4 case study

Teradyne(

On August 2nd, 2001, Teradyne, Inc. (NYSE: TER) of Westford, Massachusetts announced that it would be acquiring GenRad, Inc. (NYSE: GEN), a leading manufacturer of automatic test equipment and related software. Under the terms of the definitive agreement, each share of GenRad stock would be converted into .1733 shares of Teradyne stock. At the close of the New York Stock Exchange on August 1st, Teradyne stock was valued at $35.10 effectively valuing the acquisition at roughly $260 million including an assumption of $85 million in debt. Teradyne believed that the acquisition would initially be dilutive, but expected through synergies and an increase in demand, would become accretive in 2002. Scheduled to close in the fourth quarter of 2001, the acquisition was dependant on GenRad shareholder and government regulator approval.

By September 2001, the economic condition of the United States had deteriorated. Accelerated by the terrorist attack on New York’s World Trade Center Towers, American consumers further withdrew from traditional spending habits. During the month, Teradyne announced an unexpected third quarter loss of approximately $.32 per share. Previous analyst loss estimates were approximately $.11 per share. Amidst the economic turmoil and financial performance, the company began to eliminate 1,000 employees and reduced salaries of up to 15% for higher paid employees.

Under the circumstances, the acquisition of GenRad may be in question. The board had to decide whether or not this was the right time to undertake such a complex integration and if the economy would recover in time to have the transaction contribute to earnings on schedule.

On the last trading day in September, Teradyne’s stock closed at $19.50 and GenRad finished the month closing at $3.27 per share.

Teradyne

Corporate Background

Teradyne manufactures automatic test equipment and related software for the electronics and communications industries. The company also is a leading manufacturer of connection systems used in the testing of electronic systems.

In December 2000, the company sold a controlling interest in its software testing business to an investor group. Teradyne remains a minority shareholder in the new company under the name Empirix.

The products designed and sold by Teradyne are used in the design and testing of a large number of semiconductor products including logic, memory, mixed signal, and integrated circuits.

Electronic manufacturers who assist in the design, inspection, and testing of circuit boards and other electronic assemblies primarily use the company’s circuit board test and inspection systems. Similar to semiconductor test systems, the circuit board test systems improve electronic product performance, increase product quality, shorten a manufacturers time to market, assist in manufacturing, minimize labor costs, and increase production yields.

The company also manufacturers broadband test systems used by the communications industry for Internet testing, customer service, and voice network maintenance.

Most of the company’s test systems are complex and require support both from the customer as well as Teradyne. Pricing for these systems can reach $4 million or above. As of the year ending December 2000, no single customer accounted for more than 10% of the company’s net revenue. The largest three customers accounted for 21% of revenue in 2000.

The distribution and sales of Teradyne’s products are conducted both inside and outside the United States. While the company has sales offices throughout North America, it also maintains sales and service offices throughout South East Asia, Europe, Taiwan, Japan, and Korea. Almost all of the company’s manufacturing is done in the United States, but a majority of the revenue comes from outside the U.S. International sales accounted for 54% of total revenue in 2000, 52% in 1999, and 46% in 1998. Risk associated with international business tend to be country or region based and include political and economic instability, unfavorable trade policy, fund transfer problems, currency fluctuations, distribution, tax rates, and the ability to collect accounts receivable funds.

Teradyne has never paid a cash dividend and has maintained a policy to use earnings to finance expansion and growth.

Competition

Teradyne participates in a highly competitive environment that covers all of its business segments. Competitors are constantly improving products that may or may not be an improvement over Teradyne’s products. It is therefore essential that the company continue to invest heavily in itself to further improve and create new products for the marketplace.

Employees & Corporate Headquarters

As of December 2000, Teradyne employed approximately 10,200 persons. The company has never experienced any labor problems and does not have any employees that are members of a collective bargaining group.

Research and Development

For Teradyne to continue to compete in the marketplace, it needs to invest in both new product development and the improvement of its existing product base. In 2000, the company invested $300.9 million for new and existing products. Expenditures for research and development in 1999 and 1998 were approximately $228.6 million and $195.2 million. Research and development accounted for approximately 10% of total net revenue in 2000, 13% in 1999, and 13% in 1998.

Regulatory Issues

While the company has not experienced any significant costs associated with its compliance with numerous regulations designed to protect the environment, it cannot predict the future expenditures associated with regulatory compliance. Some of the environmental laws that impact the business include The Comprehensive Environmental Response, Compensation, and Liability Act, The Superfund Amendment and Reauthorization Act of 1986, The Occupational Safety and Health Act, The Clean Air Act, The Clean Water Act, The Resource Conservation and Recovery Act of 1976, and The Hazardous and Solid Waste Amendments of 1984.

GenRad

Corporate Background

GenRad, Inc. provides electronic manufacturing productivity solutions for contract and original equipment manufacturers of wireless and handheld devices, personal computers, business servers, DSL and other broadband switching and routing technologies, and other equipment devices used for the Internet and electronic commerce. While primarily located in the United States, GenRad also maintains facilities in Western Europe and Southeast Asia.

GenRad is organized into three business lines, each supported through its support and services division:

Process Solutions

The Process Solutions is based in Westford, Massachusetts and is comprised of seven lines of products primarily focusing on in-circuit test, x-ray test, and re-work solutions for electronic manufacturers. Products under this division range in price from $25,000 to $1,000,000.

Functional Solutions

Based in Westford, Massachusetts, the Functional Solutions division sells and markets functional test platforms for manufacturers of telecommunications, computers, and automobile electronics. Systems under this division typically sell for as little as $100,000 with a ceiling of approximately $500,000.

Diagnostic Solutions

GenRad, through its Manchester, UK facilities, provides customers with a wide array of diagnostic and information solutions tying design, manufacturing, and service into a single vision. This division accomplishes this goal through the its software and hardware solutions for the automotive and transportation customers, as well as other independent service providers.

Support and Services

Through its Support and Services Division, GenRad provides customers with on-site and remote support, maintenance programs, and programming and training to enable customers to optimize their GenRad hardware and software products.

Competition

GenRad participates in an intensely competitive industry. Competition from both domestic and foreign corporations exists across all business segments. Some of the competing companies are substantially larger than GenRad and have easier access to resources. Some of the company’s principal competitors are Agilent Technologies, Teradyne Corporation, Siemans A.G., and Bosch. GenRad, in order to overcome its competition, targets customers’ specific needs and carves out a niche rather than competes on a large, broad basis. The primary competitive factors are product performance, customer applications, engineering, customer support and service, and pricing. For GenRad to continue to compete in each of its product segments, research and development will play an ongoing critical component of the company’s strategy.

GenRad sells and supports its products primarily through an in-house sales and service team. Currently the company maintains sales offices in the United States, Mexico, the United Kingdom, Germany, France, Switzerland, Italy, Sweden, the Netherlands, Singapore, and Malaysia. The company will also contract with independent companies throughout the world to provide sales and service support in areas not directly covered by GenRad’s sales and support teams.

Employees & Corporate Headquarters

As of December 2000, GenRad employed 1,524 total employees including contracted employees. As a comparison, in the prior year, the company had 1,296 total employees. As of December 2000, no employee was a member of a collective bargaining agreement.

Customer Base

GenRad primarily targets and delivers products and services to original equipment manufacturers of electronics, electronic components and peripherals, contract electronics manufacturers, and transportation and automotive companies. While these industries make up the largest share of the company’s sales, other smaller manufacturers are also focused on for future sales.

One of GenRad’s primary customers is Ford Motor Company providing the automotive manufacturer with diagnostic equipment to assist Ford’s dealers with the problem testing of electrical systems in Ford vehicles. At year-end December 2000, Ford accounted for approximately 22% of consolidated accounts receivable. For the years ending 1998, 1999, and 2000, the Ford business accounted for approximately 11%, 31%, and 20% of consolidated revenues.

Research and Development

One of the keys to GenRad’s continued success is the development of new products and the improvement of existing products on the market. Most expenditures in research and development are primarily associated with the hiring of staff and the improvements in software and hardware in all of the company’s product segments. In 2000, the company spent approximately $29.0 million in research and development. Expenditures in 1999 and 1998 were $20.0 million and $19.0 million.

Expansion through Acquisition

GenRad had expanded through the years, utilizing both same store growth and acquisition. In April 2000, the company purchased Autodiagnos AB, an automotive aftermarket diagnostic software and equipment vender based in Stockholm, Sweden with offices in England, the Netherlands, Germany, and the United States. For substantially all of the outstanding stock, GenRad paid $26.7 million in cash and included the assumption of $6.0 million in debt. Legal and accounting expenditures for the transaction totaled $1.3 million.

Earlier in March 2000, the company acquired the assets of Nicolet Imaging Systems and the outstanding stock of Sierra Research Technology located in California and Massachusetts for approximately $40 million in cash. The transaction enabled the company to expand its x-ray inspection technologies and its repair/re-work equipment business.

In April 1998, GenRad purchased certain assets of the Manufacturing Execution Systems business of Valstar Systems Limited of Aberdeen, Scotland for $3.2 million in cash including approximately $0.2 million in acquisition costs.

Conclusion

With the stock market correction and the uncertainty of the immediate future of the United States and global economy, an acquisition of GenRad at this time may not seem appropriate. However, it may prove the key time to invest as interest rates continue to fall and stock prices remain suppressed. With the close looming in the near future, management had to decide on the fate of the deal before it was legally obligated to go through with the transaction.

Exhibit 1

GenRad, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 30,2000, JANUARY1, 2000 AND JANUARY 2, 1999
(in thousands, except per share amounts)
	2000	1999	1998
Revenue:	$	$	$
Products	275,480	232,362	159,290
Services	66,175	69,586	65,499
Total Revenue	341,655	301,948	224,789
Cost of revenue:
Products	157,257	124,114	80,112
Services	46,694	42,643	38,775
Total Cost of Revenue	203,951	166,757	118,877
Gross margin	137,704	135,191	105,912
Operating Expenses:
Selling, general and admin	80,723	63,216	67,890
Research and development	28,956	20,042	18,962
amortization of acquisition-related intangible assets	7,269	2,831	1,948
Acquired in-process research and development	500		10,097
Restructuring and other charges	1,291		8,753
Loss from impairment of intangible assets			4,906
Arbitration settlement			7,650
Total operating Expenses	118,739	86,089	120,206
Operating income (loss)	18,965	49,102	-14,294
Other income(expense)
Interest income	196	212	399
Interest expense	-8,216	-1,374	-1,163
Other	165	-169	-541
Total other expense	855	-1131	-1,305
Income (loss) before income taxes	11,110	47,771	-15,599
Income tax benefit (provision)	10,537	-277	6,531
Net income (loss)	21,647	47,494	-9,068
Net income (loss) per share:
Basic	0,77	1,66	-0.32
Diluted	0,75	1,6	0
Weighted average shares outstanding:
Basic	28,205	28,669	28,003
Diluted	28,731	29,683	28,003

Exhibit 2

GenRad, Inc.

CONSOLIDATED BALANCE SHEETS
DECEMBER 30,200 AND JANUARY 1,2000
(IN THOUSANDS, EXCEPT PER SHAE AMOUNTS)
			2000	1999
Assets			$	$
Current assets:
Cash and equivalents			8,321	6,951
accounts receivable, less allowance of $828 and $ 1,487			114,355	81,276
Inventories			65,551	49,068
Deferred tax assets			12,781
Other current assets			8,445	8,228
Total current assets			209,453	145,523
Property and equipment, net			47,620	43,194
Deferred tax assets			18,410	19,868
Intangible assets, net			91,497	38,686
Other assets			2,625	1,368
Total assets			3,699,605	248,639
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable			21,427	21,841
Accrued liabilities			11,779	5,921
Deferred revenue			10,185	9,388
Accrued compensation and employee benefits			10,645	6,750
Accrued income taxes			2,987	3,760
Current portion of long-term debt			48,590	2,353
Total current liabilities			105,613	50,013
Long-term liabilities:
Long-term debt			45,050	3,653
Accrued pensions and benefits			8,999	9,175
Lease costs of excess facilities				3,922
Deferred revenue			1,232	1,005
Deferred tax liabilities			3,412
Other long-term liabilities			4,542	4,036
Total long term liabilities			63,235	21,791
Total liabilities			168,848	71,804
Stockholders' Equity:
Common Stock			30,394	29,877
additional paid-in capital			225,738	221,854
Treasury stock			-31,292	-29,017
Accumulated deficit			-22,419	-44,066
Accumulated other comprehensive loss			-1,664	-1,813
Total stockholders' equity			200,757	176,835
Total liabilities and stockholders' equity			369,605	248,639

Exhibit 3

GenRad, Inc.

	CONSOLIDATED STATEMENTS OF CASH FLOWS
	YEARS ENDED DECEMBER 30,2000, JANUARY1, 2000 AND JANUARY 2, 1999
	(in thousands)
		2000	1999	1998
Operating activities:	$	$	$
Net Income (loss)		21,647	47,494	-9,068
Adjustments
Depreciation and amortization	25,544	14,928	15,312
Allowances for Acct rec. and inv.	8,260	-3,875	1,520
Stock-based compensation	551	590	639
(Gain) loss on disposal of prop. And eqp.	878	116	-281
Deferred income tax benefit	-11,975	-4,500	-7,500
Acquired in process research and development	500		10,097
Restructuring and other non-recurring charges	1,291		16,403
Loss from impairment of intangible assets			4,906
Increase (decrease) in operating assets and liabilities
Account Receivables	-27,961	-17,386	10,257
Inventory		-17,338	-13,289	-4,120
Other Current Assets	605	-1,159	1,147
Account payable		-2,521	11,425	-2,951
Accrued liabilities		3,896	-10,400	-153
Deferred revenue		1,262	2,705	1,318
Accrued Compensation and employee benefits	-837	-1,602	-6,260
Other Current Assets	-1,327	-1,158	-2,335
Net cash provided by operating activities	2,745	23,889	28,931
Investing Activities:
Purchases of property and equipment	-18,255	-16,241	-15,157
Purchase of subsidiaries, net of cash acquired	-69,729	-490	-4,178
Development of intangible assets	-4,251	-4,886	-6,645
Net Cash used in investing activities	-92,235	-21,617	-25,980
Financing Activities:
Purchases from credit facility,net	87,534	-2,341	-2,433
Proceeds from employee stock plans	2,681	10,154	6,633
Purchase of treasury stock	-2,275	-18,716	-14,958
Net Cash provided by (used in) financing activities	87,940	-10,903	-10,758
Effects of exchange rates on cash	2,920	2,584	-1,078
Increase (decrease) in operating assets and liabilities	e) in cash and equivalents	1,370	-6,047	-8,885
Cash and cash equivalents at beginning of the year	6,951	12,998	21,883
Cash and cash equivalents at end of the year	8,321	6,951	12,998

Exhibit 4

GenRad, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30,2000, JANUARY1, 2000 AND JANUARY 2, 1999
	2000	1999
Inventories:	$	$
Raw materials	22,704	13,247
Work in process	31,378	17,891
Finished goods	11,469	17,930
	65,551	49,068
Other Current assets:
Prepaid expenses	4,804	4,957
Other current assets	3,641	3,271
	8,445	8,228
Property and equipment:
Leasehold improvements	14,376	13,738
Machinery and equipment	69,408	58,748
Service parts	17,381	12,459
	101,165	84,495
Accumulated depreciation	-53,545	-41,751
	47,620	43,194
Intangible Assets
Goodwill	50,932	22,311
Capitalized and purchased Comp Software	15,486	11,244
Developed Technology	22,510	11,370
Assembled workforce	4,741	1,444
Other intangible assets	21,946	3,182
	115,615	49,551
Accumulated amortization	-24,118	-10,865
	91,497	38,686
Accrued pension and benefits:
Accrued U.S. pension	1,634	1,795
Accrued foreign pension	4,420	4,526
Accrued postretirement benefit	2,945	2,854
	8,999	9,175

Exhibit 5

Teradyne Inc.

	ASSETS & LIABILITIES
	DECEMBER 31, 2000 AND 1999
	2000	1999
ASSETS	$	$
Current Assets
Cash and eq.	242,421	181,345
Marketable Sec.	60,154	66,316
Acct. Rec.	420,040	296,159
Inventories:
Parts	318,790	123,300
Assembled in process	159,123	145,393
Finished Goods	34,650
	512,563	268,693
Deferred tax assets	93,958	49,716
Prepayments and other cur. Assets	48,698	45,458
Total current assets:	1,377,834	907,687
Property, plant, and equip.
Land	54,774	41,774
Buildings and improvements	293,124	238,136
Machinery and equipment	831,159	692,383
Construction in progress	75,520	9,693
Total	1,254,957	981,986
Less: Accumulated Dep.	-521,171	-484,247
Net Property,plant and equipment	733,786	497,739
Marketable Securities	161,848	139,752
Other assets	82,400	23,035
Total assets	2,355,868	1,568,213
LIABILITIES
Current Liabilities:
Notes Payable	7,389	8,221
Current portion of long-term debt	169	4,659
Accounts Payable	153,897	104,335
Accrued Employees compensation	158,817	117,314
Deferred revenue and customer adv.	183,465	60,096
Other accrued liabilities	86,637	66,223
Accrued income taxes	28,914	31,478
Total current liabilities	619,288	392,326
Deferred tax liabilities	21,257	13,907
Long-term debt	8,352	8,948
Total liabilities	648,897	415,181

Exhibit 6

Teradyne Inc.

SHAREHOLDER'S EQUITY
Common Stock (0.125$ par value)	21,570	21,290
Additional paid-in capital	334,241	234,198
Retained Earnings	1,351,160	879,544
Total Shareholder's equity	1,706,971	1,153,032
Total liabilities and shareholder’s eq.	2,355,868	1,568,213

Exhibit 7

Teradyne Inc.

		CONSOLIDATED STATEMENTS OF INCOME
		Years ended December 31,
		2000	1999	1998
		(In thousands except per share amounts)
		$	$	$
Net Sales
Expenses
	Cost of sales	1,669,699	1,047,752	947,174
	Engineering and development	300,920	228,570	195,158
	Selling and admin.	362,562	256,392	212,885
		2,333,181	1,532,714	1,355,217
Income from operations		710,765	258,198	133,934
Interest and other income		30,724	17,307	13,514
Interest expense		-1,841	-1,656	-1,566
Income before income taxes		739,648	273,849	145,882
Provision for income taxes		221,894	82,155	43,765
Income before cumulative effect of chg. in acct pri.		517,754	191,694	102,117
Cumulative effect of chg. In acct. pri.		-64,138
Net Income		453,616	191,694	102,117
Income per share before cumulative effect of chg., in acct pri.		2.99	1.12	0.61
Cumulative effect of chg. in acct.		-0.37
Net Income per common share		2.62	1.12	0.61

Exhibit 8

Teradyne Inc.

		CONSOLIDATED STATEMENTS OF CASH FLOWS
		(In thousands)
		2000	1999	1998
		$	$	$
Cash Flows from operating activities		453,616	191,694	102,117
	Net Income
	Adjustments to reconcile net income to net cash
	Deprecation	99,929	85,279	75,351
	Amortization	1,933	1,107	953
	Charge for excess inventory			23,000
	Deferred income tax benefit	-44,242	-4,101	-14,607
	Other non-cash income tax benefit	-10,997	4,354	-804
	Changes in operating assets and liabilities
	Account rec.	-113,930	-76,856	81,630
	Inventories	-235,319	-2,346	-16,990
	Other assets	7,589	-24,576	-1,184
	Accounts Payable	226,798	115,750	-18,530
	Accrued income taxes	85,482	77,171	7,685
Net Cash provided by operating activities		470,859	367,476	238,621
Cash flows from investing activities:
	Additions to prop, plant, and equipment	-235,189	-119,780	-119,457
	Increase in equipment manufacturing	-63,053	-31,376	-44,983
	Purchases of held to maturity marketable sec.	-409,180	-177,650	-20,000
	Maturities of held to maturity marketable sec.	394,006	118,990	20,000
	Purchases of available for sale marketable sec	-177,864	-204,824	-162,092
	Proceeds from sales and Maturities	177,104	169,824	224,951
	Cash acquired in acquisition	1,885
Net Cash used by investing activities		-312,291	-244,816	-101,581
Cash flows from financing activities:
	Payments of long-term debt	-5,283	-1,333	-1,615
	Issuance of common stock under stock option	55,263	82,323	26,579
	Acquisition of treasury stock	-147,472	-207,819	-51,158
Net cash used by financing activities		-97,492	-126,829	-26,194
Increase(decrease) in cash and cash equ.		61,076	-4,169	110,846
		181,345	185,514	74,668
Cash and cash eqi. At the end of the year		242,421	181,345	185,514

( (copyright 2001 – John D. Sullivan

This case was written to stimulate class discussion and analysis and is not a critique of an effective or ineffective management situation.

� “Teradyne Cuts 1,000 Jobs, Salaries, Confirms Forecast of Loss in Period.” The Wall Street Journal. September 14, 2001.

� Teradyne, Inc. Securities and Exchange Form 10-K. December 31, 2000.

� Teradyne, Inc. Securities and Exchange Form 10-K. December 31, 2000

� Teradyne, Inc. Securities and Exchange Form 10-K. December 31, 2000

� Teradyne, Inc. Securities and Exchange Form 10-K. December 31, 2000

� GenRad, Inc. Securities and Exchange Form 10-K. December 31, 2000

� GenRad, Inc. Securities and Exchange Form 10-K. December 31, 2000

� GenRad, Inc. Securities and Exchange Form 10-K. December 31, 2000