Hvb Montagne Essay

FIN 450 Homework 3 – Monmouth

Company Information

• If Monmouth merger, Monmouth stock wld show px increase… & liquidity
• On condition that Robertson val = $50/sh
• Need to get right px & offer terms acceptable to Robertson mgmt. and LT ROI /EPS for Monmouth.
• Latest Stock of Monmouth=$24/sh
• Latest sh px of Robertson = $44/sh

1. If you were Mr. Vincent, executive vice president of Monmouth, Inc., would you try to gain control of Robertson Tool in May 2003?

Yes. Monmouth had tried to acquire Robertson Tool in March 2003 but failed.

Moreover, Monmouth had mentioned their 3 acquisition criteria and Robertson Tool passed exactly all of them:

1. If Monmouth acquired Robertsoon, they could become one of the leading players in the hand tools industry

2. Robertson was in a fairly stable tools industry with a product line of small ticket items (scissors & shears; clamps & visors)

3. Robertson was one of the largest domestic manufacturers of cutting edge hand tools with 50% market share of clamps & visors and 9% (2nd largest) for scissors and shears. Plus, Monmouth can tap on their large European distribution system.

Monmouth felt that they could definitely expand Robertson’s sales growth from 2% to the industry benchmark of 6-7%. Also, it was attractive as the cost synergies would allow Monmouth to reduce COGS from 69% to 65%, SGA from 22% to 19%

1. **What is the maximum price that Monmouth can afford to pay based on a discounted cash flow valuation.

To estimate the intrinsic value of Robertson Tool under Monmouth, we used DCF on Robertson’s projected Free Cash Flows through the Cash Flows From Assets (CFFA) calculation method.

Calculating 5 years CFFA projections and discounting to PV

Firstly, we used the projected income statement figures from Exhibit 4 to kick start our estimation. To derive CFFA, we need Operating Cash Flows (OCF), Net Capital Spending (NCS) and Changes in Net Operating Working Capital (ΔNOWC).

OCF is derived from the formula: EBIT*(1-TC)+ Depreciation

NCS is derived from simply projected Capital Expenditures found in Exhibit 4.

We do not have sufficient information with regards to ΔNOWC.

CFFA is derived by: CFFA = OCF – NCS – ΔNOWC

This gives us the 5-year projections for CFFA as shown in the Appendix to this paper.

Discounting Terminal Value (TV) to PV from Year 5 onwards

We also assume that Robertson will grow at a constant rate from Year 5 onwards at a growth rate of 6%. This is the lower of 6-7% of sales growth forecast for the industry as stated in the case, where Monmouth believes that Robertson has “all the necessary strengths” to achieve this growth rate if they make certain operational changes. This means we can use the perpetuity formula to find the PV of the terminal value.