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

            The proposed acquisition of Robertson is attractive because of its distribution network. Its distribution network is very attractive as it has many of the distributors and retailers all around the United States and Canada that can push the products of Monmouth for higher sales. Robertson is also dealing with consumer products, therefore it can give benefit to Monmouth to sell its products to the direct retailers and a higher price can be charged for because this network cut the profits of wholesalers.

            It can give a chance to Monmouth to expand in the US and Canadian industry of automobiles and other gas and oil extraction industries through this distribution channel. It fulfills all three requirements of Vincent for a proposed acquisition. Robertson is also a market leader, therefore the acquisition is beneficial. The proposed company is also growing, but it is still lower than the industry, however, the industry levels can be achieved in the future days through extensive strategies of marketing in order to take advantage of its distribution network.

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

            The expected benefits will flow to the Monmouth Corporation because the benefit can necessarily flow to this company, however, this may not be possible that the benefit will flow to the other companies as well that are undertaking the proposed acquisition of the Roberson. During the time of business valuation, Monmouth can undertake the synergy cost saving while appraising the investment therefore the better bid price can be offered from Monmouth. The expected improvement will result in higher profitability; therefore the value of the firm will increase the counter effect of the operational improvements.  The operational improvements are expected to flow in the future and the results can be derived from appendix 1 that the free cash flows are positive with the higher amount, therefore this definitely can affect the price of the company through free cash flows valuation model.

            This will affect the bid price through EBIAT in the next years when the operating improvements will flow to the company and it is expected that EBIAT will increase in the future years. Therefore, the expected price is higher than the current bid price through EBIAT market multiple valuation model.

What is the maximum price that Monmouth can afford to pay, based on market multiples of EBIAT? Based on a discounted cash flow valuation? Calculation of WACC and terminal value determination?

            The EBIAT multiple valuation model is an acceptable market valuation model of the market. Through this valuation model, a multiple is used to value the company through its current earnings. However, the valuation model has some drawbacks because it considers only the current earning and not future expected earnings that are expected to grow in the future years. The market multiple is derived through the industry average in which all good, bad and moderate companies are undertaken to derive a market multiple. In this case the market multiple for EBIAT is 16.1 for Robertson (Exhibit 6). In this calculation, this multiple may not be appropriate because the industry average gives better results to incorporate any industry related performances and future consequences and the industry average is 13.3 (Appendix 3). This 13.3 is more considerable because it is an industry average, however there are some companies that are competitors to Robertson therefore it is more acceptable than the industry average. The value of the business through this valuation model is $33.25 million and the value of equity is $21.25 million after deducting the $12 million debts. This value derives the per share value of $36.34 per share that is nearly $8 lower than the current market price that is $44 per share.

            The free cash flow valuation model is widely used and acceptable valuation model in the Worth; therefore it is considered that the value derived through this valuation method is more appropriate as considered in the other valuation models used in the industry. The value through free cash flow models is the value in cash that is left for the shareholders after paying all his operating and investing cash flows.............

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