How SPX achieved its strategic advantage Essay Example

Dominion, a diversified manufacturer of proprietary engineered products with $2 billion in sales.

SPX, a multi-industry company, soared to a $5 billion valuation after completing two acquisitions, expanding its global reach and business segments. In 1999, SPX initiated the Value Improvement Process to further grow the business and create value. The process comprises six components executed simultaneously: implementing Economic Value Added (EVA), infusing leadership standards throughout the organization, completing strategic reviews, right-sizing and consolidating, developing growth strategies, and achieving expected results for shareholders. The cornerstone of these components is EVA.

The measure known as EVA calculates net operating profit after-tax while subtracting the cost of capital employed in the business. This approach links management compensation closely with performance and prevents executives from overpaying on acquisitions. It incentivizes leaders towards cash-to-cash returns instead of earnings growth. Overall, EVA provides alignment between performance measurement, decision support, and compensation. The Value Improvement Process involves both right sizing and consolidation, which is crucial for achieving profitability. Even during a declining economy, SPX acted fast to properly structure and size their business for maximum profitability.

SPX consistently evaluates each of its businesses through its strategic review process, which aligns with the "fix, sell or grow" approach. The company actively modifies its business model to accommodate customer demand through acquisitions, discontinuing lower-margin product lines, and optimizing manufacturing capacity for maximum EVA improvement. At SPX, the cultivation of growth strategies is an ongoing undertaking that significantly boosts the company's competitive edge.

SPX utilizes a value-added process which includes internal growth strategies, technology investments, and strategic acquisitions. From 2000 to 2002, SPX executed nearly 40 acquisitions using this process. In 2002 alone, SPX engaged in

13 strategic bolt-on acquisitions and filed 168 new patent applications, representing a 68% increase from the previous year. By the conclusion of 2002, SPX had amassed over 1500 patents and registered trademarks pertaining to its various products and manufacturing methods. As part of its "fix, sell, grow" approach, the company also underwent some business divestitures, such as the sale of GS Electric (a division of SPX's Industrial Products and Systems segment) and Marley Pump (an acquisition made through United Dominion).

During the same year, SPX entered into a joint venture with Assa Abloy to sell its door products business. Additionally, in 2003, SPX divested Inrange Technologies, a networking technology development unit that had been experiencing losses in recent quarters. To counter the impact of the prolonged economic downturn in the United States, SPX took steps to expand its customer offerings globally and increase sourcing activities outside of the country.

SPX expanded its operations abroad through partnerships and acquiring low-risk strategic acquisitions. During 2000-2002, their international revenues rose by over 350%, with 33% of their total $5.05 billion revenues coming from outside the United States by the end of 2002. In 2003, the company continued expanding globally.

SPX spent $4 million to double the dry-cooling capacity at its Chinese plant. This investment will strengthen its leadership in the cooling tower industry and meet the growing cooling-capacity demands of its customers in the Asia Pacific region. Furthermore, it allowed SPX to introduce advanced technology to the global market at competitive prices.
In addition, SPX acquired Ziton Australia, Intelligent Fire Systems, and Ziton Queensland, which form one of the largest independent fire protection and emergency warning systems businesses in Australia. This

acquisition expanded SPX's presence in Australia and is part of the global growth initiatives for its Edwards Systems Technology business. Thanks to its continual strategic acquisitions, SPX had accumulated over $2 million.

By the end of 2002, SPX had an overall indebtedness of a billion dollars, which was around 5 times its cash balance. This level of indebtedness restricted the borrowing capacity of SPX to just $400 million under its senior credit facility at that time. As a result, the available cash flow for the company's general use, including acquisitions and capital expenditures, was potentially limited. Furthermore, this level of borrowing may also have limited SPX's adaptability to changes in the industry, competition and economic conditions. However, in 2003, SPX managed to refinance and modify its senior secured credit facility.

The merging of two tranches of term loans and a 25 basis point interest rate cut on one tranche have resulted in a refinancing. The loan's maturity is in 2009 and has reduced SPX's debt by around $200 million. However, the company must continue to monitor its indebtedness regularly. To accomplish this, SPX needs to proactively enhance its free cash flow by cutting employee and manufacturing costs, reducing facility overhead, divesting unprofitable business units, or those no longer fitting the company's overall strategy.