Flinder Valves And Control Inc Harvard Case Solution & Analysis

Identification of Problem

RSE is considering acquiring FVC as it is interested in acquisitions since 1998; however, on that time negotiation did not reach to the stage of working out an agreement. In the current scenario, both the parties are considering the negotiation of acquisition and decision making will be done on the basis of past performance and new projected data. The company is also considering whether it should increase its enterprise value after acquisition or not and also it has to identify whether its projected cash flow will increase or not. Both the parties want to identify the valuation and term and conditions of acquisition in an active environment.

Important Considerations

Flinder Valve Cooperation’s net enterprise value, WACC and its future share price have been done in the spreadsheet named as Flinders and also mentioned in appendix 1 and 2. The net present value of FVC of 2008 till 2013 is $27,081.58 which is derived from free cash flow, which shows that the company has a secure projected cash flow as calculated by its past cash flow average growth rate as it is a positive signal for RSE, and after acquisition the company can generate a positive cash flow. If RSE does a merger then the old FVC management will remain employed. As the company’s current management at the time of acquisition is competitive enough, therefore, RSE decided not to change its existing management. RSE appointed Bill Flinders to train its new CEO. The organization pays yearly bonus to Bill almost about $50,000 to $200,000 which is good compensation for Bill. FVC’s recent merger also has good market growth which leads to an increase in the firm’s value significantly. We have calculated net operating profit after tax 2008-2013 of both the firms. Depreciation and Net working capital were given already therefore; Net operating profit, depreciation, Net capital expenditure are used in order to calculate free cash flow. After that a change in net NOPAT is used to calculate NPV. According to Financial Analyst’s point of view, FVC is the best acquisition for RSE as it has better NPV and as well as advanced technology which will also enhance FVC cooperate value.

Analysis

A premerger analysis is conducted on Flinders and RSE, as both companies’ enterprise valuation is calculated in calculated in excel spreadsheet and also mentioned in the appendix. The calculation of Flinders projected free cash flow which showed progress before merger and a discount of future cash flow with a discount in WACC which was positive. Projected cash flow estimation is conducted with the help of past trend of both the companies. The estimated revenue growth rates of FVC and RSE are 8.63 and 8.75 respectively. Free cash flow is calculated by past trends and then all cash flows are discounted with WACC as well as the terminal values and discounted terminal values are identified. The sum of free cash flow is used with the NPV being deducted by the terminal value and then it is divided by the total outstanding shares; this is done in order to identify the future share price of both the companies. The current share price of both companies is given in exhibit 6. The calculation of incremental cash flow and share premium is conducted in excel spread sheet named as Cost Synergy.

Recommendation

After analyzing both firms pre-merger acquisition, it is recommended for both the companies to go with the merger as the pre-merger would be favorable for both the companies. The future share price of FVC is estimated to be $70, whereas, the current share price of the firm is $39.75. RSE’s future share price is $114, whereas, its current share price is almost $20. Both firms showed a drastic increase in share price before merger as it indicates that the future of both businesses is profitable, therefore, after merger it is understood that both the firms share prices are affected in a positive way, plus, there is an increase in their market reputation. The recommendation for both firms is to go with the merger. This merger will not only maximize their wealth, but also make them a global leader...........................

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