Monmouth Incorporation Harvard Case Solution & Analysis

If you were Mr. Vincent, executive vice president of Monmouth, Inc., would you try to gain control of Robertson Tool in May 2003? Why, or why not?

monmouth inc case solution

monmouth inc case solution

            As the Vice President of Monmouth Incorporation, the acquisition of Robertson seems to be attractive and worthwhile. Robertson meets the given criteria of Monmouth; therefore the potential acquisition should be undertaken.

            Monmouth has a set of rules before going through any of the acquisition plan, the potential acquisition must meet those three rules before going through towards the bid price negotiations. The first rule is that Monmouth can have a chance to become a major player in the industry to which the potential acquisition relates. This rule is also qualified because Robertson is operating under hand tools business in which Monmouth group is an existing major player and this acquisition can lead it towards the market leadership position. Monmouth’s second criterion is that the industry should be fairly stable; currently, the industry is growing with an annual rate of 6%. However, the company is growing below industry’s growth, i.e.2%, but the industry falls under the company’s criteria therefore second criteria are also satisfied through the acquisition of Robertson Tools. The final criterion of Monmouth is to acquire only market leading companies; Robertson tools qualify this criterion for being one of the market leaders in its industry. The acquisition is attractive because it qualifies Monmouth’s given criteria and there can be a room for operational improvements and synergies after the acquisition of Robertson Tools.

            The operating efficiency in this case is the distribution network of Robertson tools. Its distribution network not only can save the distribution cost of synergy effect, but also it can give a better contribution to the group to increase its revenues. Robertson’s distribution network has not only good network in the US and Canada, but also in 137 countries of the world. Such a vast network gives Robertson a competitive advantage and its potential to achieve the growth at least equal to the industry growth i.e. 6%.

            Such a vast network in an ample opportunity for Monmouth group to expand its sales to 137 countries of the world through exploring the distribution network of Robertson Tools. This benefit can make the presence of Monmouth goods in 137 countries of the World therefore, its benefits are high that make the acquisition more attractive for Monmouth Incorporation.

In the deal, what is the impact of the expected operating improvements in the value of Robertson Tool and on the bid?

            The operating improvement is expected to flow to the acquiring company if the acquirer exists in the same industry as well as the acquirer outside the industry can get the benefit of operating efficiencies. The operational improvements can give a cost benefit and increase in the revenues and profitability of both acquiring and target companies.

            The cost benefits can flow to Monmouth because the group is related to the same industry; therefore it can only flow to Monmouth or any acquiring company operating under the same industry. The operating cost savings benefit can flow to the entity, therefore the value addition is considered during the valuation purpose. As a result, the economic price or price through free cash flows can be higher than the base case NPV. This is named as synergy benefits and for that Monmouth can pay higher bid price due to the flow of the economic benefit from this acquisition.

            The distribution network is going to help any acquiring organization. The network can increase the revenues through its vast distribution network and this can save the distribution cost of acquiring the company. This benefit can only flow to an entity if it has potential to expand the distribution of its base products along with the products of Robertson.

            In free cash flows, it must be considered that the net inflow of benefits can be through the cost savings and increase in the revenues therefore in that case a higher net present value is expected from Monmouth. The higher expected NPV gives an opportunity to Monmouth that it can pay the highest price as compared to other potential acquiring companies of Robertson.

What is the maximum price that Monmouth can afford to pay, based on market multiples of EBIAT?

            EBIAT market multiple is derived through the industry average of the market multiples. This method is widely used under stock exchanges to value the share prices. The enterprise value through this method is $23.13 million. The value is derived by multiplying the EBIAT of 2002 (latest financial statements) with the latest market multiples average...........................

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