Diversification Criteria Set by Monmouth for Acquisition
RTC has not yet realized its full potential, despite the fact that it is capable of doing so. The company could be able to realize its full potential and become on par with its rivals if it is led by a management team with greater expertise (6 percent growth annually).
A diversified product offering that is both affordable and appealing to a robust customer base: The availability of hand tools on the market is quite consistent (not volatile like oil-related products). Additionally, the sector is so extensive that it spans 137 countries and includes over 15,000 retail locations in just the United States and Canada combined. Products with cheap prices include, for example, goods.
In order to be successful, a company has to be the most successful option available in its market. Despite the fact that there is proof that the firm can compete successfully, the organization does not offer any financial information. With a market share of fifty percent, Robertson is the dominant player in the clamps and vises industry all over the globe. Within the industry of scissors and shears, Robertson has the third-place ranking (9 percent market share). Monmouth’s long-term position will be strengthened as a result of the company’s acquisition of Dessex and Kroll.
In May 2003, I would attempt to take over Robertson Tools Company if I were Mr. Vincent, executive vice president of Monmouth, Inc. When the businesses get united, the sales forces from Monmouth and Robertson might potentially result in lower operating expenses. Higher earnings can be achieved by reducing additional costs as well. Both the p, as well as the cost of items sold, as the cost of items sold might be decreased. The industrial market is where Robertson excels, and the company has a robust European distribution network that will boost Monmouth’s product presence and sales there. Additionally, Monmouth Inc. has long been one of the top manufacturers of electrical utilities and appliances for the oil and gas sector. This acquisition would increase the company’s diversification, lessen its exposure to the industry’s vulnerability and volatility, and prevent it from being overly dependent on it.
The Acquisition Opportunity
Given its competitive advantages, Robertson presents a compelling acquisition prospect. According to the case, the company is a market leader in its two main product lines and one of the “biggest domestic manufacturers of cutting & edge hand tools.” When it produced high-quality items with well-known brands, the company was able to gain a 50% market share for clamps and vises. Robertson was the third-largest manufacturer in terms of market share for its second product line, which included scissors and shears. Last but not least, it’s critical to emphasize the significant advantages Robertson’s distribution network offers Monmouth. 2,100 hardware distributors in the United States and Canada were accessible to Robertson’s product marketing. The business has been successful in creating a global footprint and selling its products abroad as well. After the acquisition, Monmouth may also be able to reduce Robertson’s expenses. According to the example, two significant cost-cutting opportunities are COGS, which could be decreased to 65 percent of sales, and selling expenses, which could be decreased to less than 20 percent of sales. Overall, there are a few things to take into account when determining the risk of the acquisition, but Robertson is a desirable acquisition due to the possible long-term return and impact on Monmouth’s EPS.
Because the business was unable to obtain the necessary number of shares to purchase Robertson, Simmons’ takeover offer fell through. Simmons was now thinking about the possibility of a merger between Robertson and the NDP. NDP was considering using its own shares to purchase Robertson. Simmons would have to exchange its shares in Robertson for shares in NDP, therefore this was a bad scenario for them. According to Simmons, the NDP stock had not increased significantly and was only moderately traded on the stock exchange. Due to this, it could be difficult to buy the shares at the stock exchange in big amounts. When compared against NDP’s stock, Monmouth stock was a more desirable alternative. Due to Monmouth’s NYSE listing, it was significantly simpler to sell the shares. Simmons would gain if Monmouth acquired Robertson as opposed to NDP. Simmons purchased a sizable interest in Robertson for $52 a share, thus it was unwilling to resell the stock for less than $50 and incur a sizable loss on the deal. The alternative was for Simmons to sell Robertson stock, but it was trading at roughly $44, so doing so would also result in a loss.
The vulnerability of the business is what the Robertson shareholders are worried about. First, the corporation has seen below-average performance in terms of sales and profits. Along with having a small percentage of outstanding shares owned by management and family, Robertson Tool Company also has tight accounting and financial procedures. A trading price below the book value and a PE ratio below the industry average are indicators of the stock’s poor performance. These elements raise doubts because the stock appears to be trading at record lows due to a lack of investor interest.
In addition to Monmouth, there were other potential investors. The first one was The Simmons Company, a business that made nonferrous metals, tools, rubber goods, and electrical equipment. In the year 2000, it had also purchased 44,000 shares of Robertson stock. For a price of $42, The Simmons Company offered to buy around 75% of the outstanding shares of Robertson Tool Company. To lure the Robertson stockholders into a trap, the business provided a $12 premium.
Simmons ultimately only owned 23% of the shares, therefore there was no operating independence. The management of the Simmons Company believed that the combination of Robertson and Monmouth would be the second-best option since, after the merger, Simmons could convert its 8 percent ownership stake in Robertson into Monmouth common stock. The management of Simmons advised a share price of $50 to the management of Monmouth because they considered that the economies of scale and synergies anticipated following the merger will have a significant beneficial impact on the share price of Monmouth.
The Valuation approaches.
I would take into account the company’s Net Present Value valuation while weighing an offer to make. This would enable me to incorporate Robertson’s cash flows and time value of money into my appraisal. However, this model’s use would necessitate a precise discount rate, which may be challenging to ascertain, and projects with significant size differences are not always apparent in NPV calculations.
The Discounted Payback Period, which determines how long it will take to recover the initial cost after bringing all of the cash flows to the present value, is another tool that can be utilized in evaluating the offer to make. The Discounted Payback Period will be helpful in demonstrating to the Robertson family and the vast majority of stockholders that the acquisition will be advantageous in the time period presented because one aspect of the overall goal is to improve the long-term trend of Monmouth’s earnings per share over the next five years.
Last but not least, internal rate of return is equally applicable to business valuation. The time value of money is used in this method, which takes into account all cash flows while computing the results. It typically concurs with the NPV calculation as well, which strengthens the validity of the investment choice. However, because it uses the firm’s needed rate of return for comparisons, this approach also has drawbacks.
The DCF Analysis
For the company’s valuation, we have used the discounted cash flows DCF analysis method. For that we first have determined the WACC of the company by using the data give in the case. For the determination of WACC we added the product of cost of equity and weight of equity of the company with the product of cost of debt with the weight of debt of the company. Although the values for the weight of debt and equity were easily derived from the company’s balance sheet for the initial year, to determine the values for the cost of debt we divided the company’s interest expense with its current debt and for the determination of company’s cost of equity, we used the CAPM approach. For the determination of the values for the factors that CAPM includes, we used the comparable data given in the case.
When the WACC was calculated to be 16.45% by using the above-mentioned approach, we determined the present value of all the future cash flows of the company by discounting it with WACC. The NPV of the company is calculated to be $33.16 million. Whereas the equity value is calculated to be $64.16 million….
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