Analysis

This portion of the report is based on analyzing the before merger valuation of Flinders
Values and Controls Inc. (FVC) and RSE International Corporation. In addition to this,
expected performances of both the companies after the merger have also been evaluated.
In order to evaluate the expected performance of these companies before the merger,
WACC is calculated and the value of WACC for FVC and RSE is 9.2% and 9.4% respectively
(Exhibit 3).
For the WACC calculations, risk-free rate is assumed to be 4.52 % (30-year bonds) whereas,
Market premium is assumed to be 5.5 % (geometric average) for both the companies.
However, Based on the performance of past, the growth rate of the future expected
performance is calculated during the time period 2008 to 2013.
From the analysis of the before merger valuation of Flinders Values and Controls Inc. (FVC),
it is determined that the enterprise value of a company is $856,518 while the share per
value is $351.03 according to the DCF valuation method. However, the enterprise value of
RSE International Corporation is $32,514,074 whereas; share per value is $0.52. Furthermore,
expected sales and net operating profit after taxes (NOPAT) of both the companies for the
year 2008 to 2013 are calculated on the basis of average growth rate of the past years given
in the exhibits.
The sales of FVC have assumed to increase at 8.63% growth rate from 2008 to 2013 while
sales of RSE projected to increase at 9% growth rate during the same time period. The Cost
of Goods Sold is assumed to be 70% for FVC while for RSE it is assumed to be 79% of the
revenue for all the six years. The expenses are assumed to be growing at a 5.82 % rate for
FVC while expenses for RSE are supposed to be at 4%. The Tax rate is expected to be 40% for
both the companies. The equity value/market capitalization of both the companies is around
$100 million and $1.4 billion for FVC and RSE respectively. In addition to this, the current
price per share of the FVC and RSE are $39.75 and $0.52 respectively (Exhibit 1 &2).The per
share premium of the RSE International Corporation is expected to be $0.48 whereas,
expected per share premium value of FVC is $ 0.45 from examining the after merger worth
of both the companies (Exhibit 4).
This means that both the companies will get the expected premium over their current per
share price as well as expected inflation is 7% of determining the value of both companies
after merger. Moreover, expected PV of the cash flow value of RSE after merger is
$30,144,789 while expected PV of cash flows of FVC is $1,091,150. The growth rate and
discount rate are calculated while considering the expected inflation for evaluating the post-
merger worth of both the companies (Exhibit 4).
Recommendation
From the above analysis of expected pre-merger performance Of FVC and RSE as well as
their after merger expected worth and performance it is recommended that both the
companies should go for the merger. As this merger would provide both the companies
great opportunities for growth and also enhance the value of these companies in the
industry.
Furthermore, post-merger results are promising for both the companies and allow the
companies to get the benefits from the opportunities that explore after the merger.
However, there are several benefits for both the companies that would help them
to increase the worth of their shares and to get the understanding and hold of the synergies
from the merger (Exhibit 4). Therefore, due to all these advantages, it is recommended that
RSE should acquire FVC as FVC has strong and experienced management team as well as
expected high performance in the future...................................

Strengths and Weaknesses of FVC

Strengths
1. The company is highly innovative in the production of products related to the aerospace
and defense industries.
2. Flinder Valves and Controls is a well-equipped technological advanced company due to
which it efficiently handles the small manufacturing orders.
3. The Company has developed a vast system of research and development in order to
align customer needs with the dynamic environment of the industry.
Weaknesses
The company is highly unable to manage its cost structure due to which it was highly paid
greater than its earning.
Strengths and Weaknesses of RSE
Strengths
RSE International Corporation possesses the diversified portfolio of its products that strongly
contributes to mitigating its market risk.
One of the most advantages, strength of the company is its strategic alliance with its
suppliers due to which the company is famous as the low-cost producer with the ability to
sustain the quality of its products.
Weaknesses
The company possesses a weak position in the financial market with the beta ratings of Baa
due to which the RSE is paying 6.98% on its debts.
Why should the two corporations want to negotiate?
Both companies want to negotiate because it was still unclear that whether the deal will be
settled through equity in the form of stock or in cash.
The negotiation has also revealed that Flinder Valves and Controls will not lose their identity
after merger and will not lay off its staff. However, RSE also wants to settle on these terms.
What is FVC worth? What are the key value drivers? USE DISCOUNTED CASH FLOW
VALUATION.
With the help of discounted cash Flow valuation, the company gets the idea of its current
worth. Currently, the price of a single share of the company is $39.75 however, on the basis
of DCF the results show that the company will progress in the future, and its per share cost
will be 318.054. Hence, from the perspective of FVC, the company must negotiate on the
basis of its potential performance results through DCF and must settle the deal at a price
higher than the spot price.
If the company does not go for mergers and concentrates with its current strengths then the
advanced technology of the company will contribute as its key driver to its success.
What opportunity price do you think Flinder should offer to sell the company to RSE?
The Opening price would be above $39 for Flinder incorporation because the value of per
share price will be determined with the help of a discounted cash flow approach as it reveals
that the company will achieve the high level of growth before merger. However, the future
of Flinder is also bright because after merger forecast says that it will go to achieve
economies of scale. On the basis of DCF if the potential per share price of Flinder Inc. is $318
then they should never compromise on share price below its current price which is $39.
At what value should RSE/Flinder walk away from the agreement?
The current share price of RSE international is $21.98, and the share of Flinder Valve and
Controls Ins is traded at $39 per share. The current share price of both companies reveals a
stunning figure due to which both parties can walk away from the negotiation. From the
perspective of RSE, the company can negotiate on the point that they would not acquire
Flinder Valves and Controls at the share price of 39 dollars per share.
The reason given by RSE internationals is that their current share price is $21.98 hence; they
cannot acquire a company whose share price is far greater than the share value of RSE.
Furthermore, if RSE international will consider making Flinder Valves and Control as a part of
their company then this merger will be accrued at the price range starting from $21 to $30
and not more than that range. At this, there are greater chances that if RSE would not get its
desired bargain then it will leave the negotiation. On the other hand, Flinder incorporation is
currently trading its share at the price of $39 per share. It is possible that the company
whose growth is moving upward will compromise on low share price.
How did you estimate those values?
On the basis of growth rate, we have calculated all the estimated values as a percentage of
sales growth.
Do you suggest that RSE pays in cash or stock?
If RSE international stock price will increase then Flinder should settle for the stock because
the current per share value of RSE is $21.98 which is less than the price of Flinder Inc.
However, the calculations on the basis of DCF shows that RSE international will lose its stock
value in the coming years and will end up shrinking................................

Phân tích 1. Điểm mạnh và điểm yếu của FVC và RSE FVC có rất nhiều điểm mạnh. Đầu
tiên, nó có danh tiếng về kỹ thuật xuất sắc trong hầu hết các giai đoạn phức tạp của
doanh nghiệp và, kết quả là, thường là hợp đồng chính làm việc trên các thiết bị kỹ thuật
cao cho chính phủ. Một phần quan trọng của khối lượng và lợi nhuận của nó được lấy từ
các ứng viên đặc biệt cho các ngành công nghiệp quốc phòng và hàng không vũ trụ. Các
sản phẩm như vậy đòi hỏi kinh nghiệm kỹ thuật rộng rãi chỉ là một vài công ty có khả
năng cung cấp. Vì vậy, số lượng đối thủ cạnh tranh của FVC là nhỏ. Bên cạnh đó, FVC đã
có được nguồn nguyên liệu dồi dào từ nhiều nhà cung cấp cạnh tranh. Việc sắp xếp tiếp
thị được trình bày tốt bởi vì đó là đội ngũ kỹ sư bán hàng có tay nghề bán hàng cho các
nhà sản xuất máy móc. Thứ ba, nó có Công ty Auden, một công ty lớn trong một lĩnh vực
liên quan, là kênh phân phối nước ngoài quan trọng và tạo ra lợi nhuận từ thị trường
nước ngoài. Ngoài ra, FVC còn có một tổng thống nổi bật - Finder. Ông là một nhà
nghiên cứu giỏi theo cách riêng của mình và thường xuyên nhấn mạnh nghiên cứu và
phát triển liên quan đến các sản phẩm được cải thiện. Tuy nhiên, FVC có điểm yếu
riêng. Sự lãnh đạo của công ty được cho là dựa trên sự khởi đầu của nó trong lĩnh vực
này và kinh nghiệm thực tế của nó. Ưu điểm của RSE cũng rất rõ ràng. Đầu tiên, nó có
một loạt các sản phẩm như các thành phần công nghiệp tiên tiến, dây cáp, dây chuyền,
đai ốc và bu lông, đúc và rèn, và các sản phẩm tương tự khác. Ngoài ra, mỗi bộ phận đều
có nhiệm vụ và trách nhiệm riêng, giúp cải thiện hiệu quả của doanh nghiệp. Thứ ba, RSE
là nhà sản xuất thấp nhất và là đối thủ cạnh tranh khó khăn. Nhiều nhà sản xuất cung
cấp nguyên liệu thô cho RSE và các nhà máy quốc tế của nó rất phong phú, hiện đại
được trang bị tốt. Cuối cùng, Tom Eliot, giám đốc điều hành của RSE, và đội ngũ quản lý
của ông đã bắt đầu một số thay đổi để tăng biên lợi nhuận của RSE. Mặt khác, RSE cũng
phải đối mặt với rất nhiều thách thức. RSE đã phát triển rất nhiều kể từ khi nó được
thành lập vào năm 1970. Tuy nhiên, Eliot nhận thấy rằng sự tăng trưởng của công ty sẽ
đối mặt với những thách thức trong những thập kỷ tới.

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