Paragon Tools is a healthy company built around a line of high-end machines that has continued to enjoy fairly good margins. Having gained its share in a core market during times of increased foreign competition via an aggressive pricing strategy, Paragon now enjoys increased sales. This is also due to its previously expanded flagship products for their resulting expansion of customers. Using strategic acquisitions to leverage relationships with existing machine-tools customers and constant investment in newer manufacturing equipment and larger sales forces, PT was once a force to be reckoned with.
Paragon’s current market remains fairly stagnant. Its competitors have begun preparations to expand their services division to gain a foothold on a newer market. With continuous economic swings and increasing saturation in its current market, Paragon has yet to develop a formal growth strategy. Paragon’s direct competitor Bellows & Samson is rumored to begin preparations to launch a hostile bid with MR; a company that Paragon is already in conversation with. There is an opportunity here for Paragon to present a friendly offer for MR and expand its services business.
OPPORTUNITY FOR ACQUISITION |
MonitoRobotics (MR) is a service business that uses sensor technology and communications software to monitor and report real-time information on the functioning of robotics equipment. Managers at MR have mentioned that adapting the technology for use on other industrial machinery was feasible. An example of this process can be seen as MR recently licensed their technology to a company that planned on modification for complex assembly lines with frequent breakdowns.
Paragon’s service business is responsible for servicing the products that are sold to its customers. It accounts for less than 10% of PT’s revenue and is struggling to turn a profit. This is primarily due to the high cost of developing the technology as it is still in progress. If Paragon were to acquire MR:
I. PT would have a powerful presence in a fast-growing market while preempting competitors from staking their claim there. This route is also faster to market than competitors, even if PT faces a time-lag for implementation II. Paragon & MR would have shared customers. This will increase the dependency on the relationship as well as strengthen it in the process. It also provides numerous cross-selling opportunities. III. Annual revenue would double to 800M IV. Paragon can adapt the technology for use on their machine tools. They can offer customers rapid-response troubleshooting service and effectively become a “Solutions Business”. Over time, it can adapt the technology to all machine tools and manufacturing equipment to make it less dependent on slow growing cyclical machine-tool manufacturing operation V. Paragon will have a strong position in a technology market VI. Potential for MR software technology to become the standard means of machine-tools to communicate service needs. This can then be licensed out to third parties.
For the acquisition to take place Paragon needs to first figure out the right price for the deal and pursue it before a bidding war occurs. This is primarily to prevent the price from becoming too high. In the event the price is too high, Paragon must walk away from the deal and continue to build services internally. Paragon should use Littlefield to determine a price for the deal. Littlefield’s conservative price will help Paragon determine if the purchase is feasible and/or unnecessary.
Sometimes you’ve got to sacrifice profits up front to make real profits down the line. Acquiring MR holds that promise. The acquisition has three main uses: * Improve Services segment * Improve manufacturing process (service of internal machinery) * Allow for easy future transition into self-correcting products
OPPORTUNITY ASSESMENT |