Current Situation of Flinder and Tools Available
Flinder Valves and Control is at a point where it is seeking to merge with RSE international as can be observed from the regular meetings taking place between the two entities. The respective heads are in constant dialogue together with their senior advisers as they seek to identify the most efficacious mechanism to see the merger through successfully. Part of the agreement intimates that FVC is expected to be a subsidiary of RSE; though this is to happen in such a way that their identity is concealed (Schill, Bruner & Schill, 2017). There are a variety of factors that have been considered by both parties once they merge. Part of this pertains to the compensation mechanism and also the governance of the newly founded entity. Tom Elliot, the leader of RSE, is mainly attracted by the impressive management team at FVC and due to this, he is in support of retaining all the company`s employees. In this case, there will be no retrenchment of workers (Schill, Bruner & Schill, 2017). Besides, a recent contract offered to FVC by the government to develop military based hydraulic system termed as the widening gyre happens to be one of the leading aspects that caught Elliot`s attention (Schill, Bruner & Schill, 2017). FVC is, however, under a dilemma on whether to accept payment in the form of cash or acquisition of stock. Flinders CEO, Bill Flinder is also to receive an attractive package despite the fact that he is nearing retirement, all in a bid for him to train the incoming Chief Executive Officer (Schill, Bruner & Schill, 2017). Part of the tools used for valuation involves relevant capital market data obtained by the financial advisors of both firms. Flinder also offered the forecast of FVC corporate financial statement with the exclusion of the benefits likely to accrue from the merger. The former tools, nevertheless, appear to work best in determining the actual value of both organizations.
Using the case and the supplementary data in Appendix TN1, how do you see FVC's situation? What are the strengths and weaknesses of FVC and RSE? Why should the two companies want to negotiate?
One of the benefits that FVC is likely to experience as a result of the merger is the additional cash flow. In addition to this, there is a possibility of increased equity which will offer an opportunity for more research to be undertaken (Schill, Bruner & Schill, 2017). The entity is also at a vantage point since it is much admired and there have been prior attempts to purchase it. Additionally, the Company also gets to maintain its brand name even after it is sold. Flinders will also be in a position to retain all its employees (Schill, Bruner & Schill, 2017). Contrary to this, it is evident from the data that FVC has no prior debt. Upon acquisition, the entity will end up sharing the debt formerly acquired by RSE. Auden Company has also announced its decision to sell its stake of ownership once the merger is in force since Auden cannot see itself been in a position where they are minority shareholders in a superior entity.
It is apparent that the entity is among Russell top 1000 companies and hence has a more extensive distribution network compared to FVC (Schill, Bruner & Schill, 2017). Besides the firm is very competitive in its area of operation and also bears exceptional knowledge in production. The organization also has a project CORE which involves teamwork amongst all its employees (Schill, Bruner & Schill, 2017). Conversely, despite its numerous strengths, the entity`s shares have been undervalued on the stock exchange. The organization is also under constant pressure to maximize profits. Unfortunately, this entity also lacks international connection, and in this case, it is clear that Auden is not interested in being a part of RSE. There is a need for both Companies to negotiate since a means of payment has to be arrived at as well as a precise definition of roles to be taken up in respect of the new position attained.
FVC is valued at between $4710000 and $8478000 (Arzac, 2005). In this case, one of the critical drivers happens to be book value. Upon acquisition, RSE will end up being in control of all the assets owned by FVC. Besides, liquidation would also amount to the same. $4710000 is, therefore, the least price that the Company should be sold for (Arzac, 2005). The figure was obtained by taking the annual cash flow of the entity and multiplying by the industrial average. In addition to this, the application of book value is also instrumental in the process since it can be easy to determine whether or not a stock is overrated.
What opening price do you think Flinder should offer to sell the company to RSE? At what price should he walk away from the negotiation? How did you estimate those values?
The opening price that Flinder should offer is $8478000. This is the highest possible value of FVC and should be quoted when the negotiations ensue. Upon constant deliberation, Bill is not to accept a price below $4710000. If RSE quotes a price below this figure, he is expected to walk away. In addition to the aforementioned key drivers, the values are estimated by the earnings capitalization which is based on the future expected cash flow of FVC (Arzac, 2005). Besides, the Company has a superior cash flow with no debts.
Do you recommend that RSE pays in cash or stock? If stock, what exchange ratio do you recommend?
It is advisable for RSE to pay in the form of cash. Currently, its stock prices are undervalued and also offering cash would offer ample cash reserves for FVC to undertake further research on developing their products. Further still, the price of RSE`s shares is not compatible with those of FVC, and thus taking up the option of paying via stock would lead to further complications (Arzac, 2005). A cash transaction would also make it possible for FVC to reinvest and hence increase its profit margin (Arzac, 2005). Another possibility of accepting payment through stock is that FVC would be at risk of loss in case the prices of the stock drop. It is, nevertheless, accurate to state that a cash payment would be disadvantageous to RSE and advantageous to FVC.
Schill, M. J., Bruner, R. F., & Schill, M. J. (2017). Flinder Valves and Controls Inc. Darden Business Publishing Cases, 1-14.
Arzac, E. R. (2005). Valuation for mergers, buyouts and restructuring.
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