Question No. 1:
If you were Mr. Vincent, would you try to obtain control of Robertson Inc. in May 2003?
Answer:
After careful evaluation and analysis if I were Mr. Vincent, I would try to obtain control of Robertson Inc. in May 2003. The reasons behind this decision are based on both qualitative and quantitative measures. Since, Monmouth Inc. has been one of the leading producers of the electrical appliances and utilities in the industry of Oil and Gas.
monmouth inc case solution
The management was very much concerned about the vulnerability and volatility in this nature of business and was thinking to bring diversification in its business to avoid heavy dependency over oil and gas industry. For this reason, Robertson Tool Company appeared to be a very feasible investment opportunity in terms of the Net Present Value and the Multiples.
On the other hand, Robertson Tool Company was facing serious crisis in terms of sales growth, profit performance in the recent years and a very low percentage of inventory held by the family members and the members, but the things which made Robertson Tool Company most competitive and interesting was that the company was one of the leading local manufacturers of edge and cutting hand tools and was also the leader in its two core product areas. Both of the above abilities and plus points were not previously translated by the family owned management of the company.
It held around 50% share of the $75 million market for vises and clamps. On the bright side, Robertson Tool Company also has the reputation for high quality products in the mind of the customers and has an ability to grow its revenues by current 2% of industry averaged growth of around 6%.
The company was also in favorable conditions in terms of the distribution function as the distribution area was one of the main functional areas of the Monmouth Incorporation. Robertson Tool Company has around 2,100 wholesalers and has the ability to extend to 15,000 retail outlets.
Question No. 2:
What is the maximum price that Monmouth can afford to pay based on discounted cash flow valuation? Based on market multiples of EBIAT?
Answer:
Based on our careful computations and the professional judgments, the price Monmouth can offer to the Robertson Tool Company should be under $84 of each share. Based on the Cash Flow Analysis, the company was expected to grow at a constant rate of industry averaged 6%. On the other hand, on the basis of market Multiples of EBIAT and the total market capitalization, the price offered should be below $65.
Question No. 3:
Why is Simmons eager to sell its position to Monmouth for $50 per share? What are the concerns of and alternatives for each of the other groups of Robertson’s shareholders?
Answer:
Just after the interest shown by Monmouth over the potential merger of the Robertson Tool Company, it became obvious to the management of the Monmouth Incorporation that their company was not the only one in the race. Two other potential investors, the first was the Simmons Company, a corporation with a main business of producing nonferrous metals, tools, rubber products and electrical equipment. Who also had invested in 44,000 shares of Robertson stock in the year 2000.
In March 3, 2003 the management of Simmons Company approached Robertson Tool Company and offered to tender around 75% of Robertson’s outstanding shares for $42 each. A premium of $12 was also included in the offered price, which was a trick to trap the shareholders of Robertson Tool Company. But Simmons Company just ended up with only 23% of shares which was not enough to constitute an operating independence.
On the other hand, the management of Simmons Company believed that the merger of Robertson Tool Company with the Monmouth Incorporation would be a 2nd best alternative they have, as after the merger of Robertson Tool Company with the Monmouth Incorporation, the management of the Simmons Company would convert its 8% shares holding in Robertson Tool Company into the common stock of the Monmouth Incorporation.
The management of Simmons Company expected that the synergies and the economies of scale anticipated after the merger will have a significant positive impact on the share price of Monmouth Incorporation. The company suggested a price of $50 to the management of the Monmouth Incorporation.............................
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