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MONMOUTH CASE

STUDY
Presented by: Tyla Webber, Freddy Seageng and
Sven Muller
Introduction
The following case will represent various
facts regarding decisions of Monmouth
Incs management team regarding the
future movements of the organisation to
acquire the Robertson Tool Company
who is a leading manufacturer of hand
tools.
Introduction (cont)
Monmouth-
1. One of the leading producers of motors as well as
compressors which forced natural gas through pipelines
and oil wells.
2. Management became concerned that the company was
too dependent on sales into these industries which had
large fluctuations.
3. Earnings had been above average but there were still
concerns that there was a decreasing interest in the stock.
4. Efforts by Monmouth to lessen the volatility in their
markets proved to be unsuccessful. They moved forward
on various business acquisitions but were still left in a
highly sensitive position within the economic conditions.
Introduction (cont)
Monmouth-
5. Launched full review of the companys acquisition
strategy- Found that they should only acquire
leading companies.
6. Companies were selected in order to ensure that
Monmouth would be able to become a major player
within the industry.
7. Industry also had to be stable.
8. Monmouth then expanded into the hand tool
industry through acquisition of the Kroll Electric
Corporation but was not as successful with the
Robertson Tool Company.
Introduction (cont)
Robertson Tool Company-
1. One of the largest domestic

manufacturers of cutting and edge


hand tools.
2. Leader in its two main product areas.

3. 20% owned by the Robertson Family


and Robertson management.
4. Rest of the Robertson stock is publically

owned.
Introduction (cont)
The case involves a bidding contest between Monmouth as well
as two other companies which are making final tender offers to
gain control as they have already acquired part of the
outstanding Robertson stock.
We aim to answer the following questions-

1. Why Monmouth should gain control of Robertson?

2. What is the maximum price Monmouth can afford to pay for

Robertson Tool using a DCF analysis?


3. Why is Simmons (other competing firm) eager to sell its

position to Monmouth for USD 50 per share?


4. What offer would we make to gain the support of the

Robertson family and the great majority of shareholders, while


improving the long-term trend of Monmouth's EPS over the
next five years?
If you were Mr. Vincent, executive vice president of Monmouth, Inc., would you try to gain control of Robertson Tool in May 2003?

If we were the CEOs of Monmouth, we would


definitely try to gain control of Robertson Tool. Upon
analysis of the 3 criteria that the company being
acquired should meet:
1. The industry should be one in which Monmouth could

become a major player.


2. The industry should be fairly stable, with a broad

market for the products and a product line of small


ticket items.
3. It was decided to acquire only leading companies in

their respective market segments.


. It is evident that Robertson Tool fits all 3 criteria
If you were Mr. Vincent, executive vice president of
Monmouth, Inc., would you try to gain control of
Robertson Tool in May 2003? (Cont)

What makes the deal so attractive-


1. Robertson is the largest domestic

manufacturer and leader in its two main


product areas.
2. Extremely good distribution system.

3. Holds 50% share of the $75 million


market.
4. Product lines have a very good

reputation for quality.


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

5. Monmouth can take advantage of Robertsons


strong European distribution system to sell its
other products.
6. Administration expenses can be decreased
from 22% to 19%.
7. Cost of goods sold can be decreased from 69%
to65%.
8. Sales increase could be expected from
Robertsons pulling more Monmouth products
into the industrial market and consumer
market.
What is the max price that Monmouth can
afford to pay based on a DCF analysis?

Monmouth interested to purchase and


take control of Robertson
Valuation model
Uses forecasted cash flow projections
and discounts them to arrive at their
present value
The sum of the discounted future cash
flows = Value of Firm in todays terms
WACC as discount rate
What is the max price that Monmouth can
afford to pay based on a DCF analysis?

To calculate free cash flows:


EBIAT
+ Depreciation
s in working capital
capital expenditures
= free cash flow

Do this for each forecasted year


Note: Businesses run in perpetuity we assume they
carry on for eternity
Need to calculate terminal value
What is the max price that Monmouth can
afford to pay based on a DCF analysis?

WACC
Weighted Average Cost of Capital

Rate at which a company is expected to

pay on average to all its security holders


to finance its real assets
WACC = W K + W K
d d e e
What is the max price that Monmouth can
afford to pay based on a DCF analysis?

Steps taken to calculate WACC:


WACC = W K + W K
d d e e
Debt-Equity ratio to find Capital Structure
Weight of Debt vs. Weight of Equity
Cost of Equity
Ke = rf + (rm rf)
Look familiar ? CAPM model
Cost of Debt
After-tax cost of debt = pre-tax cost of debt x (100% - tax
rate)
What is the max price that Monmouth can
afford to pay based on a DCF analysis?

Calculate the Cost of Equity


Information given:

*assumed Beta of 1
Ke = rf + (rm rf)

Ke = 4.10% + 1(6%) = 10,10%


What is the max price that Monmouth can
afford to pay based on a DCF analysis?

Calculate the Cost of Debt


Information given:

Pre-tax cost of debt


0,8 / 12 = 0,067

After-tax cost of debt = pre-tax cost of debt x (100% - tax


rate)
After-tax cost of debt = 0,067 x (1 0,4) =
4%
What is the max price that Monmouth can
afford to pay based on a DCF analysis?

Terminal Value: calculates the value of


cash flows occurring beyond a several year
projection period

g = constant growth rate (assumed 5%)


Perpetuity Growth Model
What is the max price that Monmouth can
afford to pay based on a DCF analysis?

Having calculated the future cash flows


and the terminal value, we need to
discount them to their present value:
Present Value = FV / (1 + k)t

Next we take the sum of these to derive a


value of the firm in todays terms
What is the max price that Monmouth can
afford to pay based on a DCF analysis?

Value of firm: $ 75 100 000


Given: Debt as % of Capital
75 100 000 x 28% = $21 028 000
A = OE + L; OE = A L = 75 100 000 21 028 000 = $ 54 072 000
Therefore: Value of firm / no. of share outstanding
54 072 000 / 584 000 = $ 92, 64 per share