Raytheon Benchmarking -Optimizing Capital Structure
Raytheon/Hughes AirCraft
Devising a financial plan to optimize capital structure is not a simple task. There is no single formula for selecting the correct proportion of various forms of debts and equities that maximizes the firm’s value while minimizing the average cost of capital (MoneyInstructor, 2008). Hughes AirCraft merged with Raytheon; during this merger, the organization exemplified strong financial tactics to optimize the success of the organization.
Raytheon is a global organization and is known to be the technology leader specializing in defense, homeland security, and other government markets throughout the world (Raytheon, 2008). Similar to Lester Electronics, Incorporated (LEI) and Shang-wa Electronics, Raytheon made a vertical acquisition by merging with Hughes Aircraft, a major aerospace and defense organization, in 1997. As a part of the merger negotiations, it was decided to have two classes of stock. Hughes stockowners would hold A shares, which represents 30% of the equity but will control the board with 80.1% of the voting power to elect directors. Raytheon stockholders’ B shares would represent 70% of the equity and would have equal voting rights on all matters except the election of the board.
Once the acquisition decision was made, Raytheon made several goals which included, but were not limited to reducing facility space by 3.3 million square feet and 9,700 synergy related employee reductions (bNet, 2008). Both of these very aggressive goals were met within the first year; one year after the merger, Raytheon reported record revenue earnings of $1.14 billion, up 34% (bNet, 2008).
Ensuring an optimal capital structure and securing the financing sources with the least cost of capital is critical for organizations. The ability of an organization to perform well in the market depends on the efficiency of its capital structure (MoneyStructure, 2008). LEI can learn from the Raytheon/Hughes...
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