Analysis
We have conducted careful analysis and evaluation of the pre-merger scenarios of both Flinder Valves and Controls Incorporation and RSE International Corporation and post-merger analysis of the proposed merged company. First, we have analyzed the historical data and found out trends in the financial statements of the Flinder Valves and concluded that in recent years.
The company’s revenues have increased by an average rate of 9%, which seems pretty logical because of the recent strong performance. Based on the historical data, we found out the rate of Cost of Goods Sold over Sales was around 70% (average). General and Admin. Expenses were assumed to be around 6% of the sales. Other net income was 1% of the sales.
Historical data showed that the Income before taxes or EBIT remained 25% of the sales and that trend was expected to continue in the future as well. Income tax prevailing in the country was approximately 40%. Net operating profit after tax (NOPAT) or earnings after tax was assumed to be 14% (averaged) of the total revenues. Net increase or decrease in the working capital of the company and investment in the fixed assets were given in the question, which increased by 11% each year.
For the purpose of evaluating the future financial prospects of the company, we have calculated the weighted average cost of capital (WACC) for the purpose of bringing future cash flows in present terms. For the calculation of WACC, we have assumed the A credit ratings for the Flinder Valves. On the other hand, we have assumed the 30-years US Treasury yields as a risk free rate of return and geometric average rerun as market premium for the calculation of cost of equity. Through WACC, we have calculated the NPV of the future cash flows of the pre-merger estimates of the Flinder Valves Company and the terminal value at the end of the projected life. After that, we were able to calculate the enterprise value and the value per share on the basis of DCF. Refer to computations.
A similar process has been performed for the pre-merger valuation of RSE Internationals and assumed the credit ratings of the company was Baa and assumed that the sales revenue of the company will grow by the constant rate of 8.8% and by calculating cost of equity, which led the computation to find out WACC, we have analyzed the potentials of the RSE company and calculated its present value and terminal value. Then we were able to compute enterprise value and the value of the shares on DCF basis. Then we have analyzed potential post-merger synergies and economies of scale and found that both the companies will enjoy a premium over their current share prices because of the merger, based on the expected 5% inflation rate prevailing in the market.
Recommendation
Based on the above analysis and appendices shown below, we can suggest to the companies to go for the merger, as the post-merger benefits would be favorable of both the companies and both would be able to grab the synergies and would grow further.........................
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Set in May 2008, this case represents a separate chief executive officers prospects Tom Elliott and Bill Flinder as we approach the negotiations RSE International Corporation purchased Flinder Valves and Control Inc. task for the student is to complete the evaluation and analysis of the target customer and agree on a price and exchange rate counterparties. The purpose of design for students who will be organized into groups and assigned to play the role of either valves or Flinder RSE International in negotiations. Housing provides additional personal information for each of the parties. Thus, the only element in the case of negotiating the terms of the acquisition under asymmetric information. The matter is relatively simple and provides the first exercise in the negotiation of the acquisition. It could also be taught in the usual case, the discussion fashion to an estimated joint negotiation exercise "Hide
by Michael J. Schill Source: Darden School of Business 14 pages. Publication Date: November 17, 2008. Prod. #: UV1062-PDF-ENG
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