ECONM2021Cases in Financial Management|
THE TIMKEN COMPANY|
(Word Count: 4000)|
The Timken Company – a leader in the bearing industry, is considering acquiring the Torrington Company from Ingersoll-Rand. Torrington – an engineering solutions segment of the Ingersoll-Rand. The main motive of acquisition is to enhance Timken’s market share and product base. Operating synergies are highly expected from this merger with 80 million cost savings by the end of 2007. The presented analysis, recommends in our opinion, the best course of action in the proposed acquisition of the Torrington Company: * Both companies operate and compete in same business and therefore, Timken is seeking substantial operating synergies from this largest acquisition of its history (80 million cost savings by the end of 2007). Timken expects to expand its worldwide business base with new products and services as both companies have only 5 percent overlap in their product offerings. * Stand alone value of Torrington based on DCF = 533 m.; based on industry multiples = 1150 m. * With synergy value of Torrington based on DCF = 1113 m.; based on industry multiples = 1261 m. * Timken, which has a BBB rating and a leverage of 43%, should be worried about losing its investment grate rating for further debt financing. * Ingersoll-Rand is valued and is suggested to accept at least minimum price of 533 million dollars and as high above this as could be negotiated. However, a price between a range of 880 and 950 million dollars is considered feasible for Timken to pay, after accounting for the expected synergies and the expected premiums above market price, as expected by shareholders of the target company. * This deal is beneficial because of the expected synergies of approximately 500million and therefore Timken should go forward with this acquisition. * The spare debt capacity is not sufficient to finance the whole deal. Therefore the combination of both debt and equity financing is recommended for acquisition. To maintain investment grade rating, it is recommended for Timken not to exceed 50-55% (148 m.) leverage accounting for additional debt capacity realized after the acquisition. Founded in 1898 by Henry Timken, the Timken Company is a worldwide leader in the bearing industry with headquarters based in Ohio, America. Meanwhile, Timken is considering a strategic horizontal acquisition of the Torrington Company. Torrington was established in 1866 as a leading needle company which later expanded and moved into other products including a new line of ball bearings for automobile industry. Ingersoll, a global diversified manufacturer of industrial and commercial equipment and components, acquired the Torrington Company in 1969. It now is a sub-segment of one of the four main segments (Industrial Solutions Segment - see Figure-1 for percentage consolidated sales for each segment) of Ingersoll with sales of $1.2 billion in 2002 (constitutes 34% of Industrial solution segment).
Figure-1: Ingersoll-Rand’s percentage Consolidated Sales for each segment Managements of both companies have approached each other to negotiate a friendly deal. Timken initially decided to buy only the industrial segment of Torrington but later, with clear insight, Timken decided to buy Torrington in entirety (sales approximately equal across both segments). Considerably larger than the initial acquisition plan, this decision however is in line with management’s desire to increase market share within the global bearing industry. The main issue is to evaluate expected synergies and the price to be paid for this acquisition. Once the price is agreed upon, mode of payment is another important subject to settle on. This report intends to present a detailed valuation of Torrington Company and the synergies expected from its acquisition. Further argument is about whether Timken should go forward...