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Week 6 - The Flinder Valves and Controls Inc - Answers

The document contains seminar questions for analyzing the potential acquisition of Flinder Valves and Controls (FVC) by RSE International. It discusses the strengths and weaknesses of both companies. FVC is highly innovative but struggles with cost management, while RSE is diversified but has a weak financial position. Both companies see benefits to a negotiated acquisition through stock or cash. Based on discounted cash flow valuation, FVC should demand a price above its current $39 share price. An acceptable range for an all-stock acquisition would be an exchange ratio of 1.04 to 1.81 RSE shares for each FVC share.

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658 views

Week 6 - The Flinder Valves and Controls Inc - Answers

The document contains seminar questions for analyzing the potential acquisition of Flinder Valves and Controls (FVC) by RSE International. It discusses the strengths and weaknesses of both companies. FVC is highly innovative but struggles with cost management, while RSE is diversified but has a weak financial position. Both companies see benefits to a negotiated acquisition through stock or cash. Based on discounted cash flow valuation, FVC should demand a price above its current $39 share price. An acceptable range for an all-stock acquisition would be an exchange ratio of 1.04 to 1.81 RSE shares for each FVC share.

Uploaded by

Lucas
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Seminar Questions for The Flinder Valves and Controls Inc.

Case

1. Using the case, how do you see FVC’s situation?


Located in Southern California (USA). A company in aerospace and defense (A&D)
industry, manufacturing special valves for heating exchangers. Last innovations of
FVC in A&D gave prospects for growth. Sales grew 23% from Q1 2007 to Q1 2008.
What are the strengths and weaknesses of FVC and RSE?
FVC
Strengths
The company is highly innovative, well-equipped technological advanced company. It has
developed a vast R&D system to align customer needs.
Weaknesses
The company is highly unable to manage its cost structure due to which it was highly paid
greater than its earning.
RSE
Strengths
Diversified portfolio to mitigating market risk. Strategic alliance with its suppliers.
Weaknesses
A weak position in the financial market with the beta ratings of Baa
Why should the two corporations want to negotiate?
Both companies want to negotiate dealing through equity in the form of stock or in cash.
The negotiation has also revealed that Flinder Valves and Controls will not lose their
identity after merger. RSE also wants to settle on these terms.

2. What is FVC worth? What are the key value drivers?


With the help of DCF valuation, the company will progress in the future. FVC, the
company must negotiate and must settle the deal at a price higher than the spot price. If the
company does not go for mergers and concentrates with its current strengths, then the
advanced technology of the company will contribute as its key driver to its success.
3. What opening price do you think Flinder should offer to sell the company to
RSE? At what price should he walk away from the negotiation?
Flinder will achieve the high level of growth before merger. After merger forecast says that
it will go to achieve economies of scale. On the basis of DCF Flinder should never
compromise on share price below its current price which is $39.
RSE’s current share price is $21.98. They cannot acquire a company whose share price is
far greater than the share value of RSE. On the other hand, Flinder incorporation is
currently trading its share at the price of $39 per share. It is possible that the company
whose growth is moving upward will compromise on low share price.
How did you estimate those values?
On the basis of growth rate, we have calculated all the estimated values as a percentage of
sales growth.
4. Do you recommend that RSE pays in cash or stock? If stock, what exchange ratio
do you recommend?

If RSE international stock price will increase then Flinder should settle for the stock because
the current per share value of RSE is $21.98 which is less than the price of Flinder Inc.
However, the calculations on the basis of DCF shows that RSE international will lose its stock
value in the coming years and will end up shrinking.

Auden Co. a 20% owner wold not to be in minority after acquisition and it noticed selling any
stocks in case of M&A. After the process maybe Mr. Flinder holds not his position in new
company so his stocks are attractive to buy for cash.

To analyse paying in cash or stock we must see min and max exchange rate.

Risk-free rate is 4.52% (30y bonds in 2008 – Ex. 9.)

Expected return is 5.5% (Geometric average – Ex. 9.)

Beta is 1.25 (page 718 in Footer2)

CAPM = 11.395% cost of equity

g=7.8%
Stock Price = D (1+g) / (r-g)

where:

 D = the annual dividend (1.42 in 2007 Ex. 5.)


 g = the projected dividend growth rate (7.8% as above)
 r = the investor's required rate of return (11.395%)

Stock Price = 1.42 (1+0.078)/(0.11395-0.078)

Stock price: $38,27

Stock price: $39,75 (1st May, 2008 Ex. 6.)

Min. rate = 39.75/38.27

Min rate = 1.039

Max rate = 1.81 (Ex. 6.)


Recommended method: paying cash for Auden and stocks for FVC, between 1.04 – 1.81
exchange rate ($65M - $114M in all).

Summary

The acquisition was significantly beneficial for both parties. FVC would have a bigger market
place, RSE have a new resource management system. Diversifiing of own business by RSE
take acquisition more valuable.

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