Monmouth Report

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EXECUTIVE SUMMARY
This report will analyze the price Monmouth should pay to acquire RTC by using DCF, market multiple, and stock exchange approaches. Rationales on why RTC is a good acquisition by Monmouth
RTC is a good acquisition by Monmouth as it falls under their three established criteria for all acquisitions, and also because the future potential profits, growth opportunities and synergies from this acquisition is likely to be greater than the cost of this merger. Sources of synergy gains

With the past acquisitions of Dessex Rule Company, Keane Corp, and Kroll Electric Corp., Monmouth was able to gain a combined sales force, an established distribution system, a knowledgeable expertise in the hand tool business, and quality and leading product lines that are already in the market. With the acquisition of RTC, Monmouth would be able to increase profits by lowering the cost of operations using the combined sales, marketing, and distribution channels. Profits would be greater from these synergy gains as advertising and sales expenses are reduced from 22% to 19%, as well as the costs of goods sold which could be reduced from 69% to 65%. The merger of the two companies would also get a synergy gain as they complement each other in sales earnings and distribution, where RTC has a strong edge in the industrial market and a strong European distribution system, while Monmouth has established strengths in the consumer market and a distribution system in the US and Canada. RTC would work well with Monmouth as they can pull and push products into each other’s markets, resulting in an increase of sales and market territories. With the opportunity created by the lack of shareholder support for the NDP offer, Monmouth would be able to acquire RTC and gain these substantial synergy gains by offering a fair price for this merger to satisfy all shareholders. To ensure its offer is accepted, Monmouth must satisfy RTC (20% equity), RTC shareholders (49.7% equity), and Simmons (30.3% equity). RTC will be satisfied if they feel their high-quality products remain intact and their management retains some level of control, which would not happen if the Simmons offer were accepted. RTC shareholders will be satisfied if the values of their share increase. Simmons will support the Monmouth merger if the offer price is at least $50 per share. A Monmouth-RTC merger creates higher projected earnings, which will likely convince all shareholders to accept the deal. Discounted Cash Flow Analysis

RTC bidding prices can be determined by using the discount cash flow approach, which is based on the projected future cash flows for the next five years (2003-2007).

The CFs were calculated in the following manner:
CF = NOPAT + Depreciation – ∆NWC – CAPEX, while NOPAT = EBIT – (EBIT * Tax rate), and EBIT = Sales – COGS – SA&G + Depreciation.
However, in order to determine the future Sales, Cost of goods sold, Selling, administrative and general expenses, some essential assumptions were made. To determine the bidding RTC share price ranges, we have used three scenarios: optimistic, pessimistic, and neutral. The WACC and Tax rate were given to us as 9% and 40%, respectively. Optimistic Discounted Cash Flow Analysis

If all things go perfectly well after the RTC merger, we can assume the following:
Sales Growth = 6%; COGS % of Sales = 65%; SA&G % of Sales = 19% Pessimistic Discounted Cash Flow Analysis
In case that the RTC merger does not realize any synergy gains, we assume the following:
Sales Growth = 2%; COGS % of Sales = 69%; SA&G % of Sales = 22% Neutral Discounted Cash Flow Analysis
In a neutral scenario, the RTC merger will produce a moderate amount of synergy gains in sales growth. This assumes the same forecasted cost of goods sold and selling, administrative and general expenses found in the pro-forma report of RTC:

Sales Growth = 4%
(Millions of Dollars, Except for Percentages)| 2003| 2004|...
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