Position Statement

Tenova SpA is a strong company in a troubled industry. The metals and mining industry is faced with a declining demand for their products, which is in turn reducing their need for new equipment. Tenova has the resources to weather the short-term reduction in demand with large cash reserves and a solid backlog of orders. For this reason the current market crisis may present Tenova with an opportunity for acquisition of companies in both the steel and mining equipment industries at discount prices.

I recommend is that Tenova acquire one or more companies in the mining equipment industry that occupy adjacent segments to Pyromet and Takraf. In the near future the mining industry is capable of weathering the current economic storm better than the steel industry. This will provide more opportunities than the steel industry, which is expected to be stagnant for the next five years.

An Evolving Strategy

Tenova has significantly grown in the current decade. This is not only due to the booming mining industry but also their increased understanding of the business and its environment; allowing them to deliver value to customers and shareholders.

In the industry there are two major types of competition: the full-liner companies offer customers systems that can follow the complete stream of steel production, while niche companies help customers with expertise in one area of production. Tenova has pursued a focused differentiation strategy with multiple products by offering advanced and customized systems in several niches that the are involved in.

Since the commencement of the 2003 expansion strategy, the growth of Tenova has been rapid; focusing on expansion of their technological expertise through acquiring of firms to improve existing technologies. Generally with these acquisitions Tenova has worked to preserve the company itself, while absorbing its knowledge and technology. This has proven to be a successful strategy for the company, allowing them to achieve their desire to be a technological (and sales) leader in their niche markets.

Regardless, it is important that the company not rely on acquisitions as the only way to grow technologically. Improving their own technology may be more cost efficient than simply buying companies that have good ideas.

It is also critical for management to effectively control any organizational structure complications. With an ever-growing number of business units, project management and fostering information sharing between units will become increasingly important yet difficult. As things become more and more complicated is may be necessary to further divide the company along additional function lines.

The Current Economic Crisis

Commodity Demand

The global economic slowdown has led to falling demand and prices for raw materials and commodities. From 2002 to 2007 steel production has grown approximately ten percent per annum, reaching approximately 1,350 million tons per year in 2007 and 2008. In 2009 it is expected that that number will fall by almost 15% to 1,150 tons per year in 2009 before it begins its recovery.

Equipment Demand

Steel manufacturers have managed the increased demand for steel by creating of additional capacity to produce. Over the past five years they have increased capacity by approximately ten percent per annum, mirroring demand for steel and maintaining production levels between 91% and 95% of capacity. In 2009 it is expected that the world's steel manufacturers will hit the ceiling for production capacity at just under 1,600 million tons per year, but production levels will be far lower at 74% of capacity. This lack of utilization of capacity is forecasted to lead to growth in capacity expansion being halted until 2013.

In booming economy of 2007 the steel industry invested $95 billion in capital expenditures, of which 75% was expansion of capacity and 25% was maintenance of current capacity. During this period Tenova's order intake value was approximately $2.2 billion, or 2.3% of all capital expenditures. In 2010 it is expected than capital expenditures will fall to $33 billion, with 39% going to expansion and 61% to maintenance. If Tenova maintains their current 2.3% share of capital expenditures it will result in an order intake of $0.759 billion, down by over 65% from 2007.

Company Position

Despite the inevitability that equipment demand will fall sharply for the next five years, Tenova is in a fairly strong position. Due to the current backlog of orders the company will be working for the next eighteen months, through what appears to be the worst of the economic crisis. The company has also built a large cash reserve of $409 million that give it the means to weather tough economic times, or take advantage of opportunities that may present themselves. Finallym Tenova's international presence gives them the ability to focus on markets that have not been as hard hit by the current economic conditions like India which may still be open to the possibility of growing their steel production capacity especially if they can do it at lower prices.

Tenova also believes that its multi-niche strategy creates an advantage over its competition, delaying its exposure to the crisis. This assumption is far from realistic. If a company benefits as a result of a prosperous economy, then it follows that it will be weaker during a dismal economy. While they have made changes that have benefited the company, some of their success should be attributed to the economy.

An Opportunity for Growth

It is expected that it will take until 2012 for steel's global demand to reach a level sufficient for steel production companies to justify investing in major capital expenditures. In the meantime, it is prudent for Tenova to invest their excess capital in related viable industries that will create long-term value for shareholders.

Short Term Return on Investment

When choosing an acquisition target, Tenova should find a company in an industry that will offer returns in the short term and long term. The steel industry is suffering, and is projected to continue suffering, an issue of overcapacity for the next several years. The mining industry however, does not generally suffer the same overcapacity problem. So when the economy recovers, mining companies will quickly be interested in expanding their production capacity again.

The mining industry's advantage in this respect is evidenced when we compare the compound annual grow rates (CAGR) that are expected through 2015 within the two industries. While the steel industry's CAGR is expected to retract by 3% per year, the mining industry is expecting growth of 14% per year. At these growth rates capital expenditures will be back to its 2008 levels of expenditures in the mining industry by 2015, while they will only be at 50% in the steel industry.

Diversification

Shifting a company into multiple business segments can very successful at reducing risk, because a downturn in one industry will not mean a complete erosion of cash flows in all business groups. Moreover, diversification is generally only successful when it extends a business into product lines where there are commonalities in buyers, channels, suppliers, or strong technological connections. Also, it is most likely to succeed when it extends into industries where the firm already competes.
The firm's past ventures into the mining industry have been relatively successful to date leading one to have confidence that further diversification into the sector can create additional value. This is not surprising, since their customers are similar and deal with each other. There are also strong technological similarities between the two industries, because when it comes down to it equipment manufacturing is equipment manufacturing.

Cost vs. Value of Acquisition

Things in the steel market will be difficult industry wide for several years. Consequently there may be apparent bargains, however that perceived value is eliminated when hardships are expected to continue. The right time to expand into more areas in the steel industry is when it is about to pick up again, and there is not any major growth forecasted through 2014. Buying a company now, and having it sit idle or at a low level of production will add to the real cost of an acquisition and is a less effective use of cash then leaving it in the bank earning interest.

The mining industry on the other hand is forecasting strong growth after 2010. This gives Tenova a year or two to select an acquisition target, and then iron out the details when the market conditions are ideal for acquiring mining equipment companies at the best value.

Complication and Experience

The mining industry is more complex than the steel industry. For that reason it is important that management take things slow and gradually work their way into the industry. The best way to accomplish this is to enter into segments, which Tenova has existing competencies, namely those that are adjacent to Pyromet and Takraf. In this way they can best leverage their experience and knowledge of this complicated industry.

Action Plan

Short Term

To ensure that Tenova's steel equipment division keeps working during the economic downturn and until steel companies start expanding capacity, they should continue to renegotiate contracts extending delivery time. Although this may reduce short-term profitability of the projects it will ensure that Tenova has work for its important employees, and will foster positive relationships with clients.

The many business units within Tenova's steel division will also need to improve efficency. They should expect less work coming in the upcoming years and may want to consider reducing their workforces. While the slowdown in orders may not be ideal, there can be some long-term benefits from developing a leaner more productive workforce.

Tenova should put a great deal of effort into selecting the right acquisition target within the mining industry. They should evaluate their options in the same way as they have with their acquisitions in the steel industry, looking for a company with a lot of technological know-how, with good people that can also provide knowledge and skills.

With the planned acquisitions, and possibility of continuing growth in the mining equipment industry, Tenova will need to consider restructuring its business organization. Right now the structure works well because, although they are into the mining equipment industry, they still have a larger stake in the steel equipment industry. As they become more balanced, the need to separate into two distinct divisions will become more apparent. Some functions should still be managed as one organization wide unit, some should be shifted down to the two business (steel and mining) area units, and some should remain with the local business units and offices.

Long Term

Continuing to acquire companies, both in mining and steel equipment, long-term is a good idea for Tenova. Being able to be a one-stop shop for clients, delivering a fully integrated system will allow them to derive maximum return per project. Consolidating their business in the steel industry and expanding product offerings are logical steps, and were it not for the projected state of the industry through to 2015 it would be the clear choice. As competencies in the mining equipment industry are developed, Tenova should also take advantage of opportunities to expand into other product lines.

Tenova needs to develop a system for information sharing between groups to deal with the large number of autonomous business units. The first step towards encouraging cooperation between units is bringing high-level managers and researchers from their various divisions for research and development conferences, as opposed to the current model, where information and technology is pushed down from upper management.