Speaker: Craig Melcer
Corporate Business Analyst
Boeing Defence Australia

This session was focused on several case studies based on the presenter’s work experience. Primarily, it dealt with two management accounting issues:

• Activity based costing
• Making strategic decisions – for M&A

Admittedly, this session started out as not really interesting or engaging. Our reasoning is that it had to do with the examples, which were a bit hard to relate to and also it seemed like the presenter was describing his career most of the time! The first two examples were from his experience at Queensland Rail (QR) and applying for a government tender. The other reason we couldn’t get into the presentation was because there were a lot of details and figures presented in the powerpoint slides, and we were sitting up the back and had a hard time viewing it. We spoke to another particpant and they expressed similar feedback.

The highlight for us was when the presenter said his interest as well (from his own career perspective) was on M&A, and how the numbers started to drive the business strategy at Boeing. This we liked =)

Case studies 1 & 2: Queensland Rail

Firstly, lets briefly discuss the case studies. He spoke about activity based costing and how they changed the reporting structure at QR. It was orginally structured towards responsibility cost centres. The reporting was not sophisticated enough to get down to category level. It also a required a culture change for line of business.

He then described a Government tender response. QR had a monopoly over coal haulage. In applying for the government tender, they had to consider what the competitor cost structure would look like. However, there was no other significant provider (being a government owned monopoly tends to to that!). There were only small competitors. They needed to consider what freight rates their competitors would charge. Further, if their competitors were tendering, QR had to be lower than this. In response, their competitors would predict this and also come in at a rate lower as well. Its clearly a never ending cycle where everyone is trying to play a “how long can you go game”!

It was important to align QR coal with industry standards. They also needed to compare the different kinds of locomotives (i.e. whether it was going to steam) and the efficiencies.

Importance of financial modelling

One of the key takeaways we got from this session was the importance of financial modelling. In a financial model, take into account scenarios for different costs of inputs and outputs. As accountants it is imperative that we consider these different scenarios and make management aware of this. Hence, this assists with business planning and also survival! It becomes a key decision making tool for capital investment and allocation of scarce resources when costs rise.

Accounting drives business strategy

Craig left his position at QR to join the Boeing Mergers & Acquisitions (M&A) team. Prior to his arrival, the team had been mainly comprised of strategic personnel. We assume this means management consultants or staff with those kind of high level strategic skills. In his time, he reviewed five M&A proposals which resulted in 1 successful acquisition.

A important point he made was the importance of accounting numbers and expertise he brought to the table in these discussions. It is a similar situation when staff in other non-accounting business units start throwing ideas around without considering the cost or profit impact. There has to be numbers to back it up.

Part of any Boeing acquisition required it to meet certain criteria, which we found particularly interesting:

• Financials: fit of the acquisition. Boeing company as a whole was going to benefit
• Market opportunity: Would this position Boeing for new markets and adjacent markets
• Customer needs addressed
• Investment required
• Ethics, business image – Boeing did not want a company that would tarnish their image
• Capability to do it in house

Normally, Boeing looked to the strategic fit first and then the financials. This was because the financials were not always available in initial M&A discussions. As someone that has worked in M&A, we fully appreciate this as there is a process of due diligence.

The fundamentals that you need to consider in buying a business:

• Revenues
• EBIT
• EBITDA
• Free cash flow
• Capex
• NPAT (Net profit after tax)
• Net assets
• Economic profit

There was also some discussion around valuation which was interesting. What a company is worth depends on the buyer. It depends on assumptions regarding growth and profitability aspects, but also fit. A pertinent point he made was that “valuation is a minimum for going in”. That is, it the business value justifies going after the purchase.

We mentioned fit and you need to consider stand alone versus synergy valuations. Considerations such as:

• What kind of markets could we now enter
• could we win further work we previously couldn’t have
• Measure of incremental value captured: what is the dollar value of what you can earn, as this demonstrates value

Conclusion

It is clear that in accounting information does drive business strategy – in terms of resource allocation, business planning, tenders/pitches, and decisions to acquire businesses.

The Taxabull team is attending the CPA Congress as a guest of CPA Australia.

You can follow us on twitter: twitter.com/austax

Cheers,

Taxabull team