has been identified as a viable acquisition during the current economic conditions as the share price is believed to substantially undervalue the company. Taylor Wimpey Plc. is in the house building industry which has faced substantial turbulence during the 2008/09 recession. The following information details most of the publicly available information on the above company in order to consider the viability of the proposed venture.
History and background of Taylor Wimpey Plc.
As per the information provided by the company, formation of Taylor Wimpey happened on 3rd July 2007 (Taylor Wimpey Plc, 2010) through the merger of George Wimpey and Taylor Woodrow. Both businesses have a history dating 80 years or more with George Wimpey dating back to the 1880's and Taylor Woodrow to the 1920's.
A stone working business was established in Hammersmith by George Wimpey in 1880. The company soon became a reputable contractor taking responsibility for major building projects and new tramway and road contracts throughout London. In the 1920s G.W. Mitchell went on to purchase the business from the original owners and establish it as a private company, George Wimpey & Co Limited. During the decade the road working contracts were expanded and also moved in to the house building industry. During the period between the two world wars the company managed to establish itself as a household name in the fields of civil engineering and building. In the 1930s, the company built its first estate. Even during the depression that was prevalent at that period, the properties built by the company continued to sell fast. In 1945 after the end of the war where there was a significant shortage of both skilled labour and bricks, there was the need to rebuild housing for the war torn population and also to improve the general standard of housing. To help in this course, Wimpey developed the No-Fines technique. In the 1950s due to the chronic housing shortage, Wimpey was building around 18,000 houses for the local authorities every year. In 1954 the restrictions imposed by the government on building private housing were lifted. As a result Wimpey was building private housing again. In the 1960's the economy is growing rapidly and as a result the housing market was enjoying a boom. As the Prime Minister Macmillan informed the nation, they 'never had it so good'. The regional offices of Wimpey often had to turn away work, in order to cope with the high demand. In the next decade there was a significant change in the local authority housing policies and as a result high rise flats were no longer deemed to be appropriate. As a result Wimpey changed its business models into building low rise housing on estates. Existing local authority homes were refurbished extensively which brought in significant business to the company. During this decade Wimpey became the largest private house builder within the United Kingdom by selling 106,440 homes. In the 1980s as the company celebrated its centenary, Wimpey had become a major international contractor and house builder, having branches in many parts of the world. During this decade the company experienced rapid growth and taking advantage of this new increased cash flow, the company branched into many of fields. Wimpey began to establish Wimpey Homes brand focusing on compact and quality housing. There was a substantial advertising campaign featuring the famous Wimpey cat, which went on to push the name of Wimpey into a household name that immediately came to the mind of most people who were considering purchasing affordable housing. In 1984 Morrison Homes business established in Northern California was acquired by Wimpey. In the 1990s the business experienced rapid growth expanding into various international markets and also establishing itself further in United States of America and Australia as well as in the United Kingdom. In 1996 the company purchased McLean Homes from Tarmac. After that the company discontinued its construction and quarry business and fully committed itself to the process of building homes. And as a result, the company became one of the world's biggest builders of private housing. During the last decade Wimpey continued to make a number of purchases and there by further stretched its reach. In the October of 2001, McAlpine Homes was acquired adding to the strength of the UK housing business. In 2002, Laing Homes was acquired by George Wimpey Plc. further strengthening its already established business in the United Kingdom. By 2007, the company was at the forefront of the industry of dedicated house building, through both health and safety (Taylor Wimpey Plc, 2010).
Taylor Woodrow plc has a similar prestigious history. It was established in 1921 by the 16 year old Frank Taylor, who borrowed £100 to build two new homes in Blackpool. As he was too young to register a company, his uncle Jack Woodrow gave his own name to the company in order to give it a legal presence. As a result 'Taylor Woodrow' was born. In the 1930s the commercial opportunities influenced the company to move to Hayes in Middlesex in order to build 1200 homes on the Grange Park Estate. In 1931 by the month of April, the rate of houses being released for habitation by the clients had reached the limit of four per a single day. This was a tremendous achievement in such a short time after the establishment of the business in the previous decade. In 1935 Taylor Woodrow established itself as a limited company with a capital of £3 million. The company moved on to accepting contracts in America for the construction of homes. As the Second World War started the company was ordered that only the houses that are near completion should be completed and any further new constructions were halted. The display of skills of the company in building Royal Ordnance Factories, airfields and a penicillin factory achieved it much praise. In the 1940s the company made some purchases that resulted in it entering the merchant trading and minerals business. Through this the company contributed to the war effort and played a part in building the infrastructure for the D-Day landing. By 1945 the company had 7 subsidiaries, 3 associate companies in the US. By 1948 the company was building schools and factories as well as houses in England, America and Africa. In the next decade the company took part in investing in the development of housing and property in Canada by the purchase it made of Monarch Mortgage & Investments Ltd. By now company was running over 250 projects in various parts spread out across the world. Work completed on Calder Hall Nuclear Power Station and work began on Calder Hall Nuclear Power Station. In 1960 Taylor Woodrow was appointed as main contractor to build the New Metropolitan Cathedral of Christ the King at Liverpool. In 1970 London's St Katharine Docks redevelopment work was started which was noted as 'one of the most ambitious private enterprise developments since the great fire'. In the 1980s Taylor Woodrow was established as one of the founder members for the consortium for building the channel tunnel. This carried with it tremendous responsibility as well as prestige. It was a significant project during the last century and it was an honour to have taken part within it. But in the 1990s as well as past decade, the company has continued to grow a significant rate though various new acquisitions.
Aims, Vision & Strategy
The company vision and goal is to focus on home building operations in the United Kingdom, North America, Spain and Gibraltar. The main aim of the company is to be the home builder of choice for the customers, the employees, the shareholders and the communities in which they operate.
The company has listed its priorities based on various divisions as well as the length of the term. For the group the short-term priorities include bringing the group back in to profitability after the downturn experienced during the past recession in bore the main markets of the United States and the United Kingdom through activities such as focusing more on the increase of space price rather than concentrating on the growth of higher volumes of sales, continuing to focus more and more on reduction of the costs associated with the building of homes in various localities and maintaining tight control over variations in the overhead cost structure. Other short term priorities for the group include delivering value from the existing land banks, continuing to generate cash from day-to-day operations by working to reduce the level of funds invested in land as well as the work in progress; giving priority to training and development programmes for the current and new employees of the organisation in order to maximize their potential which would contribute to the increased effectiveness and efficiency of the employees workforce in what they provide to the company; delivery of operating cash flows that are in excess of the levels that are set out within the financial covenants assigned to us. In addition to the above short-term objectives, the company also has a number of long term objectives that forms a part of its strategy. These include a growth in earnings per share that is acceptable considering the current market conditions, delivering a return on capital employed that is sufficiently above the cost of funding for the organisation, bringing up the credit rating of the group to an investment grade level, attracting and retaining the employees of highest calibre who can carry forward the name of the company to the clients.
Within the United Kingdom, the short-term objectives of the company are to provide competitive offers in each local market, reduction of building costs through the lowering of labour and material costs, major savings and value engineering of sites and adding new plots to the existing land bank through purchases made on attracted terms. The long term objectives include becoming the leading home builder in United Kingdom, focusing on improvement of the margin and better cash management, and as the market begins its recovery to focus on the growth of volumes through an increase in the outlets available to the customers.
Within the United States the main objectives are a reduction in the building costs and overheads, maintaining a reduced level of land investments and work in progress as and when appropriate, seeking growth of market share in the key markets, becoming the home builder of choice in each market as well as seeking growth of volume by taking advantage of land acquisition opportunities where the terms are attractive.
In the market of Spain (Deshayes, 2010) and Gibraltar, the company focus on concentrating its attention on Spain while discontinuing activities in Gibraltar, seeking popular locations (O'Connor, 2010) and building high-quality forms that will be attractive to the local and foreign buyers, focusing on more cost reduction and an increase in cash generation, as well as being cautious in the process of purchasing land due to the uncertainty of the current point in the market cycle.
There available financial information on the company for the most recent period are as follows (Taylor Wimpey Plc, 2009).
As per the income statement provided by the company, we can make a judgment on the progress of the company, at the worst point of the recessionary environment prevalent between the periods of 2008 to 2009. The total revenue has dropped by almost one billion pounds compared to 2008 while the cost of sales has been reduced in a similar ratio. From this we can assume that most of the costs are variable costs and other fixed overhead may be a relatively small. As a result, the gross profit available has also experienced a reduction in the same ratio. However the net operating expenses are quite closer to the levels experienced during 2008. This has not undergone an appropriate reduction comparable to the fall in business activities. Finance costs that usually refers to interest type payments on various debt instruments that the company uses for financing is business (but excludes equity capital). It is understandable that this cost has not had varied significantly from the previous year as most of these debt financing instruments are likely to be valid for long-term and therefore are not dependent on seasonal or short-term fluctuations in the business. However we can assume that due to the downgrade of credit rating of the company (Teather, 2008), it will experience difficulties in raising additional debt financing and also incur higher charges and increased interest rates until the credit rating has been restored to the previous level.
The loss on ordinary activities before taxation is higher by approximately £20m. However after adjusting for tax charge is the difference in loss is reduced to approximately £10m. Therefore compared to the previous period, there has not been a substantial increase in the loss experience. However by total loss of £110m on a revenue of £2,595m must be taken into account. While it is likely that this loss can be easily reduced or even turn into a profit within the current business period due to the resumption of the housing market, it is necessary that the possibility of future losses as well as the probable amount or the worst case amount to the considered when making a final decision.
Given below is the balance sheet for the company for the relevant period (Taylor Wimpey Plc, 2009).
As per the balance sheet, the total equity of the company is £1,500.9m which is a reduction of approximately £173m from the previous year. This is largely due to the reduction in the retained earnings that the company has gone through during the financial period. The real reduction is significantly more than the figures stated. However this is hidden by the figure for a large share buyback during the previous period. Coming back to the asset valuations we can see that the deferred tax assets have increased significantly. This however can be of benefit only when the business improves to a profitable stage from where the company can take advantage of this. As for the inventories, the total value has decreased significantly by more than one billion pounds. From this we can assume, that the company has put on hold new acquisitions of land and properties until there are signs of a market improvement. In addition to the above, cash and cash equivalents has also decreased by almost £600m from the previous year. The current cash position seems to be very precarious compared to the previous year. If a similar loss were to occur during the next financial period, the company will run out of cash within approximately two months.
As per the liabilities we can see a significant reduction of the bank loans offer to the company of a value totalling more than £1 billion. This can be interpreted as a sign of loss of confidence in the company by the banking services (Leitch, 2008). However the good news is, that the total liabilities have been reduced by almost £2 billion.
Considering the present situation, we can deduce many facts on to the nature of the company, its future under the present circumstances and most importantly what it can achieve with the additional resources that the KKR can bring to the table (Harrington, 2008). The most obvious points to note are that, the company is fast running out of cash due to the losses they are making as well as cash flow issues that may be tied to the confidence of creditors in the creditworthiness of the company. Due to its substantial credit downgrade, it can be seen that the company is having trouble raising necessary finances for the day to day financing. This may result in a situation where the company is forced to default on some of the obligations it has to its creditors, employees or the government as well as the employees. With the financial resources available with the KKR and its vast experience in raising debt finances to purchase and finance troubled companies, it may be possible to substantially raise the credit rating of the company simply by guaranteeing of the debts issued by Taylor Wimpey. Also with the substantial cash flows that are at disposal of KKR, it is possible to invest substantially in the undervalued property market or the land market so that it is possible to make a substantial profit when the market conditions improve. KKR can also provide much expertise in managing financial matters as well as finding proper business partners within the United States where it holds significant influence.
Problems envisaged and cultural issues
The deal may not be a smooth process due to a number of issues. One of the more significant is that Taylor Wimpey is considered to be a traditional British firm within its main market, the United Kingdom. An acquisition by a firm such as KKR renowned for leveraged buyouts could raise significant vocal opposition as well as much negative publicity for both the companies. This could result in significant political opposition to the deal influenced by various special interest groups. The perception that Taylor Wimpey is no longer a British Company can reduce its appeal within the United Kingdom. However there could be an increased interest in the markets within North America which may provide relatively higher benefits. Due to the current economic situation it is unlikely to encounter significant staff resistance from the employees unless significant cuts are to be made. Since such cuts are unlikely, it is reasonable to assume that the staff will fully cooperate as the job market outside is extremely difficult for those who are off work.
Approach for the takeover
There are a number of factors to consider when approaching this takeover. As for the current work force we can reasonably assume there is unlikely to be much effect in the markets outside United Kingdom. Even within United Kingdom, we do not expect any significant reduction of the currently employed staff, as even at the moment, the present management has done the maximum possible to minimize the staff costs. However it may be necessary to relocate the main offices to the United States for the better management of the organisation. This could be handled through an incentive scheme for the relocation of the senior management individuals to the United States. As most of the work is done on site, we do not expect a significant outsourcing of activities from one location to any other. As there are not going to be significant changes in the workforce or any significant relocation, this can be used within the marketing campaigns inside United Kingdom to give a positive view of the acquisition. Within the North America, there must be significant marketing campaign to promote Taylor Wimpey as an American business to make the maximum benefit of the 'Buy American' campaign that is spreading across America as a result of the difficult economic environment.
As a result, we conclude that the acquisition of Taylor Wimpey can add significant value to both the companies. The financing capabilities of KKR and expertise and experience in the property market of Taylor Wimpey can go on to command a significant market share growth within its current markets as well as new markets, as a result of this acquisition. Hover over it must be noted that there are a number of issues to consider, and proper steps must be taken to avoid any unnecessary problems that can arise.