STAFF ANALYSIS MONMOUTH’S ACQUISITION OF ROBERTSON Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

STAFF ANALYSIS MONMOUTH’S ACQUISITION OF ROBERTSON Case Study Solution

Quantitative

As for the quantitative part of the discussion, the fields which are used to provide analysis is by using a Discounted Cash Flow approach, Market Multiples Approach, and other financial bid perspectives considerate for this situation.

For the Discounted Cash flow Approach, the weighted Average cost of capital (WACC) has been calculated on the provided data which provides a WACC of 5.01%, the calculation is provided in the Exhibit 1 below. The discounted Cash flow approach provides the organizational value at $ 10.21 Million without the Terminal Value, and $ 125.87 Million with terminal Value. This leads to the share price of $ 17.49 and $ 215.52 respectively; DCF approach of share value is attached within Exhibit 2 below.

The other method used to compute the share price for the organization is through the Earnings before Interest after Tax (EBIAT) Multiple, this is taken by the industry average and provides a Net Share price of the organization at $ 20.49 / share, provided in Exhibit 3 of this staff analysis report. The EBIAT Multiple is a market derived multiple which categorizes the organization according to the top industrial areas of the market.

The Earnings per share after the combination of the firms will provide an increase to the overall Monmouth’s group, this is provided in the attached Exhibit 4 below. The calculation provides that the maximum available of shares for Monmouth to increase without the Dilution in its EPS figures is 1.62 Million shares. The current Monmouth’s share is categorized at $ 24 at the current date. This provides a total valuation of $ 38.88 million, if ranked among the shares of Robertson than the maximum price which will be offered to shareholders of Robertson will be $ 66.57. This amount is way more than the required amount by the shareholders of Simmons and Roberson in total.

If we consider the other organizations which have considered the bid process of Robertson Company, then the organization which came up for bidding was NDP co. which offered a share for share exchange to the Robertson equity holders, NDP’s deal was 1 for 5 shares (5 NDP shares for 1 Robertson Share), the Value for NDP share was at $ 10.62. This provided a total Share price of $ 53.10 / share of Robertson.

Another company for the takeover was Simmons Org. which played the game, but at the end held 133,000 shares which was roughly approximately 22.7% of the total equity, not granting them controlling right. When we consider the competitive bids of NDP and Simmons, then the asking price of NDP and Simmons was around $ 50 for a share in Robertson. This amount is at a 12% premium on the current share price of Robertson of $ 44 / share.

The summary on the financial factors on the organization is provided in the table below:

		Price / Share	Total Value (M)
1	DCF with Terminal Value	$ 215.52	125.87
2	DCF without Terminal Value	$ 17.49	10.21
3	EBIAT Multiples Approach	$ 20.49	11.97
4	EPS Capacity of Monmouth	$ 66.67	38.94
5	NDP PROPOSAL	$ 53.10	31.01
6	SIMMONS Want Money	$ 50.00	29.20

Recommendations

As per recommendation to the organization to the organization, it is suggested that the actual dollar per share price should be somewhere between $ 40 – 60. This will take account of all the perspectives of the shareholders for the organization SIMMONS, and the ROBERTSON family. As this amount will provide a price premium as required by SIMMONS on their investment and will satisfy the needs of Robertson family.

As for the best facilitation to be provided as the SIMMONS suggested a non-taxable way of providing funds. Then the best method available to the Monmouth is through a share for share transfer, but this amount is limited to not more than 1.62 million shares to be provided. This method will also tackle further problems such that as Simmons will be paid, they will not consider a reverse takeover of Monmouth and the organization can use the management of Robertson family to further the objectives of MONMOUTH CORPORATION

exhibits

Exhibit 1: WACC

Calculation of WACC
Asset Beta	0.725
Debt	28.0%
Equity	72.0%
Re- geared Equity beta	0.8942
RF	4.52%	*AA % taken due to Debt / Equity %
Cost of debt	4%
Cost of Equity	5.40%
WACC	5.01%

Exhibit 2: DCF Approach

	Actual			Forecasts
	2002	2003	2004	2005	2006	2007 to Infinity

Sales	$ 55.3	$ 58.6	$ 62.1	$ 65.9	$ 69.8	71.20
Cost of Goods	37.90	38.09	40.37	42.84	45.37	46.28
Gross Profit	17.40	20.51	21.74	23.07	24.43	24.92
Sell & Admin	12.30	11.13	11.80	12.52	13.26	13.53
Depreciation	2.10	2.30	2.50	2.70	2.90	2.90
EBIT	3.00	7.08	7.44	7.84	8.27	8.49
Tax @ 40%	1.20	2.83	2.97	3.14	3.31	3.40
EBIAT	$ 1.8	4.25	4.46	4.71	4.96	5.09

Capital Expenditures		-4.00	-3.50	-3.60	-3.80	-2.90
Working Capital (W)		-1.37	-1.52	-1.65	-1.69	-0.60
add: Depreciation		2.30	2.50	2.70	2.90	2.90

Cash flows		1.17	1.95	2.16	2.37	4.49
WACC @ 5.01%		0.952	0.907	0.864	0.822	0.783

DISCOUNTED CASH FLOWS		1.12	1.76	1.87	1.95	3.52
Terminal Value						119.2

NET VALUE		125.87
NET VALUE WITHOUT TERMINAL		10.21


No. Of Shares		584,000

Price Per Share with Terminal		$ 215.52
Price Per Share without Terminal		$ 17.49

Exhibit 3: EBIAT Multiple

PRICE USING MARKET MULTIPLEs

	Average EBIAT Multiple	13.31429
	Robertson tools Multiple	$ 1.8

	Value using Multiple	23.96571
	Less debt	12
	Equity Value	11.96571

	No. of shares	584,000

	Price Per share	20.49

Exhibit 4: EPS Combination

	2003	2004	2005	2006	2007
Monmouth's Data
Net Income	$ 11.0	$ 11.9	$ 12.8	$ 13.8	$ 15.0
Shares Outstanding (mil)	4.21	4.21	4.21	4.21	4.21
Earnings Per Share	2.61	2.83	3.04	3.28	3.56

After Acquisition
Net Income	15.25	16.36	17.51	18.76	20.09
Maximum Shares for Same EPS	5.83	5.79	5.76	5.72	5.64
New Shares	1.62	1.58	1.55	1.51	1.43

MAXIMUM SHARES CAN BE ISSUED IS	1.62	Million