Flinder Valves and Controls Inc.

In early May 2008, W. B. “Bill” Flinder, president of Flinder Valves and Controls Inc. (FVC),
and Tom Eliot, chairman and chief executive officer of RSE International Corporation (RSE),
were planning to negotiate a possible acquisition (mua lại) of FVC by RSE. Serious
discussions for combining the two companies had started in March of that year, following
casual conversations that dated back to late 2007. Those initial talks focused on the broad
motives for each side to do a deal, and on the management issues, including compensation
(bồi thường), in the new firm. What still remained was to negotiate a final term sheet on
which the definitive agreement would be drafted and signed.

In the background, the past 12 months had been associated with mounting difficulty for the
U.S. economy. The industries within which RSE and FVC operated were not immune (miễn
nhiễm) from these effects. A recent analyst report summarized the market view for
industrial manufacturing.
Tighter borrowing standards and a severely weakened housing sector are weighing on the
domestic economy, prompting consumers to cut back on spending and industrial manufacturers
to reduce production. A similar situation now seems to be taking hold in western Europe.

Both corporate leaders were concerned about the opportunities and risks of doing a deal in
this increasingly challenging (không tăng trưởng) environment.

Flinder Valves and Controls Inc.

Flinder Valves and Controls, located in Southern California, manufactured specialty valves
and heat exchangers. FVC maintained many standard items, but nearly 40% of its volume
and 50% of its profits were derived from special applications for the defense and
aerospace industries (ngành công nghiệp quốc phòng và hàng không vũ trụ). Such products
required extensive engineering experience of a kind only a few firms were capable of
providing. FVC had a reputation (uy tín) for engineering excellence in the most complex
phases of the business and, as a result, often did prime contract work on highly technical
devices for the government.

FVC was an outgrowth of a small company organized in 1980 for engineering and
developmental work on an experimental heat-exchanger product. In 1987, as soon as the
product was brought to the commercial stage, Flinder Valves and Controls Inc. was
organized to acquire the properties, both owned and leased, of the engineering
corporation. The president of the predecessor (tiền nhiệm) company, Bill Flinder, continued
as the president of FVC. Eventually, the company acquired the patents it had licensed.

The raw materials used by the company were obtainable in ample supply from a number of
competitive suppliers. Marketing arrangements presented no problems. Sales to machinery
manufacturers were made directly by a staff of skilled sales engineers. The Auden Company,
a large firm in a related field (lĩnh vực liên quan), was an important foreign distribution
channel under a non-exclusive (độc quyền) distributor arrangement. About 15% of FVC’s
sales came from Auden. Foreign sales through Auden and directly through FVC’s own staff
accounted for 30% of sales. Half the foreign sales originated in emerging economies,
mainly Brazil, Korea, and Mexico. The other half originated in the United Kingdom, Italy,
and Germany.
 Although competitive erosion in the mid-2000s had temporarily interrupted (gián đoạn
trong dài hạn) FVC’s sales growth, better economic conditions in the markets of developed
countries, together with FVC’s recent introduction of new products for the aerospace and
defense industries, offered the company excellent prospects for improved performance.
Sales in the first quarter of 2008 grew 23% over the corresponding period (cùng kỳ) in
2007, at a time when many of FVC’s competitors experienced limited growth prospects.
Exhibits 1 and 2 show the most recent financial statements for FVC.

EXHIBIT 1. Consolidated Balance Sheet as of December 31, 2007 for Flinder Valves and Controls
(dollars in thousands)
Assets
Cash 1.884
U.S. Treasury tax notes and other Treasury obligations 9.328
Due from U.S. gorvernment 868
Accounts receivable net 2.316
Inventories, at lower of cost or market 6.888
Other current assets 116
Total current assets 21.400
Investments 1.768
Land 92
Buildings 6.240
Equipment 18.904
Less: allowance for depr. 7.056
Total plant, property, and equipment gross 18.180
Construction in process 88
Total plant, property, and equipment net* 18.268
Patents 156
Cash value of life insurance 376
Deferred assets 156
Total assets 42.124
Liabilities and Stockholders' Equity
Accounts payable 2.016
Wages and salaries accurued 504
Employees' pension cost accrued 208
Tax accrued 72
Dividends payable 560
Provision for federal income tax 1.200
Total current liabilities 4.560
Deferred income tax 800
Common stock at par (shares authorized and outstanding 2,444,000 shares) 1.220
Capital surplus 7.180
Earned surplus 28.364
Total equity 36.764
Total liabilities and stockholders' equity 42.124
* Equivalent land in the area had a market value of $320,000 and the building had an estimated market worth of
$16,800,000. Equipment had a replacement cost of approximately $24,000,000 bit a market value of about $16,000,000
in an orderly liquidation.
 EXHIBIT 2. Summary of Consolidated Earnings and Dividends for Flinder Valves and Control
(dollars in thounsands)
(Unaudided) Three
months ended 3/30
2003 2004 2005 2006 2007 2007 2008
Sales 36.312 34.984 35.252 45.116 49.364 11.728 14.162
Cost of goods sold 25.924 24.200 24.300 31.580 37.044 8.730 10.190
Gross profit 10.388 10.784 10.952 13.536 12.320 2.998 3.972
Administrative 2.020 2.100 2.252 2.628 2.936 668 896
Other income - net 92 572 108 72 228 14 198
Income before taxes 8.460 9.256 8.808 10.980 9.612 2.344 3.274
Taxes 3.276 3.981 3.620 4.721 4.037 1.009 1.391
Net income 5.184 5.275 5.188 6.259 5.575 1.335 1.883

Cash dividends 1.680 2.008 2.016 2.304 2.304 576 753

Depr. 784 924 1.088 1.280 1.508 364 394
Capital expenditures 1.486 1.826 2.011 2.213 2.433 580 640
Working capital needs 1.899 3.492 -1.200 4.289 4.757 1.130 1.365
Ratio analysis

Sales 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Cost of goods sold 71.4 69.2 68.9 70.0 75.0 74.4 72.0
Gross profit 28.6 30.8 31.1 30.0 25.0 25.6 28.0
Administrative 5.6 6.0 6.4 5.8 5.9 5.7 6.3
Other income - net 0.3 1.6 0.3 0.2 0.5 0.1 1.4
Income before federal taxes 23.3 26.5 25.0 24.3 19.5 20.0 23.1
Net income 14.3 15.1 14.7 13.9 11.3 11.4 13.3

FVC’s plants, all of modern construction, were organized for efficient handling of small
production orders. The main plant was served by switch tracks in a 15-car dock area of a
leading railroad (khu vực bến tàu 15 toa của một tuyến đường sắt hàng đầu) and also by a
truck area for the company’s own fleet of trucks (xe tải riêng của công ty). From 2005 to
2007, net additions (tài sản ròng tăng thêm) to property totaled $7.6 million.

Bill Flinder, an outstanding researcher in his own right, had always stressed the research and
development involved in improved products (sản phẩm cải tiến), with patent protection
(bảo hộ bằng sáng chế), although the company’s leadership was believed to be based on its
head start in the field and its practical experience.

FVC’s success had brought numerous overtures from companies looking for diversification,
plant capacity, management efficiency, financial resources, or an offset to cyclical
business. For instance, when Flinder Valves was taken public in 1996, Auden Company,
which later became a holder of 20% of FVC common stock, advanced a merger (sáp nhập)
proposal. Rumors of possible antitrust action by the U.S. Department of Justice had
circulated after the news of the proposed merger became public, and Auden withdrew from
the discussions. FVC received various proposals from 1998 on, but none reached the stage of
working out an agreement until the advances of RSE International Corporation.

FVC had come to RSE’s attention with the FVC’s disclosure of a U.S. government contract.
FVC was to develop an advanced hydraulic-controls system (hệ thống điều khiển thủy lực
tiên tiến), code-named “widening gyre,” for use in numerous military applications. The
technology was still in research and development, but was expected to have broad
commercial value if the results were found to be economically successful.

RSE International Corporation

Tom Eliot had founded RSE International in 1970, grown it, taken it public, and firmly rooted
it as a Russell 1000 company. In response to what he perceived to be the firm’s growth
challenges for the next decade, Eliot had persuaded RSE’s board that the company should
follow a policy of focused diversification, which would be achieved by an aggressive growth-
by-acquisition program designed to create opportunities and entries into more dynamic
markets than the ones RSE then served.

In 2008, RSE manufactured a broad range of products including advanced industrial

components as well as chains (dây chuyền), cables (dây cáp), nuts and bolts (đai ốc và bu
lông), castings and forgings, and other similar products. RSE then sold them (mostly
indirectly) to various industrial users. One division produced parts for aerospace propulsion
and control systems with a broad line of intermediate products. A second division produced
a wide range of nautical navigation assemblies and allied products. The third division
manufactured a line of components for missile and fire-control systems (hệ thống tên lửa).
These products were all well regarded by RSE’s customers, and each was a significant factor
in its respective market. Exhibit 3 shows the RSE balance sheets for 2007; Exhibit 4 presents
the income statements from 2003 to 2007.

EXHIBIT 3. Consolidated Balance Sheet for RSE International as of December 31, 2007
(dollars figures in thousands)
Assets
Cash 46.480
U.S. government securities, at cost 117.260
Trade accounts receivable 241.760
Inventories, at lower of cost or market 179.601
Prepaid taxes and insurance 2.120
Total current assets 587.221
Investment in wholly-owned Canadian subsidiary 158.080
Investment in supplier corporation 104.000
Cash value of life insurance 3.920
Miscellaneous assets 2.160
Property, plant, and equipment, at cost:
Building, machinery, equipment 671.402
Less: allowances for depr. 260.001
Property, plant, and equipment - net 411.402
Land 22.082
Property, plant, equipment, and land - net 433.484
Patents, at cost, less amortization 1.120
Total assets 1.289.985

Liabilities and Stockholders' Equity

Notes payable to bank 5.795
Accounts payable and accrued expenses 90.512
Payrolls and other compensation 38.399
Taxes other taxes on income 3.052
Provision for federal taxes on income refund, estimated 32.662
Current maturities of long term debt 30.900
Total current liabilities 201.320
Notes payable to bank (1) 119.100
 Deferred federal income taxes 29.783
2% cumulative convertible preferred stock, $20 par, 1,389,160 shares outstanding (2) 27.783
Common stock, $2 par, 96,000,000 shares authorized, 62,694,361 shares issued 125.389
Capital surplus (3) 21.904
Retained Earnings 764.821
Total equity 939.897
Total liabilities and stockholders'equity 1.289.985
(1) $150,000,000 note, payable semiannually beginning June 30, 2008; $30,900,000 due within one yea, shown
in current liabilities. One covernant required the company not to pay dividends, except on preferred stock, or to
make other distribution on its shares or acquire any stock, after December 31, 1999, in excess of net earning
after that date.
(2) Issued in January 2007, convertible at rate of 1.24 common share to one preffered share; redeemable
beginning in 2012; sinking fund beginning in 2016.
(3) Resulting principally from the excess of par value of 827,800 shares of preferred stock over the pay value of
common share issues on conversion in 2007.

EXHIBIT 4. Summary of Consolidated Earnings and Dividends for RSE International

(dollars in thousands)
2003 2004 2005 2006 2007
Net sales 1.623.963 1.477.402 1.498.645 1.980.801 2.187.208
Cost of products sold 1.271.563 1.180.444 1.140.469 1.642.084 1.793.511
Gross profit 352.400 296.958 358.176 338.717 393.697
Selling, general, and administrtive 58.463 69.438 74.932 87.155 120.296
Earnings before federal income taxes 293.937 227.520 283.244 251.562 273.401
Taxes expense 126.393 95.558 116.130 101.882 109.360
Net earnings 167.544 131.962 167.114 149.679 164.041
Depr. 19.160 20.000 21.480 24.200 26.800
Cash dividends declared 85.754 77.052 53.116 77.340 92.238

The company’s raw material supply (sheets, plates, and coils) of various metals came from
various producers. RSE International’s plants were ample, modern, well-equipped with
substantially newer machinery, and adequately served by railroad sidings. The firm was
considered a low-cost producer that possessed unusual production knowledge. It was also
known as a tough competitor.

Eliot and his management team had initiated several changes to help increase RSE’s profit
margins. Chief among them, in late 2006, had been the implementation of Project CORE, a
business wide initiative to improve and unify the corporate wide information systems. This
project had already identified numerous opportunities for improving profits and sales. As a
result, RSE’s latest sales and earnings forecasts projected a steady increase over the next
five years. The current plan (excluding merger growth) called for sales to hit $3 billion
within five years (Exhibit 5). Despite Eliot’s confidence and optimism for the future of the
company, he believed that the stock market still undervalued his firm’s shares.

EXHIBIT 5. Forecast Financial Statements for RSE International

for the Years Ended December 31, 2007 - 2012 (dollars in thousands except per-share figures)
Actural Projected
2007 2008 2009 2010 2011 2012
Net sales 2.187.208 2.329.373 2.480.785 2.642.037 2.813.769 2.996.658
Cost of products sold 1.793.510 1.920.085 2.064.243 2.216.470 2.367.290 2.537.259
Gross profit 393.698 409.288 416.542 425.567 446.479 459.399
Selling, general, and administrtive 120.296 129.786 139.481 151.027 161.315 169.826
Income before taxes 273.402 279.502 277.061 274.540 285.164 289.573
Taxes expense 109.361 111.801 110.824 109.816 114.066 115.829
Net income 164.041 167.701 166.237 164.724 171.098 173.744
Cash dividends 92.238 102.082 108.714 115.779 125.185 133.313
Depr. 26.800 27.950 29.770 31.700 33.170 35.960
Net PPE 389.321 426.522 459.404 498.497 541.109 587.580
Net working capital 422.597 447.956 486.428 528.407 574.238 624.303
Earnings per share (1) 2.62 2.60 2.58 2.56 2.66 2.70
Divs. per share common stock (1) 1.42 1.58 1.69 1.80 1.94 2.07
Divs. per share preferred stock (2) 0.40
(1) 62.694.361 common shares in 2007. Thereafter, 64.416.919 shares reflecting conversion of the preferred stock.
(2) 1.389.160 preferred shares in 2007. Conversion into 1.722.558 shares of common stock assumed in 2008.

The Situation
During the early part of 2008, a series of group meetings had taken place between Tom Eliot
and Bill Flinder and their respective advisers. It seemed clear to both parties that both FVC
and RSE could profit from the merger. By early May, a broad outline of the merger seemed
to be developing. Flinder Valves was to become a subsidiary (công ty con) of RSE
International the deal would be structured in such a way as to preserve FVC’s identity. The
two sides had explored some of the governance (quản trị) and compensation (bồi thường)
issues in the merger:

- Flinder would be retained along with his top management team and all other employees.
No layoffs (sa thải) were contemplated => This reflected (phản ánh) RSE’s intention to
invest in and grow the FVC operation. FVC’s solid (vững chắc) management team was one of
the factors that had attracted (thu hút) RSE in the first place, and Eliot wanted to keep the
same management in place after the merger. Flinder would receive a generous option based
incentive bonus that could result in a salary increase of between $50,000 and $200,000 per
year. Because Flinder was 62 years old and nearing retirement, the compensation package
was meant to retain him in the coming years as he trained a new chief executive.

The price of the deal was less clear. FVC’s shares traded on the NASDAQ, whereas RSE’s
traded on the American Stock Exchange. The market capitalizations (vốn hóa thị trường)
for FVC and RSE were approximately $100 million and $1.4 billion, respectively. Both
companies had experienced recent rapid rises in share price due to strong performance
despite the weak economic environment. Exhibit 6 shows recent share prices for Flinder
Valves and RSE.2

EXHIBIT 6. Market Prices of Flinder Valves and RSE International Corporation

FLINDER VALVES & CONTROLS RSE INTERNATIONAL CORPORATION

Common Stock Common Stock Preferred Stock
High Low Close High Low Close High Low
2003 16.25 8.75 15.00 12.31 10.05 11.88
2004 24.75 14.00 22.63 14.36 11.77 13.16
2005 25.00 20.00 22.25 12.81 9.27 11.13
2006
31/03 24.38 20.75 21.50 14.13 12.83 13.95
30/06 22.75 20.38 21.00 13.69 12.04 11.78
30/09 22.75 20.38 21.50 12.83 10.48 11.26
31/12 24.36 20.13 21.00 12.39 11.26 11.87
2007
31/03 23.50 20.00 21.75 11.60 10.20 10.67 13.61 12.21
30/06 23.63 19.88 22.00 11.60 10.90 10.90 13.15 12.04
30/09 22.75 20.00 22.50 13.61 11.13 13.61 14.22 12.37
31/12 30.00 22.25 28.50 17.01 13.30 16.78 17.32 13.77
2008
31/03 32.13 26.00 31.50 20.73 15.08 20.69 17.32 13.98
01/05 39.75 38.90 39.75 22.58 18.30 21.98 17.63 15.35

The financial advisors (cố vấn) had collected a variety of relevant capital-market data. Exhibit
7 provides valuation information on exchange-listed comparables for Flinder Valves and
RSE. Exhibit 8 presents information on recent related acquisitions. Exhibit 9 presents
historical money-market and stock-return data through May 2008. RSE’s debt was
currently rated Baa.

EXHIBIT 9. Capital Market Interest Rates and Stoc Price Indexes (averages per year
except April 2008, which offers closing values for April 25, 2008)
2006 2007 04/2008
U.S. Treasury Yields
3-month bills 4,70% 4,40% 1,28%
30-year bonds 5,00% 4,91% 4,52%
Corporate Bond Yields by 6,48% 6,48% 6,98%

Stock Market
S&P 500 Index 1.418 1.468 1.398
Price/Earnings ratio 17,70 18,30 17,40

Industrial Machinery Stocks

Price/Earnings ratio 13,90 14,00
Dividend yield 1,40% 1,40%

Historical return premium of equity over government debt (1926-2007)

Geometric average 5,50%
Arithmetic average 7,20%

Flinder had shared FVC’s current corporate financial statement forecast with Eliot but had
emphasized that it did not include any benefits of the merger or the benefits of promising
new technologies, such as the widening gyre (Exhibit 10). The reluctance to include the
widening gyre project stemmed from the substantial uncertainty remaining regarding its
potential economic benefits.

EXHIBIT 10. Forecast of Financial Statements for Flinders Control and Valves for Years
Ended December 31, 2007-2012 (dollars in thousands)
Actural Projected
2007 2008 2009 2010 2011 2012
Sales 49.364 59.600 66.000 73.200 81.200 90.000
Cost of goods sold 37.044 43.816 48.750 54.104 59.958 66.200
Gross profit 12.320 15.784 17.250 19.096 21.242 23.800
Administrative 2.936 3.612 4.124 4.564 5.052 5.692
Other income, net 228 240 264 288 320 352
Income before taxes 9.612 12.412 13.390 14.820 16.510 18.460
Taxes expense 4.037 4.965 5.356 5.928 6.604 7.384
Net income 5.575 7.447 8.034 8.892 9.906 11.076
Depr. 1.508 1.660 1.828 2.012 2.212 2.432
Net PPE 18.268 22.056 24.424 27.088 30.049 33.306
Net working capital 16.840 20.331 22.515 24.971 27.700 30.702

The companies had yet to settle on the form of consideration, either cash or RSE stock, that
would best serve the parties to the deal. Eliot expected that RSE had the financial capacity
to borrow the entire amount through its existing credit facilities. Roughly 70% of the
Flinder Valves stock was held by its board of directors (ban giám đốc) and their families,
including the 20% owned by the Auden Company and 40% owned by Bill Flinder. The
Auden Company did not object to the merger, but it had given notice that it would sell any
RSE shares received in the deal. The Auden Company was about to undertake a new
expansion of its own, and its executives were not disposed to keeping tag ends of minority
interests in a company such as RSE. They saw no reason, however, for not maintaining their
satisfactory business relationships with the Flinder Valves enterprise if it became a division
of RSE International.
RSE International’s stock had a beta of 1.25; the beta for FVC was 1.00, based on the most recent
year’s trading prices. Both companies faced a marginal tax rate of approximately 40%.

Questions
1. How is FVC’s situation?

2. What are the strengths and weaknesses of FVC and RSE?

3. Estimate of intrinsic value for each firm and the value of the post-merger entity?

4. What is a reasonable offer price for FVC?

5. Do you recommend that RSE pays in cash or stock? If stock, what exchange ratio
do you recommend?

Answers
1. Situation

Hình thành và phát triển:

 Năm 1980, công ty FVC nghiên cứu và phát triển một sản phẩm thử nghiệm về trao đổi
nhiệt. Đến 1987, sản phẩm chính thức được đưa lên thị trường và mở rộng kinh doanh,
đồng thời thực hiện mua lại các bằng sáng chế đã được cấp phép.

Đối tác kinh doanh:

 Các nhà cung ứng nguyên vật liệu đầu vào;

 Công ty Auden (chiếm 20% vốn CSH) - một công ty lớn hoạt động trong lĩnh vực có liên
quan: FVC ủy thác (không độc quyền) phân phối bán hàng cho các nhân viên lành nghề
của Auden.
Đối tác bán hàng:

 Brazil, Hàn Quốc, Anh, Đức, Italia, Mexico,...

Tình hình kinh doanh:

 Khoảng 15% doanh thu bán hàng thu được từ Auden;

 30% doanh thu nước ngoài từ Auden và doanh thu trực tiếp từ nhân viên của FVC;

 50% doanh thu bán hàng nước ngoài từ các nền kinh tế mới nổi chủ yếu như Brazil, Hàn
Quốc, Mexico;

 50% doanh thu từ nước ngoài còn lại từ Anh, Ý, Đức;

 Quý 1/2008, tăng 23% doanh thu so với cùng kỳ năm ngoái;

 Từ 2005 -2007, tài sản ròng tăng thêm 7,6 triệu đôla.

Lợi thế:

 FVC có kinh nghiệm và uy tín trong lĩnh vực công nghệ - kỹ thuật, đa số FVC ký các hợp
đồng kinh doanh với chính phủ. Gần 40% khối lượng sản phẩm và 50% lợi nhuận lấy từ
các ứng dụng đặc biệt cho ngành công nghiệp quốc phòng và hàng không vũ trụ.

 Có các nhà máy, các công trình xây dựng hiện đại được hỗ trợ bởi 15 toa tàu của một
tuyến đường sắt hàng đầu và đội xe tải riêng của công ty, năng lực quản trị và R&D
mạnh.

Tình hình hiện tại:

 FVC đang phát triển một hệ thống thủy lực tiên tiến (widening gyre);

 Đầu tháng 05/2008, chủ tịch công ty Flinder Valves and Controls Inc. - W.B. Bill Flinder
có kế hoạch thương lượng việc bán lại công ty FVC cho Tom Eilot - chủ tịch kiêm giám
đốc điều hành của RSE International Co. Trước đó, khủng hoảng kinh tế toàn cầu xảy ra
và bùng phát vào năm 2008, FVC và RSE hoạt động trong ngành công nghiệp sản xuất
cũng bị ảnh hưởng bởi những tác động tiêu cực trên thị trường. Các tổ chức/định chế tài
chính thắt chặt chính sách cho vay, khiến cho người tiêu dùng phải cắt giảm chi tiêu và
đầu tư, các nhà sản xuất thu hẹp quy mô hoạt động. FVC và RSE rất quan ngại về những
rủi ro trong tình hình hiện nay, họ tìm kiếm những cơ hội trên thị trường để đảm bảo sự
tồn tại của công ty.

2. Strengths and Weaknesses

Strengths Weaknesses
- -
- -
- -
- -
FVC
- -
- -
- -
- -
 - -
- -
- -
- -
RSE
- -
- -
- -
- -

3. Intrinsic value and value of the post-merger entity

4. Price’s FVC

5. Payment

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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