The Timken Company to Acquire Torrington
This memo will examine Timken Company's decision to acquire Torrington by examining the stand-alone value of Torrington, the synergies of this acquisition and the effect on Timken's investment grading. Acquiring Torrington seems to fit well with Timken's long term growing strategy. Torrington and Timken share 80% of their customers but only overlap 5% in their product offerings. Not only would this allow customers to make Timken a one stop shop for many of their needs but also according to a survey done by the University of Michigan, companies that were integrated were more profitable than those who focused on only one good. Acquiring Torrington would help in their efforts of becoming more global by increasing their presence in the global bearing market from 7% to 11%, making the two companies combined the third largest producer of bearings in the world. Finally, the acquisition of Torrington could give Timken an expected annual cost savings of 80 million dollars by the end of 2007, which are the expected synergies. Per calculation, Torrington’s stand-alone valuation is 192.789 million dollars (see Exhibit X), with the assumption that NWC equals 13.5% of sales. All of the numbers in this Exhibit are from the attachments of Timken case. EBIT, capital expenditure, net sales, and depreciation expense are from Exhibit 5 of the Timken case. Tax rate is calculated based on Timken Corporate Income Statements from Exhibit 1 of the Timken case. For the WACC calculation, cost of equity is calculated the assumption of a risk premium of 6.5%, since the market premium decreased over time from 7.1% to 4.7% and it is reasonable to assume that the market premium would be close to 6% by 2002. Risk free rate and cost of debt is from Exhibit 9 of the Timken case. With the assumption that Torrington and Timken are similar to each other, beta is drawn from Exhibit 8 of the Timken case. Then, the weights of equity and debt are...
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