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Flinder Valves and Controls Inc Case Solution
Flinder Valves and Controls Inc. is merging with RSE International, as demonstrated by the periodic communication between the two corporations. The respective heads for Flinder Valves and RSE International are constantly communicating with their senior advisors to isolate the most effective mechanism for profitably completing the merger. A provision of the agreement implies that FVC will be a subsidiary of RSE, though this will be done so that their identification will be obscured. Both parties have taken into account several factors when deciding to combine.
Element of this is related to the financial and organizational mechanisms and the governance of the newly formed entity. Correspondingly, Tom Elliot, the leader of RSE International, is primarily drawn to FVC by the impressive management team, and as a result, he is in favour of retaining all company employees, implying that there will be no layoffs. FVC, on the other hand, is torn between accepting cash payments and stock acquisition. For the merger to be truly successful for both Flinder Valves and RSE International, it is important to determine the accurate value of the companies and then propose the negotiations to cater to each company's demands.
Following questions are answered in this case study solution:
What do you believe Flinder Valves is worth? What key financial assumptions determine the range of high and low values in your valuation analysis? Also, draw on any other valuation approaches and information that you can.
What are the advantages and disadvantages of a combination between Flinder Valves and RSE International? What is your best alternative to a negotiated agreement with your counter party?
What risks do RSE International and Flinder Valves face in this proposed merger? Consider a range of transaction, financial, and operating risks. What effect do these risk factors have on the value of Flinder Valves?
From your perspective as a negotiator for your company, what are your goals in this negotiation? What do you expect are the goals of the other team?
Develop a negotiating strategy, including an identification of your opening and walk-away bid (ask) prices. The pre-negotiation report will require you to justify your walk-away price, therefore, list your three most important negotiation objectives and discuss what you hope to achieve and why?
Case Study Questions Answers
1. What do you believe Flinder Valves is worth? What key financial assumptions determine the range of high and low values in your valuation analysis? Also, draw on any other valuation approaches and information that you can.
Flinder Valves has an optimistic financial position. As evident from the information in Exhibit 2, it is clear that its sales have been increasing year after year. In 2008, it can be seen that the first quarter did approximately 20% better than the first quarter in 2007, and this, along with Flinder being debt-free, makes Flinder Valves a striking option for the RSE International Corporation.
To determine the valuation of Flinder valves, the Discounted Cash Flow method can be adopted, which seeks to assess a company's worth by discounting future cash flows to present value and can be done in this case as Flinder has projected its financial statements till the year 2012. From 2007 till 2012, Flinder is projecting sales growth of approximately 10-11% (10.9%) every year. To derive the value, it is important to use the weighted average cost of capital (WACC) of the Flinder Valves. However, it is imperative to note that while the DCF method gives an insight into the inherent value of the worth of the company by taking into account the financials of the company, the central information of terminal value is correlated to the enterprise value, which means unless there is complete surety regarding the steady growth rate of the company, the values can likely be misinterpreted.
While quantitative analysis and judgement are important when making crucial decisions for a company, equally important are the quantitative interpretations to gauge the standing and value of a company. In this particular case, Flinder Valves is doing positively, considering all its plants are suited to meet the contemporary demands, and it has been noted that since the products manufactured by Flinder require extensive engineering experience and since Flinder is known for engineering excellence, it has a competitive edge over the complex phases of business.
2. What are the advantages and disadvantages of a combination between Flinder Valves and RSE International? What is your best alternative to a negotiated agreement with your counterparty?
The advantage of the combination between Flinder Valves and RSE International is that it would give both companies a competitive edge in manufacturing the excellent products they have been involved in even before the proposed merger. As a result of the merger, new avenues for R&D will be opened, leading to product development and market expansion. Once the merger is through, RSE International will be able to gain positively from the skilled and pertain in excellent engineering staff of RSE International while also being the half-bearer of the losses. However, there are also several disadvantages to this proposed combination between Flinder valves and RSE International.
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