Evaluation of a Merger or Acquisition

Evaluation of a Merger or Acquisition

Caterpillar Incorporation is an American multinational company founded in 1925 and headquartered in Deerfield, Illinois. Caterpillar Company designs, develops, manufactures, and sells heavy-duty machinery. Caterpillar is the world’s leading manufacturer of construction, agricultural, and mining equipment, both diesel and natural gas engines and industrial turbines. The company has been in business for almost a century now, and it has been instrumental in making high-quality, heavy-duty machinery known worldwide. Caterpillar’s corporate strategy for all these years has been merger and acquisition. Since its inception, Caterpillar has acquired 38 companies, thus increasing its portfolio. One of Caterpillar’s recent acquisitions was the acquisition of Carbon-point Solutions, an enhanced energy group, in September 2021 (Caterpillar Inc, 2021). Carbon-point Solutions was a U.S.-based carbon capture Technology Company in Rhode Island. This company provides technology that concentrates and captures carbon from the air for utilization. Carbon capture systems using the Carbon-Point Solutions is a patented process that can be applied to engines and machinery turbines in oil and gas sites and industrial plants. Thus, combining Carbon-Point Solutions technology with Caterpillar’s oil and gas solutions makes it easy to reduce greenhouse gas emissions in industrial plants, oil and gas sites, and waste management sites (Caterpillar Inc., 2021). In other words, the main reason Caterpillar acquired Carbon-point Solutions was to own the carbon-capturing technology by making engines with this technology. Doing so would improve the quality of the machinery and equipment the company manufactures because it will be manufacturing “green “machinery that promotes sustainability. Do you need urgent assignment help ? Get in touch with us.

Evaluation of Potential and Actual Risks of Acquisition

There are several risks associated with Caterpillar’s acquisition of Carbon-point Solutions. The first potential risk is the financial risk; mergers and acquisitions can put a huge cash burden on companies if not executed properly. Many of the acquisitions ended badly because there was no proper due diligence on financial costs to be spent in the process of acquisition. The risk of overpaying for an acquired company destroys shareholders’ value (DePamphilis, 2010). According to Forbes, overpaying during acquisition is the major merger and acquisition risk factor of modern times. Overpaying risks come when there is a problem of poor evaluation practices by the patent company since there are many examples of companies that have suffered due to overpaying during the acquisition.

The second risk Caterpillar faces in the acquisition of Carbon-Point Solutions is an overestimation of synergies. As already mentioned, the main reason Caterpillar acquired Carbon-Point Solutions was to own the carbon-capturing technology. Caterpillar may have overestimated the benefits of the carbon-capturing technology, and if indeed it was overestimated, then it could be a risk that may affect its finances in the future. (DePamphilis, 2010). Caterpillar is banking on carbon-capturing technology to improve the quality of its machinery to sustainable machinery to outsmart those of the competitors and earn more because of the technology. However, if the company is over banking on this technology and does not give the expected benefits, it will be a risk.

The third risk Caterpillar faces is integration shortfalls; when there is an acquisition, the acquiring company must successfully integrate the acquired company to enhance the synergies in internal management (DePamphilis, 2010). However, it could be a great risk when the acquisition disrupts the internal management and company culture. Some of the issues that may arise due to poor integration of activities are poor internal auditing, poor communication, and loss of value. Another risk that Caterpillar faces is the unexpected costs associated with the acquisition. In the acquisition process, companies must pay multiple types of fees (DePamphilis, 2010). This calls for the management of the acquiring company to consider all the fees and other costs associated with the acquisition. Caterpillar has been in business for many years and has acquired 38 companies; this means that it has experience in the acquisition process; hence, it always puts mitigating measures in every acquisition it does.

Analysis of the Acquisition’s Impact on Supply Chain and Working Capital Management

Working capital management is closely associated with the physical supply chain; in other words, the supply chain can optimize its cash management to meet expenses without high cash holdings costs. One of the main financial objectives of the firms is to minimize the time between paying for the inputs and receiving the payment for the outputs (Suer, 2019). This is the period in which working capital financing is required in the supply chain management process. To cut down the level of working capital, a company needs to attain some goals, including minimizing cash available, cutting down accounts receivables, extending accounts payable, and reducing inventory days. To attain these goals, a firm has to ensure that the supply chain activities are related to the working capital requirements. Inefficient management of the working capital cuts down the profitability of the firm as well as leads to a firm’s financial crisis. (Suer, 2019). An increase in each short-term account is an investment that reduces the available cash. The best way to manage the working capital is to play with the supply chain operation to ensure that there is minimal cash available. Therefore, there is a strong direct relationship between working capital and supply chain management.

The acquisition of Carbon-Point Solutions by Caterpillar did not have much impact on the relationship between its supply chain and working capital. However, Caterpillar is required to integrate carbon-capturing technology into its engines and turbines to make them more sustainable (Waste 360, 2022). The process and technicality of integrating this technology could interfere with the levels of supplies it does to the market. There are possible supply delays to the market because of the tedious process of including the carbon-capturing technology on the engines and other equipment. The delay could cause a working capital management crisis due to an interrupted supply chain (Mergr, 2022). For Caterpillar to streamline its supply chain and stabilize its working capital, it will take time and effort to balance working capital management and modify the supply chain. However, Caterpillar has been in business for many decades and has made the Malaya acquisition; hence, it has huge experience in working capital management and supply chain during the acquisition process.

Caterpillar’s Management of Human Capital

Human capital is defined as personal contributions to an organization through the effort, skills, and capabilities to enable the firm to maintain its existence. Every organization has a human resource management strategy to manage employees to attain their full potential to give the company a competitive advantage (Baron & Armstrong, 2017). Like many other organizations, Caterpillar has a good human capital management strategy. When Caterpillar acquires a particular firm the way it acquired Carbon-Point Solutions, it absorbs the workers of the acquired company and trains them to learn the internal values and operations.

Caterpillar would not be the company it is today without the people who strive to shape it. Caterpillar manages its human capital using its strong human resource department. This department is responsible for hiring and recruiting new employees (Baron & Armstrong, 2017). It publishes job vacancies, looks for competent candidates, screens them, interviews them, and makes recommendations for employment. The second way Caterpillar manages its human capital is by ensuring a safe working environment at the workplace. One of the principal elements of human resources in Caterpillar is to foster work environment security to minimize the chances of injuries and casualties.

Caterpillar manages its human capital using performance appraisal, where employees are rewarded for their performance. The human resource team evaluates the performance of each employee or each department and rates it according to its performance (Baron & Armstrong, 2017). Performance appraisal leads to promotion or even salary increments, making workers work hard and smart.

In addition, Caterpillar manages its human capital through efficient communication channels. It employs compelling correspondence to ensure effective communication between departments. Caterpillar workers are required to convey information on time, and the managers and supervisors are supposed to listen and react to the information (Baron & Armstrong, 2017). Thus, clear and frequent communication makes managing human capital easier at this firm. Another way in which Caterpillar manages its human capital is through attractive compensation. The company pays its employees well and pays promptly. It has an employee compensation plan that is competitive to retain talented workers.

Recommendations and Rationales

Findings

One finding of Caterpillar is that this company has been in business for almost a century now. Caterpillar’s products are sold globally because of their high quality and durability. Caterpillar is the world leader in manufacturing and selling heavy machinery. I have found that Caterpillar’s corporate strategy is acquisition; the company has been growing due to acquisition, and so far, it has acquired 38 companies and several mergers. Caterpillar not only deals with manufacturing heavy-duty machinery but also has over 20 brands in different industries. It also deals with energy solutions and finance. Another finding is that one of its recent acquisitions is the acquisition of Carbon-Point Solutions, a company specializing in carbon-capturing technology. This acquisition means that Caterpillar now owns this technology and is integrating it into its products, like engines and turbines.

Rationale

The Carbon-Point Solution acquisition is beneficial to Caterpillar. This is because Caterpillar will strengthen and achieve its goal of sustainability through carbon-capturing technology. Caterpillar got it right in acquiring this firm.

Recommendations

Caterpillar needs to invest more in innovation to take advantage of carbon-capturing technology to manufacture more unique and sustainable products.

Caterpillar needs to subject the workers absorbed from the acquired firm to rigorous training and coaching to instill its culture and values in them.

Caterpillar needs to expand its supply chain and open more shops in various parts of the world to access many customers to beat the competition.

Caterpillar should embrace new technologies to build its competitive muscles to face the ever-increasing competition.

References

Baron, A., & Armstrong, M. (2017). Human Capital Management: Achieving Added Value Through People. Kogan Page Publishers,

Caterpillar Inc. (2021). Caterpillar Acquires Carbon-Point Solutions. Retrieved from https://www.prnewswire.com/news-releases/caterpillar-acquires-carbonpoint-solutions-301373323.html

Caterpillar. Human Resource. Retrieved from https://www.caterpillar.com/en/careers/career-areas/human-resources.html

DePamphilis, D. (2010). Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions. Elsevier,

Mergr. (2022). Caterpillar Mergers and Acquisitions Summary. Retrieved from https://mergr.com/caterpillar-acquisitions

Suer, S. (2019). Relationship between Working Capital Management and Supply Chain Management: A Contemporary Approach. Research Gate. DOI:10.4018/978-1-5225-8970-9.ch011

Waste 360. (2022). Caterpillar Acquires CarbonPoint Solutions. Retrieved from https://www.waste360.com/mergers-and-acquisitions/caterpillar-acquires-carbonpoint-solutions

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Evaluation of a Merger or Acquisition
The final essay will involve applying the concepts learned throughout this course to an analysis of a merger or an
acquisition (M&A). Review page 655 in the textbook and watch the short video “Working Capital” found in the required

valuation of a Merger or Acquisition

reading section of the Unit VII Study Guide. Much of the information you will need to complete the analysis can be found
in the company’s annual report. You may choose any recent M&A (within the last five years). Using the concepts from this
course, you will analyze the success of the merger or acquisition.
The completed project should consider the financial statements of both companies (balance sheet, income statement,
cash flow statement, days of working capital) and address the following include:
• An introduction to the companies involved in the M&A, including background information of the company’s and the
reasons’ for the merger.
• Evaluate the potential and actual risks which occurred during the merger and what the companies could have
done differently to mitigate these risks.
• Analyze how supply chain management plays a role in working capital management and how the M&A impacted
supply chain management for one or both of the companies.
• Discuss the companies’ management of human capital in the M&A.FIN 6301, Corporate Finance 4
• A synopsis of your findings, including your recommendations and rationale for whether the M&A was beneficial to
both companies and your recommendation on best practices for moving forward.
This analysis should be at least three pages in length, excluding title page and reference page(s), using APA formatting
guidelines. Support your findings and recommendations with evidence from at least five scholarly sources in addition to
the annual report, such as the textbook, industry reports, and articles from the Library. Be sure to include links to websites
that were used as references or to access company information.