MRC, Inc. is a Cleveland based manufacturing company specialized in power brake systems for trucks, buses, and automobiles; industrial furnaces and heat treating equipment; and automobile, truck and bus frames. As till 1957 most of MRC's sales were made to less than a dozen large companies in the automotive industry, it was exposed to the risk inherent in selling to a few customers in a very cyclical and competitive market. Archibald Brinton, President of MRC, Inc., begun an active program of diversification by acquisition. The need for rapid diversification seemed compelling to minimize the risk and to explore new business opportunities. After several failed attempt of internal diversification, they realized the lack of knowledge of their management about businesses outside the automotive area. So acquisition brought them quick fix where it brought already knowledgeable people in their respective areas. By the end of 1960 the diversification campaign had resulted in five acquisitions, two of which were major transactions.
MRC Inc. through its diversification program had resulted in five acquisitions. Below is the history of MRC’s acquisitions:
Acquired J.O. Ross Engineering Corporation in exchange for 281,000 shares, added $27 million in sales. March 1958
Acquired Hartig Engine and Machine Company, Mountainside, New Jersey, for cash and notes October 1958
Acquired Transportation Division of Consolidated Metal Products Corporation, Albany, New York, and moved operations to Owosso, Michigan, Division April 1959
Acquired Nelson Metal Products Company, Grand Rapids, Michigan, for cash November 1959
Acquired Surface Combustion Corporation, Toledo, Ohio, for $23 million cash, added $38 million in sales.
After their fifth successful acquisition, the CEO of MRC Archibald Brinton faced with a dilemma of whether to buy American Rayon, Inc. AMERICAN RAYON, INC. (ARI)
American Rayon, Inc., a Philadelphia-based corporation, was the third largest producer of rayon in the United States. In 1960, ARI had recorded sales of $55 million and a pre-tax profit of $5 million. By early 1961, ARI’s stock value was on a decline trading at less than half of its book value on the NYSE. Consequently, ARI’s management was seeking the market and arrange a merger with a congenial partner. This is when it got the attention and interest of Mr. Brinton to acquire American Rayon, Inc. FIBER MARKET AND PRODUCT OVERVIEW
Fiber market consists of Rayon, Nylon and Cotton. Rayon’s market share was increasingly rapid until 1959 but started to fall by year 1960. Nylon was introduced in 1955 and was eating up the market for Rayon. It has achieved a good increase in market share every year.
1. 3rd largest producer of rayon in the US
1. Increased earning difficulties 2. $20M liquid assets
2. Rayon industry was declining
3. No short or long-term debt
3. Entry of new fiber products 4. Modern central manufacturing facility
Should MRC, Inc. acquire American Rayon Inc. (ARI) ?
Is MRC's management control system well suited to handle ARI?
To find out viability of MRC’s acquisition of ARI.
To find out how much should MRC pay for the ARI acquisition. 3.
To find the Net Present Value of ARI.
Growth is the explicit objective of the acquisition program 2.
Strengthen liquidity and borrowing capacity
Areas of Consideration
ARI is the 3rd largest producer or Rayon
ARI had over $20 million in liquid assets that were not needed for operations -
No short or long term debt
They had a modern manufacturing facility, their facilities can be retrofitted for new technology. -
MRC has a long history of successful acquisitions through its diversification campaign (therefore they have enough experience in handling risks and problems...
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