Hanson PLC:

Demerger and Analysis

Executive Summary
Hanson PLC became an extraordinarily powerful company under the leadership of its two founders: Sir Gordon White and James Hanson. Hanson oversaw the U.K operations, while Sir White expanded the company by establishing a new base of operations in the U.S. Sir White built his reputation as a corporate raider, one who overtakes large corporations both through passive buyout schemes and hostile ones. The company experienced an amazing growth period from its inception until the early 90s, when it became apparent that Hanson PLC had become too large to subside by acquiring companies. In 1997, the company went through a demerger, in which the company was split into four different sectors: Energy, Tobacco, Chemical, and Construction. The only splinter to maintain the Hanson name was the Construction one, which becomes the main academic focus of this paper. Hanson (the construction splinter) faced a new challenge as a company: both founders had retired and the company needed to take a new direction to continue profitability. It is with this in mind, that three recommendations have been put forth to ensure continued success for the company. Those three are: Horizontal Market Expansion, International, and US expansion. After extensive research (see attached), it was determined that Hanson represented a very strong company, with solid profit margins and financials. The reason for such an aggressive strategy is simple; Hanson has a significant pool of liquid assets and expansion became necessary to remain competitive on a global level. First off, lets examine the process of horizontal market expansion. It is recommended throughout this paper for Hanson to expand its construction materials scope to include glass, steel and lumber. In a sense, this allows the company to become a one-stop shop for industrial construction materials needs. Steel and lumber are two industries that are both in a downturn and subject to a relatively cheap overtaking; a strategy that has proven successful for Hanson in the past. As for the glass industry, it fits very nicely into Hansons profile, especially since it is an industry that is heavily dependent upon sand, one of Hansons most abundant resources. Next, lets examine international and U.S. expansion as a whole. Hansons construction competitors have begun to expand into areas such as South America, where the industry is blooming and offering numerous opportunities for growth. It becomes necessary for Hanson to move into the region to realize global expansion and to push its new horizontal market expansion strategy. Also within the U.S., Hanson has a weak hold on the market only working in thirty of the fifty states. It is recommended that Hanson expand its U.S. operations in concurrence with its horizontal market expansion to maximize the companys profits and to enjoy continued success for a storied corporation.

Analysis of Demerger
Hanson PLC at one point in time was one of the biggest companies in the world. Hanson was one of the biggest businesses in England and in America. The tactic that Hanson used in its original business plan was to buy companies, split them up, and make obscene amounts of profit off of their dismantling. Hanson grew into one of the largest companies and to keep up with its own growth it became necessary to acquire billion dollar businesses. In the world, there are only a finite number of billion dollar businesses. Hansons shareholders demanded dividends because they were accustomed to them for the previous 26 straight years. Hanson had a real issue at hand, how were they going to continue to grow when they had billions of dollars of debt and only a few companies left in the world that would further enhance the existing businesses that they already owned. Thus, Hanson decided to focus on four specific markets, Building, Chemical, Energy and Tobacco. Hanson started to build each one of the four segments into huge billion dollar businesses. Hanson was the enormous umbrella and these separate but huge segments all fell under it. Hanson was making friendly and hostile takeovers at any cost. When the company was first formed the driving force of the company was by two men, Sir Gordon White and Lord Hanson. Hanson was the man who stayed mostly in England and would tinker with the companies once they had been acquired. White was the acquisition mastermind. He had a vast array of contacts and could sense an opportunity to make Hanson a more profitable company from miles away. Together what Hanson and White set out to due was simple, make a great deal of profit. It sounded simple but the way in which these two worked together was remarkable and could hardly be replicated. The opportunities that attracted them the

most were companies that had profits that were leveling off, in low technology, low growth markets but had the potential to improve quickly. The ideal company than Hanson would target would be one huge company that was a conglomerate of smaller pieces. The way in which Hanson made its incredible profit margins was by knowing how to sell the less profitable pieces of the conglomerate and keep the most profitable pieces. For example if a billion dollar conglomerate had four huge pieces to its puzzle but one of the pieces was making high profit, they would usually sell the other three pieces in separate times and nearly always make back the price of the entire conglomerate. Thus, by knowing how to sell of the bad pieces and keeping the profitable ones, Hanson would acquire the most profitable legs of company for nearly nothing. Hanson was very good at this game that they played and White was the man would made most of this magic happen. Once they had weeded out the parts of the conglomerate that they didnt like they proceeded with two options. The first route being pouring additional money and management into the acquired company and making the company apart of the Hanson umbrella by honing in the acquired companies strengths. Or, the second option being after a little bit of time elapsing from the purchase going around and selling the profitable leg to a hungry buyer for a hefty profit if Hanson didnt feel that the company would fit into the Hanson umbrella. In 1995 Hanson changed its managerial staff and outlook for the company. Hanson and White had become old men and had already handed off the reigns of the company to the new executive staff. Yet, the new executive staff lacked the carnivorous attack that White and Hanson had used to turn Hanson into a global powerhouse. The new management staff felt that Hanson was headed towards the end of acquiring new huge conglomerates and turning it into profit. The new staff came with a more focused approach and decided to do something radical. Their idea was to have a demerger of the Hanson umbrella, splitting up building, chemical, energy and

the tobacco into separate public companies. Their reasoning was that from 1990-1996 the companies stock had not really moved at all. It wasnt increasing or decreasing because investors werent thoroughly impressed with the progress that Hanson had achieved as of late. The new management knew that they had to do something dramatic and the demerger is the route that felt was best for many reasons. Other huge corporations have used demergers in the past to lift up a stock price and to get analysts excited about the stock again, examples of this include, Sears and AT+T. Thus, Hanson decided after serious deliberation that the demerger was necessary and that it was a good thing for the company. The other reason that Hanson felt that the demerger was going to be essential was because the company was simply growing too large and the chances of finding companies to acquire were becoming harder and harder to find. After the demerger they became four separate public companies, Millenium Chemicals, Imperial Tobacco, Energy Group PLC, Hanson PLC. Of the four publicly traded companies only Hanson PLC is the only one that kept the name and turned its focus to the building industry of the world. Hanson PLC in turn sold off the other legs of the company to minimize some of its large amounts of debt. Hanson picked the building aspect of their company to further push because they felt they had the best chance at total domination of the market throughout the world. Upon further looking into the demerger it is definitely clear that Hanson made a wise move in splitting up the companies. Hanson was getting too big and the idea of honing in their business into one specific sector seemed to make the most sense. The only point in the demerger that is up for debate is if they sold Imperial, Millenium and the Energy Group too soon and too cheaply. Some may argue that the three businesses should have been held longer and if one were to look into each of the individual companies financial performance, all have done well since being sold off. In conclusion Hanson probably could have gotten more for each of the companies that

they sold but in complete honesty, Hanson had so much debt that it was totally necessary to liquid some of their companies and have a better financial position. The companies were more valuable that what they were sold for but the time sensitivity of when the demerger took place indicates that Hanson made the right move and now has set itself up for a bright future in the building sector.

Recommendations

Horizontal Market Expansion

Not only should Hanson expand its current aggregate construction material market both domestically and internationally, but Hanson should also expand its market horizontally into new product lines. One recommendation we came up with was for Hanson Plc to look into other major construction material markets such as the steel and glass industries. In essence, Hanson would be expanding their market to include construction materials other than just bricks and cement, thereby turning the company into a one-stop shop for all industrial construction needs. Not only will this strategy lower the overall material cost for their clients, but it will also help Hanson Plc expand into new markets and increase its profit margin. To accomplish this goal, we recommend Hanson Plc considers buying companies from other construction material industries. Not only does this option fit seamlessly with Hanson Plcs bolt-on acquisition strategy but it would also offer a golden opportunity for the company to immediately expand into these new markets. We have selected three other major building materials industries that Hanson Plc should consider immersing itself within, namely the steel, glass, and timber markets. While these industries have somewhat different characteristics and opportunities as will be further discussed in the next section of the paper, were confident that Hanson Plcs distinctive competencies in company acquisition and management will be able to bring these industries together and make it a profitable business model. As shown throughout the history of the company, Hanson Plc has been able to successfully acquire and manage major companies that have significantly different product lines such as Tobacco and Typewriters. Nevertheless, acquiring companies in the steel, glass, and timber industry will not make the company lose

focus of its current aggregate construction material market, but rather strengthen it. Currently, there is no company that offers such a selection of construction materials on such a grand scale. Since the company will be focusing on construction components that are essential to the industry, Hanson Plc will gain a substantial advantage over its competitors when bidding for jobs.

The following three sections are brief examinations of each of the recommended industries for expansion:

Steel Industry

Steel is the most basic and widely used metal in the construction world, accounting for more than $57 billion in sales per annum. Currently the U.S. is the largest steel producer in the world, accounting for 5% of the total U.S. manufacturing GDP. The current US Steel industry is controlled by a handful of large firms, which have substantial government subsidization. However, the industry has recently experienced a production overcapacity resulting from economic slowing in Asia and a global recession. Bethlehem Steel Corp., one of the biggest U.S. steel manufacturers, filed for Bankruptcy on Monday, October 11, signaling a significant downtrend in the industry. While the steel corporations in the U.S. are facing a hard time from the global recession, it might offer Hanson Plc a unique time and opportunity to buy steel companies that are undervalued at a premium price. The stock prices of the steel companies have been dropping more than 70% on average from the past two years. (AK steel holding 26.14 vs. 9.25, Birmingham Steel 20.12 vs. 0.54, USX US Steel 20.75 vs.14.37). Since steel and concrete are the fundamental building materials of

any construction project, steel companies would be a natural fit for Hanson Plc to incorporate into their product line.

Timber Industry

Before the demerger of the company in 1990s, Hanson Plc was already involved in a small lumber operation. However, Hanson Plc has lost this market completely after breaking apart the company and selling much of its assets. Currently there are numerous timber companies scattered throughout the world, each holding their own specific lumber location area. Underdeveloped countries and North America are the primary market for the majority of such companies. While there is no real dominant firm that controls the timber market akin to the steel industry, 50% of the world timber production comes from the top 50 lumber companies. The high-powered firms, such as international paper, do not play such a big role in the construction materials market but rather in sheet-paper. Local middle-size wood companies are largely responsible for construction-grade lumber production. Considering the size and financial power that Hanson Plc has, it should not present a large problem for Hanson to acquire these companies and enter into the timber market. Construction-grade lumber products represent a vital construction material for small to medium-size construction project and any interior decorations. At present the market is considered very large and has very few top suppliers. By being able to bundle lumber with other construction materials, we feel that Hanson Plc will gain a huge advantage over the existing players in the market. Take into consideration that Hanson Plc has once run a company in this market before, the timber market will then represent a very attractive market for Hanson to expand into.

Glass Industry

The glass industry is a mature but still growing industry with a rate of 3% annual growth. The industry includes both major corporations and small business companies, accounting for more than $27 billion in annual sales. There are four major distinct segments within the glass industry: glass containers, fiberglass, flat glass, and specialty glass. While research and development of all glass sectors are closely tied together, operations are mostly independent. Flat glass is the most widely used product in any construction project. We then recommend that Hanson Plc should enter only into the flat glass industry to maintain its focus on construction materials. Similar to the steel industry, recent economic recession has forced many glass manufacturers into a difficult position. Nevertheless, the recession seems to have less effect on the glass industry than the effect it had on the steel industry, as most of the glass companies have begun to recover from this economic downturn. One fact that makes the glass industry an attractive market for Hanson Plc engage itself in, is the fact that glass is made mostly from sand. Hanson Plcs current aggregate products also depend largely on the sand supply. Hence, by having two operations using the same line of supply material, Hanson then would be able to exploit its supply inventory to the fullest extent. By being able to offer flat glass products to its clients in addition to concrete, steel and wood material, Hanson Plc then will be able to establish itself as a complete provider of all major construction material, giving the company a distinct competitive advantage, which would in turn lead to a significant increase in profit margins.

Expansion into South/Central American Market

We feel that Hanson must maintain its strategy of expansion into new markets through bolt-on acquisition. With the exception of Antarctica and Africa, Hanson has operations in every other continent in the world, barring South America. The entrance into South Western Hemisphere is the next logical step in Hanson maintaining its competitive advantage. We feel that Hanson stands to see considerable gains through expansion south of the US border. The South/Central American markets are in their embryonic stage, due to the fact that most of the countries in that region are poverty stricken. However, with the implementation of NAFTA, and as more American companies relocate their plants and operations into South America we feel Hanson stands to increase revenues by entering into major contracts for road construction, factories, and other infrastructure projects. It must also be considered that the value of resources such as quarries has consistently been increasing, even more so in recent years as regulations become stiffer in countries such as the US and the United Kingdom. Many South American nations lag behind America and Britian in this regulatory aspect. Therefore it is conceivable to believe that South American quarries may be purchased at a discount. Currently, two of Hanson's major competitors, Vulcan and Martin Marietta Materials, both have operations south of the US border. Additionally, two of the world's top concrete producers, Cemex and Holderbank, also have operations in Mexico and South America. It is our opinion that Hanson's failure to exploit this opportunity is a major weakness. We feel Mexico is the ideal place to gain a foothold in the Central American market. Hanson PLC currently has operations in several border states with its biggest plant in Texas. The purchase and integration of an existing company with a presence

in the region will gain Hanson market share and "pave" the way for further southern expansion. The question of who to acquire is a difficult one. This is due to the relatively immature and fragmented nature of the industry in Mexico as compared to Europe and the United States. There are many private companies who own quarries and plants. This makes it very difficult to find the right company to acquire. We feel that Hanson should not look for only one company but possibly many small companies. One particular company who seems to be a fit for Hanson is Grupo Cementos de Chiuahua, S.A. de C.V. "Currently it is a vertically integrated group, whose subsidiaries are engaged in the production and sales of gray cement, mortar, ready-mixed concrete, materials and aggregates for construction. The facilities include two cement plants, two mortar plants, seven concrete plants, two terminals and installations for the production and sale of construction materials and aggregates. The GCC Group's cement plants are located in the cities of Chihuahua and Juarez, fulfilling 95 percent of the market in the state of Chihuahua. The facilities to produce ready-mixed concrete are distributed within the state of Chihuahua, holding 75 percent of that market." (http://www.mexicosi.com/business/busdir/company.htm#building) We feel that by entering into the Chihuahua, Mexico's largest state, Hanson will gain a strong presence in the Mexican region and be positioned to move closer towards the equator. It is our belief that Hanson should not be satisfied with simply a presence in Mexico, we feel that they should continue expansion farther down Central America and into South America. It is our belief that Hanson should enter the Brazilian market place. Brazil is the largest country in South America and one of the most developed; however, it is

still an emerging market in most respects. Over the last ten years construction trends in Brazil have shown growth. Although growth may have seen a slow down in recent years one can partially attribute that to stagnant global economic growth, however, the market still exists and the opportunity for Hanson to see large profits is most certainly there. Additionally, the economic slowdown may in fact prove to be an advantage to Hanson when attempting to acquire a company. We feel that by entering into the Brazilian marketplace Hanson will be strategically positioned to enter into the remainder of South America. The question of who to acquire is even more complicated in Brazil than in Mexico. Again, the industry is fragmented, even more so than in Mexico. Also, finding information on potential companies to acquire has proven very difficult due to language barriers. It is our recommendation that Hanson not look for simply one company to acquire in Brazil, but many. We feel that Hanson can effectively enter into the Brazilian/South American market by bolting on many small companies. It is our recommendation that it is imperative that Hanson enter into the South/Central American market. Considering two of its main competitors, Vulcan and Martin Marietta Materials, have a South American presence, and the region is generally in its embryonic stage, Hanson stands to realize considerable profits from South American expansion.

U.S. Expansion Strategy

After a SWOT analysis, we have determined that Hansons primary strength is its acquisition skills backed by an extensive credit line. Hanson has become a dominant player in the building and construction industry, which makes a high earning growth rate hard to achieve. The global economic slowdown gives Hanson the opportunity to consolidate the building and construction industry.

We recommend Hanson starts this consolidation by acquiring small companies in areas of the United States where the locations offer strategic importance for enhancing the internal strength of Hanson. Hansons management has identified many of their priority concerns. Some of their recent acquisitions, such as Pioneer, demonstrated their skill in successfully executing this strategy. However, we believe Hanson is not paying enough attention to the opportunities in the United States. The United States has long been the technology leader in the world. The management has been trying to cut costs through the use of information technology and corporate restructuring. Both of these endeavors are very expensive and represent long-term commitments of resources, which make it essential to ensure the best possible implementation while keeping maintenance costs low. To achieve this ambitious goal, Hanson needs top notch companies with extensive innovative track records and experience in the research and development of brick manufacture, cement and quarry products. Hansons management has increased its investments in the research and development area, but there is a concern that managements consideration set is incomplete without a thorough search for companies in the United States. The development of commercial real estate has been slowing due to lower profit margins. This is not likely to improve over the short term as consumers become more frugal in the slower business environment. To benefit from this adverse situation, Hanson can initiate two main strategies. First, open up the emerging market with its abundant cash flow and gain the location convenience, exclusive rights to the distribution channel (wherever it is legal), and the brand recognition while other firms are struggling to stay afloat. This was previously outlined in our international expansion strategy. Secondly, reduce the variable unit costs in all of Hanson core businesses. At Hansons current production level, even a penny saved per unit of brick can result in millions of dollars. As the recession sets in and banks become more reluctant in offering loans, this will become an important and sustainable income.

Currently, the U.S. equity market environment offers good opportunities. First, the interest rate of loans is at an all time low since the 1960s, which reduces the downside loss of a wrong acquisition. Second, many firms are trading at a significant discount relative to their market value two years ago. This is especially true for the technology firms, which the management concurs to be a priority for cost reduction. Investing in any type of technologies has inherent risks. However, if we compare the relatively low cost with the high potential for gain, the risk seems justifiable. Information technology and material science may be the right combination for Hansons purposes.

Risk And Assumption

Horizontal Market Expansion

Before we consider horizontal market expansion strategy for Hanson Plc, we have looked into its current company structure and found that there are only two viable options for the company. Either Hanson Plc has to keep on expanding or it has to liquidate its debt position. Since we have agreed that Hanson Plcs foremost proficiency is its ability and know-how to acquire and manage other companies, we do feel strongly that it should continue on expanding. While Hanson Plcs debt position was undeniably large, we feel that this was in a relatively strong ratio when compare to its cash flow return from its bolt-on acquisition strategy. Acquiring other building material businesses seems to fit perfectly with Hanson Plcs new philosophy of bolt-on acquisition[1] since it will help the company gain a new advantage in its construction material market. Nevertheless this strategy also presents some new risks that have to be taken into serious consideration. First of all, there can be some hidden internal risk in each industry and company that Hanson Plc acquires which can make this business model turns out to be unprofitable as a whole. Yet, Hanson Plcs long history and experience in acquiring companies in a total different market lines and successfully manage them into profitable investments seems to make this a less threatening risk. Another risk in this horizontal market expansion lies within the amount of investment that Hanson Plc has to commit in buying companies in these market. Steel industry seems to represent the biggest problem in this case since few large corporations control most of the steel production. Nevertheless, the recent drop in steel industry presents Hanson Plc a unique opportunity in acquiring them without

spending large amount of investment. Glass and timber industry presents less trouble since they are control by relatively smaller firms. The speed in the acquisition of companies in these industries then will be a challenge that Hanson Plc has to taken into the account.

Expansion into South/Central American Market

When entering into a potentially profitable business venture there are always risks involved. When considering expansion into the Central American region there are a few risks to consider. The first being market share. Currently, several of the world's top concrete producers already operate in Mexico and South America. The risk is attempting to gain market share away from companies such as Cemex. The assumption we make when addressing this risk is that when Hanson finds a company to bolt-on, the strategy in choosing that company will be much the same as the previous acquisition strategy Hanson has used effectively. We assume that Hanson will choose the right company to gain a strong foothold and market share. Another associated risk is a lack of companies to acquire, or the companies Hanson would like to acquire are selling at a premium. The assumption we make with this is at some point in time in the near future the opportunity will present itself. Another risk when entering into the South American market is government stability and regulation. This is a risk that Hanson, with its global scope, manages everyday. We assume that currently the governments in Mexico and Brazil are stable, as well as there is less regulation in those countries as opposed to the US and UK. Additionally, we assume that Hanson is very experienced in entrance into new markets through acquisition and will continue to utilize its controls, be aware of events in the region, and remain profitable at the end of the day.

Despite the risks, we feel that due to Hanson's global scope and expertise in entrance into new markets via acquisition, they will have little difficulty succeeding in the South/Central American market place. We feel that this is an extremely large and potentially profitable opportunity.

U.S. Expansion Strategy

We assume that Hansons excellent credential and global leadership attracts enough talents, who understand which technologies can add enough potential value to Hanson to justify the tech firms cost plus the expected value of the potential loss. Hansons long history in traditional industries may also make it harder for the company to achieve high level of technology adoption, which is usually a precondition for realizing the gains.

Supporting Analysis
Distinctive Competencies

Hanson Plc has the size, the money and know-how experience in taking companies over. This gives them a unique opportunity in implementing their bolt-on acquisition strategy, which turns out to be their most profitable business models. Hanson Plc has very strong cash flow. In 2001, the company reported an f189 million cash generate from operation. (58% growth rate from previous year.) This cash flow makes Hanson Plc a very strong company financially even though it has considered amount of debts. Given its size and strong cash flow, Hanson Plc has a stable company structure that enables its client to trust to make deal with. Since it is also the biggest player in the aggregate construction material market, it has a huge amount of power.

SWOT Analysis

Strengths: Hanson PLC has been able to improved and enlarged asset allocation by acquiring companies and sell off the ones that dont fit into the companys core business. The acquisition process has been a quick way to expand geographically allowing better global diversification. The recent purchase of Pioneer has given Hanson a much stronger presence in several developing and emerging markets. Pioneer also contributes strongly to the talent pool of Hansons management, which is a long term asset for continuing success. Hansons management has been known for its exceptional ability to acquire companies at excellent prices and profit from them through integration or selling each pieces after fixing up the inefficiencies through management restructuring. For Hanson to agree to the price of 1.73 billion dollars, Pioneer must be very good. The annual report suggests that Pioneer is already adding to the earnings of Hanson despite the global downturn. Smart use of information technology enables Hanson to share efficiently information developed and used in different departments, which helps cutting down the research and development costs. The fast transfer of information through various methods of organizing and mining data helps capacity planning, which reduces inventory levels and shorten customer response time. An efficient operation with good management helps keep the customers happy by giving them quality products that meets their needs. Hanson has traditionally organized its various companies and divisions into autonomous units and give each unit a separate management. While this has worked well while Hanson had 150 businesses in its portfolio, we believe as the company become much more concentrated in a few businesses all related to the constructions of infrastructures, it is good strategy to start this more centralized form of management for best utilization of cross company/division resources and knowledge bases. Hansons operations and earnings has shown improvements over the last five year s despite the Asian Crisis and the troubling economy. As one of the largest ready-mix cement, brick and quarry manufacturer of the world, Hanson enjoys good economy scale that gives it significant cost advantage. The cost advantage and solid financial

position enables Hanson to take the lead in the pricing of its products without much worry about price wars from the smaller competitors in the industry. Weaknesses: The integration and sharing of various types of information through out the company may present a risk for the loss of information as some of these get sell off. The information asymmetry between different departments also may embark political plays, which leads to another operation inefficiencies. If Hanson has designed the companys information flow well and offer adequate incentives for team-based performance, this weakness can be alleviated. The other potential weakness of growing through acquisition is the cultural and focus fit of the acquired with the buying company. This risk can be minimized with experience and research. The more difficult weakness to cure is that as the company gets big and focused, the risk of high losses resulting from one industry downturn becomes larger, which often leads to low stock price and cash flow. This combination makes a company a vulnerable target for hostile takeovers. Hanson has grown for years by doing this to others, so it may be more skilled in avoiding this unfortunate scenario. Nevertheless, we see this as a weakness for concern. Opportunities: China, Indonesia, Barcelona and Madrid are all going through significant restructuring and developments. These foreign operations help diversify Hansons portfolio. While Hanson is the leading supplier in the industry in Britain, there are still plenty of opportunities pursue, as the government undertakes many long-erm building projects of large public infrastructures. If Hanson succeeds, it may also boost its brand recognition in Britain.

Threats: Australia, UK, North Carolina, Texas are facing weakening markets, while the costs of natural gas has increased significantly. So far, this threat has been alleviated through continuing expansion of markets. However, if the condition worsens, Hanson

will need to better utilize its strengths and apply them to additional opportunities to maintain the earnings and its shareholders confidence. Otherwise, Hanson may die by its own sword.

Value Chain We feel that a value chain analysis was not a very applicable business analysis tool for Hanson Plc simply because Hanson has too many independent businesses. While value chain provides a good analytical tool to identify the business processes in each company, it is rather hard when applying this to a large diversified conglomerate. Even though after the demerger, Hanson Plc only focused on constructional materials, their characteristics can still be described as a large umbrella company that hosts many different construction companies. The only reasonable way to apply the model is to analyze each of their internal company processes individually and we feel that this was outside the scope of this paper and would bring little value to the argument as a whole.
Porters Five Forces

The Risk of New Entry by Potential Competitors: When one were to analyze the potential for new competitors in the building and construction segment in the way in which Hanson is currently positioned, it is highly doubtful that new competition would put up. Hanson is a billion dollar business and has a stranglehold on the entire construction business, namely the concrete business all over the world. There will always be new competitors but the chances of new competitors that would compare in size to that of Hanson is minimal. The Degree of rivalry among established companies within an industry: The degree of rivalry among the established players in this industry is pretty significant. When one were to consider the fact that each of these contracts that can get for concrete, in a market like China the competition for that contract is high

competitive. There are price wars to lowball the competition there are several tactics always being used to land these highly coveted highly profitable contracts.

The Bargaining Power of Buyers: The bargaining power of the Buyer, namely huge corporations or governments usually have the power in this relationship. In the case of Hanson, the government will issue a bid and indicate how much they are willing to pay for the work to be completed. If Hanson cannot make it for the bid price they simply will not get the job. But in the case of their competition it is necessary to sometimes make a marginal profit to continue to gain market share and get high profile clients. The Bargaining Power of the Suppliers: The supplier in this case would be Hanson and they have to succumb the bid prices of the buyers. Therefore they dont have a lot of power in the relationship. The bargaining power that they do have is in their overall business plan. When then have successful operations in all countries and have a great track record thats where the bargaining power of Hanson can come in, great reputation and price cost leader, Hanson is able to attract businesses in this facet. The Threat of Substitute Products: Hanson is a company that sells the actual items to the construction companies that allow them to complete their jobs. Therefore it is unlikely that a company will produce a material that will replace concrete or steel or quarries. The threat of substitute products is minimal to non-existent.

Financial Analysis
Over the six months ending on December 31, 2000 Hanson enjoyed a profit margin of 11.7%, revenue growth of 69.1%, and a sales growth of 63.3%. Over the course of the year Hanson saw gains from many sources, its strongest source of cash flow was its operations. Hanson's total operating cash flow was $554.9 million. Considerable amounts of cash have also been received from selling businesses, fixed assets and investments, $104.5 million. At the beginning of 2000, Hanson had a total debt obligation of $2,927.1 million. Over the course of 2000 Hanson increased this number considerably to $4,569 million. This was predominantly due to the acquisition of Australian-based building materials company Pioneer International Limited on April 26, 2000. This represented the largest single transaction for Hanson since the demerger in 1997. The acquisition is considered to be very beneficial to Hanson because it strengthens Hanson's existing positions in its current markets, while providing a foothold in the Australian market. The cost of the acquisition was 1,542.8 million or roughly $2,268.8 million at a .68 pounds for dollars exchange rate. Hanson paid for this acquisition by an upfront cash payment of 1,161.7m to Pioneers shareholders and also, by issuing 82.4m Hanson shares valued at 381.1m to make up the balance of the acquisition cost. Over the course of the year Hanson has also increased its borrowings in order to rebuild their cash position. It is one of Hanson's priorities that they generate enough cash in order to manage their high level of debt. Sales of existing subsidiaries, such as their waste management business in 2000, will provide cash flow for Hanson, however, they still must maintain their revenues and profit margins. Hanson uses an interest cover ratio, which measures the amount of interest that they pay against the cash earnings generated by the company to set a maximum amount of debt we are comfortable

with. Over the cycle Hanson believes this ratio to be about five times, and is currently at that level. Hanson's balance sheet (below) is strong. In order to maintain its past success, Hanson must maintain a strong cash position in order to continue its strategy of bolt on acquisitions. To do this Hanson must maintain both its operating revenues and profit margins, as well as continuing to sell off sectors of the company they believe to not be as profitable as other possible ventures.

ANNUAL BALANCE SHEET

As of 12/31/98
Restated 12/31/99

As of 12/31/97

As of 10/01/96

Cash Short Term Investments Cash and Short Term Investments Trade Accounts Receivable, Net Other Receivables Total Receivables, Net Total Inventory Prepaid Expenses Other Current Assets Total Current Assets Property/ Plant/ Equipment, Net

1,331.2 597.8 1,929.0 846.9 846.9 531.1 331.3 242.2 3,880.6

1,882.0 667.6 2,549.6 450.2 450.2 365.5 213.1 254.0 3,832.4

2,356.6 74.0 2,430.6 580.6 580.6 309.7 3,320.9

2,609.1 9.4 2,618.6 523.1

6,018.1 27.6 6,045.7 4,541.9

523.1 4,541.9 496.2 959.9 232.5 0.0 3,870.4 11,547.6

4,455.2

3,206.2

2,901.7

2,985.1

9,244.6

Goodwill, Net Intangibles, Net Long Term Investments Total Assets Accounts Payable Accrued Expenses Notes Payable/ Short Term Debt Current Port. LT Debt/ Capital Leases Other Current Liabilities Total Current Liabilities Long Term Debt Capital Lease Obligations Total Long Term Debt Total Debt Deferred Income Tax Minority Interest Other Liabilities Total Liabilities

1,625.3 445.7 10,406.7 522.6 641.7 2,197.7 99.7 3,461.7 2,371.7 2,371.7 4,569.4 236.3 828.6 6,898.3

427.0 99.9 7,565.5 267.3 589.4 1,467.5 87.1 2,411.3 1,459.7 1,459.7 2,927.1 231.3 782.4 4,884.8

102.5 191.6 6,516.7 208.9 643.7 893.5 82.7 1,828.7 1,461.5 1,461.5 2,355.0 915.4 4,205.7

0.0 181.4 290.3 7,036.9 21,082.4 275.2 660.7 1,427.6 75.6 2,439.0 1,495.9 1,495.9 2,923.5 888.0 2,288.5 5,195.9 0.0 8,372.4 4,452.4 4,452.4 9,648.3

661.8 0.0 1,167.9 4,577.9 5,764.7 17,402.8 1,889.8 2,164.0 (613.6) 239.5 3,679.7

Redeemable Preferred Stock Preferred Stock - Non Redeemable, Net Common Stock 2,134.0 1,892.6 1,891.7 1,890.9 Additional Paid-In Capital 2,165.7 2,165.5 2,165.0 2,164.3 Retained Earnings (1,105.2) (1,377.4) (1,745.7) (2,783.0) (Accum. Deficit) Treasury Stock Common Other Equity 313.9 0.0 0.0 0.0 Total Equity 3,508.4 2,680.7 2,311.0 1,272.1 Total Liability & Shareholders Equity Shares Outs. - Common Stock Total Common Shares Outstanding

10,406.7

7,565.5

6,516.7

7,036.9 21,082.4

735.16 735.16

651.73 651.73

651.73 651.73

651.40 651.40

651.07 651.07

Employees (actual figures) Number of Common Shareholders (actual figures)

27,000 74,613

14,000 134,576

14,000

16,000

Currency Exchange Rate 0.689 British Pounds / U.S. Dollar (most recent) ADR Information 5 Share(s) Per ADR