Why an acquisition rather than organic growth or partnership? A traditional organic growth would only expand BT’s revenues and geographic scope. However, BT is looking for something more than that. Indeed, with this acquisition they will increase their competencies in propulsion systems and train controls which would complete their product portfolio. In other words, BT will gain technical and technological knowledge as well as a more complete product range thanks to this acquisition.
Doing that internally would cost a lot of time and money : both of which Bombardier cannot spend since they want to invest in the European rail market as soon as possible and bridge the gap between them and their competitors Alstom and Siemens. 4. Is Adtranz an attractive acquisition target for Bombardier? What are the arguments for and against? To begin with,Adtranz faces difficulties and might deter Bombardier from acquiring it. First, it has a history of poor quality products and reliability and certification problems with two train models : Electrostar and Turbostar.
The challenge for BT is to find the causes of these problems and put an end to the mismanagement in place in Adtranz. One cause, according to the director of public affairs at BT Neil Harvey, might be that Adtranz took too many contracts and did not carry them out well enough. Furthermore, Adtranz has a poor customer support function and its contract bidding processes were considered as inefficient. Consequently, BT’s strong governance, manufacturing controls and efficient contract bidding can perfectly outweigh Adtranz’s weaknesses.
However, the prospects of the European market and the core business of Adtranz outweigh its weaknesses and make it attractive for BT. First, Europe is a strategic location to expand railways activities. Indeed, Europe is at the top of technological performances in the industry. Moreover, the eco-friendly movement and strong government support assure long term growth in Europe. Secondly, BT wanted to balance their revenue streams produced by its different groups.
BT wanted to counter balance their growing Aerospace branch by investing heavily in the rail business. Diversifying their range of activities is a way to secure their investments and different activities of the group can benefit to each other. In this case, even if margins are low, the rail industry generates huge cash flows thanks to the traditional business practice of advance payments from customers. Thus it can finance large investments in the aerospace sector where cash is lacking.
Thirdly, the only way to make profits in this low margin rail industry is to cut costs and Adtranz can be valuable here. Indeed, by applying BT’s production and cost control systems, they will be able to reduce the repair and late delivery expenses that amounted to 20% of Adtranz’s expenses. Finally, BT will gain technological knowledge and complete their range of products. BT was very successful at building cars, subways and trams but had little expertise on propulsion systems, locomotives, switching and communications gear.
It would strengthens BT’s technological knowledge and allow them to close the technological gap in Europe against their competitor Alstom and Siemens which were in advance technologically. Furthermore, Adtranz is very big (twice the size of BT) which means that the acquisition would reinforce maintenance and services while providing more facilities for customers in Europe. To conclude, Adtranz is an attractive acquisition for BT on a financial, geographic and technological level and Adtranz’s weaknesses can be overcome by BT’s strong corporate culture and governance system.