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Investment Outlook - Third Quarter 2017

As seen in the Canton Repository

Question: “Timken has acquired six companies in the last 12 months. Is this good for shareholders?”

By: Ryan T. Fulmer
Tuesday, February 13, 2018

After the Great Recession of 2008, many publicly traded companies have chosen to acquire companies as their management teams believe the acquisition path is less risky than spending capital on new and unproven products or offerings. Acquisitions also theoretically offer a quick and easy method to grow sales, profits, and product offerings.


Unfortunately, the vast majority of acquisitions (both publicly traded and private company) do not create shareholder value. In fact, they often destroy value.According to the Harvard Business Review, 70-90% of acquisitions fail!


Don’t get worried just yet. Just like ice cream flavors, there are all sorts of different strategies for acquiring companies. Some companies look to acquire competitors to gain economic scale or to spread more sales over a similar amount of fixed costs.This is a proven strategy, but it requires excellent strategy and execution.


Another widely used approach is to acquire companies to try to correct sluggish growth.The acquiring company can inject additional resources such as cash, human capital, and a larger sales team and hope that the new product will accelerate the acquiring firm's financial results. This strategy is high risk even though it is often attempted.


Yet another approach to mergers and acquisitions is for the acquirer to look at its customers and ask what other products or services could be offered to them? Which of these additional products or services align with the acquirer’s core competencies (competitive advantages)?


The Timken Company has chosen, what I believe to be, the best approach to acquisitions. This is looking at its current customers and trying to determine what additional products could be added to its offerings to grow sales. The company mission is: “Timken is a world-leading manufacturer of bearings and mechanical power transmission products, continuously improving its portfolio and related services to make global industries stronger.”


Let’s dive a little deeper into Timken’smergers and acquisitions strategy (M&A) and see how it fits the mission to “continuously improving its portfolio.”


Since May 2017, the Timken Company has acquired three new businesses; PT Tech, Groeneveld Group, and ABC Bearings.This is in addition to the three other companies in the prior 12 months. Timken has focused on expanding its products and services relating to products that are complementary to bearings such as; couplings, electric motor services, clutches, brakes, belts and chains, and lubrication systems.


Timken’s goal is to leverage its knowledge of metallurgy and friction into these adjacent products lines. These strategies also strengthen its current customer relationships with Caterpillar, John Deere, United Technologies, and Ford to sell additional value-added products and services to differentiate itself from competitors; a lower-risk approach to growth!


Gaining a share of the wallet with customers is not easy, but we think the brand name and Timken quality will go a long way with customers.


Over the long-term stock prices reflect the economic value that is created by management's investing and its ability to allocate capital in shareholder-friendly ways.Examples are; share repurchases, growing dividends, mergers and acquisitions, and internal investment (or capital expenditures).


Since 2013, Timken has allocated over$2 billion of capital with about $1.2 billion toward dividends and stock buybacks, which are certainly shareholder in a friendly way.


Additionally, the management team has spent $370 million in acquisitions, which should benefit shareholders in the long-term with product expansion and aftermarket revenue opportunities.


Timken’s stock price has reflected these changes too! Over one- and 10-year time periods Timken has outperformed peers and the broad stock market, according to the company’s recent Investor Day presentation.


Source: Company filings


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