Flinders Valves and Controls Inc Harvard Case Solution & Analysis

Analysis

RSE Opening Price

It is analyzed that the average “Premium prior to the announcement date of merger” is 30.85%. The fair value of consideration that should be offered by the RSE International Corporation to Flinders Valves and Control Inc. in the negotiation is: $126.92 million (97*1.03085). The maximum consideration price that should be offered by the RSE International Corporation to acquire Flinders Valves and Control Inc. in the negotiation is: $147.86 million (113*1.3085).

Because of the opening price of acquisition, Flinders Valves and Control Inc. should start the negotiation at the acquiring value at $126 million with the RSE International Corporation and stop the negotiation at the value of $97 million which is the market value of Flinders Valves’. equity. 

RSE International Premium Offer 

The next step in the acquisition of Flinders Valves and Control Inc. consists of estimating the cost value of the firm. The valuation of the organization may fluctuate in any direction, it may fluctuate above or below the market price at the time of acquisition, which arises due to the volatility in the economy of the market over the period of acquisition. The fair value of Flinders Valves and Control Inc. should be determined in order to identify how much RSE International Corporation should offer for acquiring of Flinders Valves and Control Inc.

In order to determine the fair value of acquisition, discounted cash-flow method can be used for this procedure as this process will reflect the future cash flow of Flinders Valves and Control Inc. are at the present value. On the other hand, this model is also used to predict the potential cash flow, which is generated at the post-acquisition.

The perpetual growth is assumed to grow at the rate of 5%. Therefore, the enterprise value can be determined as$113 million, or it can be called as the maximum acquisition price on which RSE International Corporation would be agreed to pay to acquire Flinders Valves and Control Inc.

The market value of Flinders Valves and Control Inc. can be determined by analyzing the closure. Flinders Valves’ common stock at 1st May 2008,wasclosed at $39.75 per share. This share price is then multiplied by the total number of Flinders Valves’ outstanding share, which results in the market value of Flinders Valves and Control Inc. of worth $97 million. This determined value is the minimum value that Flinders Valves and Control Inc. would accept from the RSE International Corporation. The acquisition premium will then be determined which will be $113 million - $97 million. The value of the enterprise value of the RSE International Corporation determined by the acquisition premium is without the market effects.

Form of Payments

There are three choices of payment for acquisition i.e. RSE International Corporation has the choice either to pay the consideration by the cash, pay the consideration by issuing the stock, or pay the consideration by the combination of cash and stock based over the stable exchange rate. If the organization is paying the consideration by the stock, then the value of the stock of the RSE International Corporation, based over the real enterprise value should be estimated through Discounted Cash-flow Technique.

Flinders Valves and Controls Inc Case Solution

In order to acquire Flinders Valves and Control Inc. through the cash offer, the RSE International Corporation will need to borrow the bank loan as the RSE International Corporation is not maintaining enough cash reserves. As a result of the acquisition of Flinders Valves and Control Inc. through cash payment, the WACC of RSE International Corporation will drop less than 1%, which will slightly drop the RSE International Corporation enterprise value, however there will be no effect over the outstanding share of the RSE International Corporation.

The return provided to the Auden Company over their holding of 20% in Flinders Valves and Control Inc. is in theform of cash, due to which the outstanding shares of the RSE International Corporation would not be affected, and the share price of the RSE International Corporation will remain constant. Since the executives of the Auden Company were not in favor of keeping the minority interest such as of the RSE International Corporation, therefore Flinders Valves and Control Inc. would dispose the RSE International Corporation shares received in the deal.........................

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