TransDigm's Acquisition and Integration of Arkwin Industries

Abstract

In May 2013, TransDigm, a company that manufactured a wide range of highly engineered aerospace parts for both military and civilian aircraft, announced it was buying Arkwin Industries for $286 million in cash (3 times Arkwin's sales of $91 million). Having acquired more than 40 companies in the past 20 years, TransDigm was an experienced acquirer with a unique business model focused exclusively on value creation. This case describes TransDigm's acquisition, integration, and talent development processes as well as the changes TransDigm implemented at Arkwin in the first three years after the acquisition. It serves as a complement to the TransDigm in 2017 case (HBS case #720-422). Whereas the TransDigm in 2017 case provides an overview of the company, its history, its value creation strategy, and its incredible financial performance, the Arkwin Industries case provides a deep dive into a single transaction as a way to illustrate TransDigm's value creation strategy in practice. That strategy consists of three parts--value-based pricing, cost reductions, and new product development--and has the goal of doubling a target firm's operating margins and cash flows within five years.

This case allows students to understand TransDigm's unique business model in greater detail and to explore how it creates value and for whom. The case focuses primarily on one aspect of TransDigm's value creation strategy (value-based pricing) to explain how TransDigm is consistently able to generate operating margins that are 100% larger than similar firms in its industry. Data in the case allow students to discuss the concept of limit pricing and whether it may or may not work in this setting. To a lesser extent, the case focuses on the firm's integration and talent development process, and raises the critical question of whether TransDigm can continue to grow revenue and adjusted EBITDA at more than 20% per year indefinitely.

Keywords: Merger integration, limit pricing, competitive advantage, competitive strategy, M&A, acquisitions,pricing power, supplier power, bargaining power, value capture, monopoly, value-based pricing, roll-up, consolidation, value drivers, growth strategy

JEL Classification: L1, L11, L8, G34, D43