1. DESCRIPTION AND GOALS OF THE CASE
2. QUESTIONS YOU MUST ANSWER IN YOUR REPORT
3. APPENDIX 1: CONFIDENTIAL SUPPLEMENTARY INFORMATION FOR MANAGEMENT OF FLINDER VALVES AND CONTROLS 4. APPENDIX 2: CONFIDENTIAL SUPPLEMENTARY INFORMATION FOR MANAGEMENT OF RSE INTERNATIONAL 5. SUPPLEMENTAL TECHNICAL NOTE: VALUATION AND MERGER NEGOTIATION
CASE 43: FLINDER VALVES AND CONTROLS INC.
DESCRIPTION AND GOALS
SET IN MAY 2008, THIS CASE REFLECTS THE SEPARATE PERSPECTIVES OF CHIEF EXECUTIVE OFFICERS TOM ELIOT AND BILL FLINDER AS THEY APPROACH THE NEGOTIATIONS OF RSE INTERNATIONAL CORPORATION TO ACQUIRE FLINDER VALVES AND CONTROLS INC. YOUR TASK IS TO COMPLETE A VALUATION ANALYSIS OF THE TARGET AND BUYER AND TO NEGOTIATE A PRICE AND EXCHANGE RATIO WITH THE COUNTERPARTY.
THE CASE HAS THE FOLLOWING GOALS:
• Exercise valuation skills: The case affords opportunities for valuation based on discounted cash flow, comparable transaction multiples, and current market prices. Also included are such valuation details as options and contingent interests, operating synergies, gains from horizontal expansion, and the need to satisfy various stakeholders.
Illustrate practical concerns about mergers and acquisitions: Additional questions the buyers and sellers face include setting the exchange ratio of shares, tax exposure, dilution, and voting power.
Questions for your report:
Using the case and the supplementary data in Appendices 1 and 2, how do you see FVC’s situation? What are the strengths and weaknesses of FVC and RSE? Why should the two companies want to negotiate?
What is FVC worth? What are the key value drivers?
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? How did you estimate those values?
Do you recommend that RSE pays in cash or stock? If stock, what exchange ratio do you recommend?
In a merger there are two parties with asymmetric information, that is, when they come to the negotiation table one party has information the other party does not and vice versa. For example, top management has better information about the strengths and weaknesses of the firm, knows about major structural changes in the firm, or is knowledgeable about a major expansion of the firm into new foreign markets. The information in appendices 1 and 2 reflects the type of information only the top management of firm posses. Use it for your analysis.
FLINDER valves and controls inc.
Confidential Supplementary Information for Management of Flinder Valves and Controls
As Bill Flinder neared retirement, the idea of selling FVC to a bigger firm seemed almost necessary. He had a good top-management team, but he didn’t think any one of them could step in and run the show alone. He found stability in the RSE International combination that was worth something to him. In the increasingly global market place with more costly development, FVC needed a deep-pocketed partner to expand and to bankroll more research. Flinder believed that the company would also benefit from gaining access to a large marketing and distribution network. As the company continued to grow, it would need to gain production know-how for high-volume manufacturing. Flinder Valves did not have this kind of expertise. Finally, there had been an increasing trend of consolidation in Flinder Valves’ industry over the last year. Flinder feared that without a well-financed partner, the company would be swamped by competition. He was intrigued with the possibility that Flinder Valves might be more fully valued if it were part of a larger, more diversified enterprise. Thus, when the merger opportunity with RSE International Corporation came along in 2007, Flinder determined to make it work as best as he could.
Flinder believed that FVC had alternatives to this deal. Rockheed-Marlin Corporation, a large...
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