Team 1 Monmouth Case 1. Is Robertson a good candidate for Monmouth (assuming the price is right)? Why? Yes. Robertson Tool Company had been going through a few years of low sales and profit, and, coupled with conservative financial and accounting practices, was far behind the normal growth rate for companies in its industry. Robertson’s 50% control of the market for clamps and vises, along with its good position in the scissors and shears’ $200 million market, let it compliment the diverse holdings of Monmouth.
These are attractive attributes of Robertson, but the selling point lies in the distribution network consisting of 2,100 wholesalers and 15,000 retail outlets. The Robertson products are sold in 137 countries worldwide. This avenue to market Monmouth and Robertson products across resources could lead to above average growth and profits. 2. Estimate a WACC for the acquisition. Invested Capital| ? | $37,696,000 | ? | ? | ? | Debt| | $12,000,000 | | | ? | Equity| | $25,696,000 | | | ? | ?| | | | | ? | Current market price| | $44 | | | ? |
Shares outstanding| | 584,000| | | ? | ?| | | | | ? | Unlevered Beat of Comparables| | 0. 725| | | ? | Debt/Capital of Comparables| | 32%| | | ? | Levered Beta| | 0. 86| | | ? | Risk free rate| | 4. 10%| | | ? | MRP| | 6. 0%| | | ? | ?| | | | | ? | Cost of equity| | 9. 28%| | | ? | ?| | | | | ? | Sources of capital| | | Weights| | After-tax cost| Debt| | | 31. 83%| | 3. 64%| Equity| | | 68. 17%| | 9. 28%| ?| | | | | ? | YTM| 6. 070%| Tax Rate| 40%| WACC| 7. 5%| 3. Discuss whether you think the forecast prepared by Vincent and Rudd is reasonable. Why? Be specific.
We think the forecast is not reasonable since they forecast was too optimistic and subject of their sales growth. a) The growth rate estimate in the future they use is approximately 6%. The current growth rate is just 2% that cannot be increased as 2 times as large in a short time, although it might increase due to the sales increase after the merge and acquisition of the Monmouth and Robertson. b) NWC should be as a percentage of sales. c) Terminal Growth rate shouldn’t be zero but around 2%. d) The estimations of SG&A cost and COGS are reasonable.
The merger and acquisition will result the percentage SG&A and COGS of sales respectively gradually decrease by increasing the manufacture efficiency and inventory turnover. Therefore, we decided to change the growth rate from 6% to 3% in the pro-forma, we will have the value of the firm calculated out from the pro-forma is $50 million instead of $56 million. 4. Prepare a value estimate for Robertson equity using the DCF method and info from steps 2 and 3 above. ?| Actual| Forecasts| ?| 2002| 2003| 2004| 2005| 2006| 2007| ?| | | | | | ? | NOPAT| 1. 8| 2. 4| 3. 1| 3. 8| 4. 2| 4. 4|
Plus: Depreciation| 2. 1| 2. 3| 2. 5| 2. 7| 2. 9| 2. 9| Less: CAPEX| | -4| -3. 5| -3. 6| -3. 8| -2. 9| Less: Change in NWC| -1. 4| -1. 5| -1. 6| -1. 6| 0. 0| Firm Free Cash Flow| -0. 7| 0. 6| 1. 3| 1. 7| 4. 4| ?| | | | | | ? | ?| | | | | | 81. 9| Firm Value (millions)| 85. 95| | | | Terminal g| 2%| Less: Debt| 12| | | | | ? | Equity Value| 73. 95| | | | | ? | Shares Outstanding| 584000| | | | | ? | Price per share| 12. 66| ? | ? | ? | ? | ? | 5. Estimate a value for Robertson equity based on the comparables approach. | Actuant Corp. | Briggs & Stratton| Idex Corp. | Lincoln Electric| Snap On Inc. Stanley Works| Robertson Tool Co. | | | | | | | | | Collection Period (days)| 55| 77| 47| 61| 96| 77| 53| Inventory % Sales| 12%| 18%| 13%| 17%| 18%| 16%| 33%| | | | | | | | | Operating Margin % Sales| 17%| 13%| 20%| 15%| 10%| 15%| 5%| Return on Capital| 21%| 9%| 10%| 12%| 11%| 14%| 4%| | | | | | | | | Times Interest Earned| 3. 8| 3. 2| 7. 1| 11. 5| 7. 8| 9. 3| 3. 5| Debt % Capital| | | | | | | | ? balance sheet values| 98%| 52%| 30%| 27%| 29%| 40%| 28%| ? market values| 29%| 37%| 20%| 17%| 19%| 24%| 37%| Bond Rating| BB-| BB+| BBB| -| A+| A| -| | | | | | | | |
Value of Firm ($ mil)| $ 712| $ 1,443| $ 1,191| $ 1,145| $ 1,861| $ 3,014| $ 29| EBIAT ($ mil)| 55| 119| 98| 90| 129| 234| 1. 80| EBIAT Multiple| 12. 8| 12. 1| 12. 2| 12. 7| 14. 4| 12. 9| 16. 1| | | | | | | | | Share Price| $ 42| $ 42| $ 29| $ 22| $ 26| $ 27| $ 30| Earnings Per Share| 2. 80| 3. 20| 2. 00| 1. 78| 1. 80| 2. 32| 2. 32| Price/Earnings| 15. 0| 13. 1| 14. 5| 12. 4| 14. 4| 11. 6| 13. 5| Average p/e multiple is 13. 5 Use the p/e multiple to multiply Robertson’s earning per share=13. 5*2. 32=31. 32 Now Robertson issued 584,000 shares So the equity value is 18,290,880 6.
What price will be necessary to gain the support of the Robertson family, Simmons, and the majority of shareholders? What are the interests, concerns, alternatives for each group? . | Robertson| Simmons| Majority of SHs| Price| $32. 82| $50| $30| Interest| Distribution system| Interested in electrical equipment, tools, nonferrous metals, and rubber products| To improve the EPS of Monmouth in the next five years. | Concerns| A relatively poor sales and profit performance| NDP Stock price fluctuates| Poor company Performance Relative to the Industtry| Alternatives| NDP, Simmons, Monmouth| 133000 shares| NDP vs Monmouth| . Does Monwouth have an advantage over NDP in the bidding contest? Do you think NDP will raise its offer in response to Monmouth offer? The synergies created by a merger between Monmouth and Robertson are clearly greater than that of NDP. As a publisher and manufacturer of auto parts, the benefits would not be as many as that of Monmouth. NDP must consider how much it is willing to spend or borrow in order to make a bid greater than Monmouth. If Simmons receives his $50/share, he will be accepting of the merger, and support Monmouth.
This will turn the favor to Monmouth, as an acquisition by NDP would surely devalue the resources of Robertson instead of using synergies created by mixing markets and offering new, complimenting, product lines. In fact, as Robertson is undervalued in the market because of unsystematic latencies and inefficiencies, the $50/share price demanded by Simmons might be less than the long-term gain inherent in the merger of Robertson and Monmouth. 8. What price can Monmouth pay without harming its long term trend in earnings per share ? Finance texts focus on net present value of cash flow to make investment decisions.
Are companies therefore foolish if they make acquisitions based at least in part on earnings per share impact? First, we need to forecast Robertson’s net income if it is acquired by Monmouth, assuming its interest expenses will be $0. 8 million for the next five years. Second, we will forecast Monmouth’s total net income after acquisition of Robertson. Monmouth must raise funds to make this acquisition. The company anticipated making the acquisition by issuing stocks. Thus, we will calculate how many shares Monmouth should issue without harming its long term trend in earnings per share, and total shares outstanding after acquisition.
We know that currently stocks of Monmouth and Robertson closed at $24 and $44, respectively; therefore, we can calculate the exchange ratio as $44/$24=1. 83x. If Monmouth acquired the entire Robertson by an exchange of stocks at a price of $44 per share, the shares that Monmouth needs to issue is 1. 07 (1. 83*0. 584) million. As a result, Monmouth’s total shares outstanding after acquisition would increase to 5. 28 (4. 21+1. 07) million. Now we know the total net income and total shares outstanding after acquisition, we can then calculate the after-merge earnings per share of Monmouth.
According to the table below, the row in green shows that the after-merge EPS is lower than the before-merge EPS during the first two years, but will become higher in the following three years. Therefore, if we paid $44 per share for Robertson’s stocks, we can acquire the entire Robertson’s stocks without harming Monmouth’s long term trend in earnings per share. Using the same techniques, we can estimate the price range that Monmouth can pay without harming its long term trend in earnings per share.
We can use the Goal Seek function in Excel to estimate the highest exchange ratio. As you will see in the table below, the exchange ratio can increase up to 1. 98x without harming Monmouth’s long term trend in earnings per share. Therefore, using the exchange ratio of 1. 98x, we can estimate the per share price paid for Robertson’s stocks. The estimated price would be $47. 52 (1. 98*24) per share, higher than Robertson’s current trading price of $44, therefore will attract the shareholders of Robertson’s to sell; but still on’t harm Monmouth’s long term trend in earnings per share. However, EPS plays very little role in deciding whether an acquisition is good or not, since a company’s net income after acquisition and total shares outstanding can be affected by many factors. Acquisition will bring synergies to the acquiring company, such as cost savings and efficiency. Also, the acquiring company may not need to buy the entire target company’s outstanding stocks to gain control. As a result, EPS could also change due to these factors. Thus, NPV is a better alternative to value an investment.