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Yeats Valves and Controls Inc.

Case Study

Case Studies in Finance Class: Case Discussion in Finance Submission Date: 23.12.2012

Case Discussion in Finance – Yeats Valves and Controls Inc.

1 2 3 3.1 Issue Statement Is there a strategic fit between Yeats and TSE? Data Analysis Calculation of the WACC 4 5 6 6

3.1.1 Return on equity ............................................................................................................................ 7 3.1.2 Return on debt ............................................................................................................................... 8 3.2 3.3 3.4 4 DCF Analysis Using multiples what is the value of Yeats? Comparison firm value and stock value Recommendations 9 11 12 13

2 Andrea Auer, Tanja Bertossa, Denise Grittner, Dominik Willi

Case Discussion in Finance – Yeats Valves and Controls Inc.

Executive Summary We have been asked to advise Yeats Valves and Controls Inc. (YVC’s) how they should proceed with their business. On the next pages we are discussing if a merging with TSE International Corporation (TSE) makes sense. YVC’s and TSE have different strategies. YVC’s makes the largest part of its profit in one area – aerospace and defense sector. They are producing high quality products. TSE is a large company with a wide range of products. They are operating international and are known as a low cost producer. In chapter three we are discussing if the two strategies between those companies match together.

First we calculated the weighted average cost of capital (WACC). It is based on the assumption of a stable debt/equity ratio. YVC’s has no outstanding debt. We first had to compute return on equity and return on debt. To calculate return on debt for TSE we have taken the rating of a Baa Corporate Bond.

To find the present value of the future cash flows we used the discounted cash flow (DCF) method. It can be used to find the fair value of a firm. This method of valuing asset or a company uses the concepts of the time value of money. In our calculation we considered working capital, capital expenditures and depreciation.

Furthermore we calculated a price multiple. We just took price/earnings (P/E) ratio into account, because we did not have enough data to calculate further ratios. With those ratios it is possible to make estimation for the future value of stock returns as well as of the total value of the company. We recognized that the stocks for both companies are undervalued.

All calculations are done with number from 1999 except the cash flows within the DCF- Analysis. The detailed calculations are available in a seperate excel sheet.

3 Andrea Auer, Tanja Bertossa, Denise Grittner, Dominik Willi

Case Discussion in Finance – Yeats Valves and Controls Inc.

1

Issue Statement

YVC’s has been founded in 1980. Since retirement neared Yeats, CEO of the firm, started to make future plans for the company. Serious negotiations about a merging with TSE International Corporation, a well-known competitor, started in the late of 1999. If the merging would take place Bill Yeats would remain as CEO of YVC’s and the company would become a subsidiary of TSE. Nearly 50% of the profit of YVC’s is derived from special applications for the defense and aerospace industries. Auden Company, which held later 20% of the common stock of YVC’s, was a major foreign distribution channel. About 15% of sales from Yeats products were generated by Auden. Even through the currency crisis YVC’s stayed stable. Better market conditions and the introduction of new products in the aerospace and defense industries provided an auspicious future outlook for the growth opportunities of the company. Auden Company indicated their interests in merging with YVC’s. The idea had not been further developed. As time passed selling the company seemed nearly necessary. Reasons were the retirement, which got closer as well as the fact that...