Merger and Acquisition of Robertson Tool Company

TO: Harry Vincent, Executive Vice President of Monmouth, Inc.

FROM: Group 1- Qinyue Qian (lead writer), Sijia Liu, Jiani Zhou

DATE: April 8th, 2018

SUBJECT: Merger and Acquisition of Robertson Tool Company

Monmouth is the leading producer of engines and massive compressors and it has diversified its background through acquisitions. It is looking to gain control of Robertson, but Simmons and NDP are also both on the list of potential acquirers. The values of current and post-merger Robertson and the merger synergy value, with consideration of the other competitors’ offer packages, are used to determine Monmouth's ideal offer price.

Strategic fit between Robertson and Monmouth

Monmouth is determined to become a major player in hand tool industry and has built a solid foundation through acquisitions of Dessex, Keane and Kroll. Three criteria for choosing the acquisition firms were established with the full review of Monmouth’s acquisition strategy. Roberson is a strategic fit for Monmouth since it fulfills all three criteria.

Robertson is one of the largest domestic manufacturers of cutting & edge hand tools, which fulfills the Monmouth’s first and third criterion. Apart from its leading position, Robertson has 50% share of the $75-million market for clamps and vises and a 9% share of the $200-million market for scissors and shears. The broad business lines provide stability and thus fulfill the second criterion of Robertson.

Meanwhile, Monmouth’s management expertise, overlaps with Robertson’s sale force and distribution channel can help reduce Robertson’s costs and improve its turnover rate.

Robertson’s pre-merger, post-merger and synergy value

We use the APV valuation to calculate equity value per share of Robertson. It’s $18.6 per share in the pre-merger valuation and $76.3 per share in the post-merger valuation. The synergy value is 33.6 million, indicated by the difference between the 22.9 million pre-merger and 56.5 million post-merger valuation. The specific process of equity value per share calculation is indicated as follows:

• calculate the free cash flow from 2003 to 2007 based on the operating assumptions
• choose the average asset beta of comparable companies as unleveraged beta and 30-Year U.S. treasury bond rate as risk-free rate, then we get asset return rate of 8.09% as the discounted rate using the APV method
• use 8.09% to get terminal value at year 2006 as well as the present value of free cash flow and terminal value
• use their long-term debt of 12 million to multiply with 40.9% tax rate to get the tax shield
• discount terminal value and free cash flow, plus tax shield, minus the net debt to get equity value. Divide equity value by total share number to get the equity value per share

Implied synergies

The implied synergies value is 33.6 million. After merger, Robertson is estimated to have higher inventory turnover rate, lower COGS % Sales and SGA % Sales, which lead to higher NOPAT, lower change in NOWC and thus higher free cash flow.

The improvements listed above are likely tied to the higher management efficiency and better distribution channel at Monmouth. Monmouth has a great management team after a series of acquisitions. With their expertise and advice, Robertson can reduce its segments and focus on lean product lines, which can increase its management efficiency. Meanwhile, utilizing Monmouth’s common sales, distribution system and joint advertising, Robertson will be able to reduce its administrative costs and potentially have a higher consumer market share.