Monmouth Inc. Harvard Case Solution & Analysis

Question No. 1:

If you were Mr. Vincent, would you try to obtain control of Robertson Inc. in May 2003?

monmouth inc case solution

monmouth inc case solution

Answer:

If I were Mr. Vincent, I would have taken the initiative for acquiring control of Robertson Inc. in May 2003, on behalf of the careful analysis and evaluation. Qualitative and quantitative measures are the key elements which support this decision, as; Monmouth Inc. has been one of the largest producers of electrical appliances and utilities in Oil and Gas industry.

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The management wanted to bring diversification in its business because of its concerns regarding the volatility and vulnerability in this nature of business and also for avoiding the dependencies over oil and gas industry. For this reason, the Robertson Tool Company seemed to be the most practicable investment opportunity in terms of Net Present Value.

On the other hand, despite the fact that the Robertson Tool Company was facing some serious issues such as low sales growth, unsatisfactory performance in the recent years and low inventory held by the members and the family members, the factors that made the company interesting and most competitive were its involvement in the manufacturing of the edge and cutting hand tools and was also the leader in its two main products. These abilities and the positive points of the company were not previously translated by the family owned management of the company.

The Robertson Tool Company also has the best reputation for its high quality products and the brand image was very high in the minds of customers, whereas, the company holds around 50% of the share of the $75 million market. The company possesses the ability to grow its revenue by 2% of industry having an average growth around 6%.

The company was also considered to be in promising condition due to its distribution function as the distribution area was one of the main areas for Monmouth Incorporation. The Robertson Tool Company has consists of 2,100 wholesalers and the company has the ability to increase the number of retail outlets by 15,000.

Question No. 2:

What is the maximum price that Monmouth can afford to pay based on discounted cash flow valuation? Based on market multiples of EBIAT?

Answer:

On behalf of the careful computation and judgments, Monmouth can offer the price to the Robertson Tool Company that should be under $84 each share. On behalf of the Cash Flow Analysis, it was expected that the companies can grow at a constant rate of industry average around 6%. Moreover, on the basis of market multiples such as total market capitalization and EBIAT, therefore, the price that is offered is supposed to be below $65.

Question No. 3:

Why is Simmons eager to sell its position to Monmouth for $50 per share? What are the concerns of and alternatives for each of the other groups of Robertson’s shareholders?

Answer:

Just after the interest shown by Monmouth over the potential merger of the Robertson Tool Company, it became obvious to the management of Monmouth Incorporation that their company was not the only one in the race. Two other potential investors, the first was the Simmons Company, a corporation with a main business of producing nonferrous metals, tools, rubber products and electrical equipment. It also had invested in 44,000 shares of Robertson stock in the year 2000.

On March 3, 2003, the management of the Simmons Company has approached the Robertson Tool Company and offered to tender around 75% of Robertson’s outstanding shares for $42 each. A premium of $12 was also included in the offered price, which was a trick to trap the shareholders of the Robertson Tool Company. However, Simmons Company just ended up with only 23% of shares which was not enough to constitute an operating independence.

On the other hand, the management of the Simmons Company believed that the merger of the Robertson Tool Company with Monmouth Incorporation would be the second best alternative they have, as after the merger of the Robertson Tool Company with Monmouth Incorporation, the management of the Simmons Company would convert its 8% shares holding in the Robertson Tool Company into the common stock of Monmouth Incorporation.

The management of the Simmons Company expected that the synergies and economies of scale anticipated after the merger will have a significant positive impact on the share price of Monmouth Incorporation. Therefore, the company suggested a price of $50 for the management of Monmouth Incorporation..............................

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