Northern Drilling is a subsidiary of the third largest exploration drilling contractor in the world, InterDrilling Corporation. Northern Drilling was started in 2006, when InterDrilling hired Peter Bremnerto build the company from scratch. Northeren is particularly operating in Canada, the world’s largest diamond drilling market. Northeren grown through acquisition in Canada since then. (Northern Drilling Inc.: The Mond Nickel Contract Decision)
It is a full-spectrum services company, that have superior technical capability and great safety standards. Back in 2010, it was having 34 drill rigs out of which 12 rigs were deep diamond drills. (Northern Drilling Inc.: The Mond Nickel Contract Decision)
One of the major issues is that the company had overdependence on Noranda, as 60% of its business was due to the contract with Noranda. And the more serious part of the story is that it was up for renewal as well.
Now, the Northeren was invited for proposal for 2 projects for which it has necessary expertise but short of labor. It is a three-year contract that can solve its short term problems. It has to decide whether it would be feasible for it to undertake the project. The proposed Mond contract involved drilling over a span of three years for poly-metallic deposits near Sudbury, Ontario. The RFP was separated into two individual jobs: a deep job with 3,000-metre holes, and an intermediate job with 1,800-metre holes.
Moreover, acquiring these two projects may disturb the Noranda and its contract are up for renewal this year. The company may lose significant business if lose this contract.
Situational Assessment Findings
To carry out these projects, the company is having shortage of necessary specialized equipment and that equipment is very expensive.
Then the company have shortage of drillers and even in the industry there is a shortage of drillers.
Then the customer relationships are also at stake, Noranda, the company traditionally supplied 60% of Northern drilling revenue may get alienated due to the new contract. One reason is because of the competition between Noranda and Northern drilling. Secondly, the company would be needed to commit its drilling resources on Mond’s site which is a direct competitor of Noranda as well.
It is obvious for the company to go for the new business opportunity because not doing so may end up bankrupting the company. The Noranda may not give new business to the Northeren. 60% of the business comes from Noranda. In this case, Northern would lose 60% of its business. However, accepting Noranda’s contract would give it three years of financial security.
However, as calculations provided in Appendix 3, commissioning both projects would result in highest return on investment. Choosing one option at a time would although produce return higher than the hurdle rate of 20% at 22%. But choosing both the products would give company highest profit with 24% return on equity form.
The alternative strategies should be based on SWOT analysis of the company (Appendix 1). They should be based on its strength, convert its weakness into strength, exploit opportunities and/or mitigating threats. The strategic options available o Northern Drilling tare as follows,
Identification & Analysis of Strategic Options
Make Investment into equipment
The new contract from Mond is necessary for the company as it would provide it longterm financial security as well and it can employ synergies to reduce its cost base. If the company can make arrangement with Noranda, then it would need 4 new equipment which will cost $3,600,000 otherwise it would be needing 8 equipment for $7,200,000 (Appendix 4).
The company requires new equipment in order to meet new order. The finance can be arranged through debt. The company has very low debt to equity ratio of just 0.04. As compared to competitors it is very low. The major competitor that can bid on the contract all have much higher debt to equity ratios. BoartLongyear has 72% (814244/1134440), Major Drilling group has 0.43 (144418/337847) and Orbit Drilling has debt to equity ratio of 0.36 (37153103787). In case of 4 equipment investment, its debt to equity ratio will become 0.18 (8094/24477) and in case of 8 new equipment, it would reach 33% (4494/24477).
Acquire Human Capital, Particularly Drillers
It also needs human capital not only for this contract but because it is also its weakness. A weakness which can limit the level of its operations. It can arrange for human capital through new hiring both online and through employee referral. For such a strategy, there would involve hiring costs, wages, time consumed in training and developing new employees, advertising fees and recruitment fee in case company outsource its hiring process.
Merger and Acquisition
Merger and acquisition have several benefits for the company. It would increase its resources that would help it expand further and the company can also decrease its costs due to synergies between the merged companies. It would also give it access to experienced workers. It would also provide company opportunity for growth due to increased visibility in the market and huge new customer base. The industry is already very competitive (Appendix 2) and the company need to reduce the buyer power as well as reduce the threat of new entrants and substitution. In this regard, merger with a large company would increase its supplier power. (Benefits of mergers and acquisitions)
However, there are also some negatives of the merger and acquisition. Both companies may have conflicting objectives and there would be very high acquisition costs. Then aligning the corporate structure (which is a very difficult job) of both organization is also necessary.
The company should bid for Mond’s site. It should try to negotiate with Noranda to free 4 equipment. In this case it would need less amount in new equipment and there would be room for further investments by raising debt capital.
The company should pursue both projects as it would give company highest return on its investment of 24% as compared to 22 percent if it bids for single project. It would also help it acquiring new drilling talent with long term contracts (at least for 3 years as compared to annual contracts which is routine). This would give company further competitive advantage.
Then the company should finance the equipment through debt capital The company has very low debt equity ratio and so can secure financing for new machinery easily. Then the company should also hire new people with different HR strategies like through referral, online recruitment or through subcontracting.This would ensure company completes the Mond site projection but will also give its substantial competitive advantage due to having trained drillers.
As recommended, the company should bid for Mond’s site. It should try to negotiate with Noranda to free 4 equipment. Moreover, it should also use its relationship with Noranda to figure out whether Noranda would be interested in working with Northern and renew its contract so that Northern can hire more personals accordingly. In this case it would need less amount in new equipment and there would be room for further investments by raising debt capital.
The company should pursue both projects as it would give company highest return on its investment of 24% as compared to 22 percent if it bids for single project. The company should hire new experienced drillers along with hiring trainee drillers.
The following factors are important to establish whether the company is successful in its new strategy or not. They are as follows,
Northern Drilling Inc.: The Mond Nickel Contract Decision (2012) Richard Ivey School of Business Foundation
Benefits of mergers and acquisitions. (2004). nibusinessinfo.co.uk. Retrieved 15 June 2018, from https://www.nibusinessinfo.co.uk/content/benefits-mergers-and-acquisitions
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