Many companies now seek to speed up their growth through mergers and acquisitions. According to Yahoo! Finance, manufacturer Triumph Group (NYSE: TGI ) has recently acquired General Donlee Canada. Was this deal a good idea? And can it help Triumph stand out among its competitors? Let's find out.
The expected outcome of the acquisition
Triumph is a global leader in manufacturing and overhauling aerospace structures, systems, and components. Buying General Donlee will primarily add to its engine and rotor shaft business, as General's major customers, which include GE Aviation and Bell Helicopter, now become Triumph's.
The acquisition will immensely help Pennsylvania-based Triumph expand its reach into Canada, since Donlee is headquartered in Toronto. According to forecasts released by Boeing, the demand for new aircraft in North America is projected to reach 7,250 planes between 2013 and 2032, carrying a total value of $810 billion. Joining forces with Donlee will enable Triumph to capture a larger chunk of this expanding market, in both the U.S. and Canada.
This $110 million acquisition is expected to increase Triumph's annual revenue by approximately $60 million. The company has effectively paid $2.08 per share to increase its annual revenue by $1.15 per share, which seems like quite a reasonable deal.
Staying conservative and assuming that Triumph will maintain its net margin of 8%, the synergies expected will most likely increase the company's earnings by $4.8 million, adding $0.09 per share earnings to its current EPS of $5.67.
Where Triumph is taking steps to expand its international presence, its key rival HEICO (NYSE: HEI ) is also taking steps to strengthen its foothold in the market. It is also operating in the aerospace industry. It provides jet engine and aircraft component replacement parts, thermal insulation blankets and parts, and specialty components for aerospace and industries.
Where Triumph is undertaking steps to enhance its international presence, Heico has also been undertaking small acquisitions to strengthen its Flight Group segment. What Heico may be doing better than Triumph is that its acquisitions are based on strengthening its product line, which will enhance its earnings.
This fact was reiterated by the recent results released by the company showing its net income to have gone up by 25% mainly due to the strong results of Flight Group. Triumph, meanwhile, saw an increase of 20% in its bottom line in the last quarter, and its latest acquisition will only add 1.6% to its earnings.
Also, HEICO's debt profile is slightly better, with a long term debt-to-equity ratio of 0.55 as compared to Triumph's 0.65. High debt can be threatening for equity investors who see their returns at risk.
In the light of the current market dynamics and the recent steps taken both companies, Triumph is lagging behind. Although Triumph and HEICO are on the same page, trying to grow through acquisitions and financing their deals with cash or debt, HEICO is making more sensible acquisitions, as exhibited by its recent results. Despite the geographical expansion in its aerospace segment, Triumph's acquisition is expected to bring about only a minor change in its EPS.
In my opinion, Triumph needs to take its plans for the future back to the drawing board.