Monmouth Case Study

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Monmouth, Inc.
- Case Study -

Strategy

1) Describe briefly Robertson’s business and the key factors to succeed in it. How well is Robertson doing from an operational standpoint? What KPIs should one consider? Robertson is one of the largest domestic manufacturers of cutting & edge hand tools and a leader in its two main product areas: * Clamps and vises: the company holds a 50% share of a market estimated at $75-million, with a reputation for high-quality and a very strong brand name * Scissors and shears: the company holds a 9% share of a market estimated at $200-million, with an equally high reputation for quality From an operational perspective, the annual sales growth of 2% is behind the industry average of 6% per year, and profit margins are a third of other tool manufacturers. In Table 1 we compare Robertson’s efficiency ratios to the industry average: Efficiency Ratio| Robertson| Industry Average|

Collection Periods| 69| 52|
Inventory % Sales| 15%| 5%|
Operating Margin % Sales| 17%| 33%|
Return on Capital| 13%| 6%|

As the comparison suggests, there is considerable margin for improvement in Robertson’s inventory management and operating margin. However, even in these circumstances, the company has an above average Return on Capital and collection period; as such, there is considerable potential for upside under a new management team with tighter, more efficient controls. 2) In general, how might an acquisition benefit the acquiring firm’s shareholders (give four or five generic ways)? In the specific case of Robertson: Why is Robertson an acquisition target? Why are Monmouth and the other parties interested? Usually, an acquisition is pursued for some or all of the following reasons: * Increasing market share and geographical reach

* Realizing revenue (cross sales / up sales) and expense synergies (redundancies, rents) * Diversification of products (or conversely, divesting to focus on core businesses) * Reducing tax liabilities (buying a loss maker)

* Acquiring talent, especially if the target is a start-up * Vertical integration
In many ways, Robertson is a textbook acquisition target; it has a large number of openly held shares, it trades below its book value and is managed in an ineffective way. In essence, this means that taking over Robertson can be profitable even without any synergies. Simmons, whose actions are more typical of those of a financial buyer rather than strategic buyer, hopes to gain control, replace the board and unlock the underlying value of Robertson through broad changes to the way the business is run, including aggressive cost cuts and elimination of product lines. Monmouth, a typical strategic buyer, is looking to work together with existing management in 3 key areas: * Focusing on a limited number of profitable products, thereby reducing COGS from 69% of sales to 65% of sales, * Personnel redundancies reducing SG&A expenses from 22% of sales to 19% of sales * Revenue synergies, mostly focused on cross-selling and opening new markets for Monmouth’s products through Robertson’s European distribution system NDP, which most likely was approached by Robertson, rather than the other way around, is a “white knight” looking to capitalize on a good deal (and possibly other privileged terms) offered under the pressure of a hostile takeover. Valuation

3) Estimate Robertson’s value per‐share using Firm Value/EBIAT and P/E multiples for all comps and both recent Robertson data and operating improvement forecasts (where Firm Value in Exhibit 6 refers to market value of equity plus book value of interest bearing debt). Determine a price range. What pitfalls do you see in this exercise? What would you do to alleviate them? First, we assume that the definition of Firm Value refers to net debt, that is book value of debt minus cash. The only companies comparable with Robertson are Actuant, Lincoln Electric, Snap-On and...
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