The Timken Company

Matt Johnson

The Timken Company

The Timken Company has been leading the bearing industry for years and plans to continue to do so by acquiring the Torrington Company a rival competitor. This could be a very profitable acquisition since they only had a 5% overlap in product offering and the two companies’ customer lists overlapped by 80%. The problem that Timken faces however is how to finance this deal. Timken’s debt to capital is already at 43.1% and if they take on more debt they worry that credit agencies may downgrade Timken’s BBB investment rating. Our job is to find the best strategy to finance this acquisition that will prevent an investment downgrade.

The first options that we can choose from are financing with all equity through issuing shares to the public or by issuing them directly to Ingersoll-Rand. The next option available is to finance with all debt, this option will almost certainly force a downgrade. The final option would be to use a mixture of both debt and equity.

Before we determine the best financing option we need to first find out what the intrinsic value of the Torrington Company is so that we know how much we need to finance. I used the DCF₁ approach to value the company and assumed a 6.5% growth rate along with 2% inflation growth to forecast sales into 2007. For the WACC₂, I calculated the cost of debt at 1.24% and the cost of equity at 5.54% giving us a total cost of capital of 6.78%. With these calculations the DCF model gave Torrington a net present value of $722 Million which is cheaper than what analysts forecasted, but I believe it is accurate. However, we do expect $80 million in cost savings, but also anticipate $130 million in integration costs. This leads us to our total amount needed for financing of $772 Million.

Now we move onto how we should finance a $772 Million acquisition. First option is to finance using only