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Contents:

1. Descriptionandgoalsofthecase
2. Questionsyoumustanswerinyourreport
3. Appendix1:ConfidentialSupplementaryInformationforManagementofFlinderValvesand
Controls
4. Appendix2:ConfidentialSupplementaryInformationforManagementofRSEInternational
5. SupplementalTechnicalNote:ValuationandMergerNegotiation
Case43:FLINDERValvesandControlsInc.
Descriptionandgoals
SetinMay2008,thiscasereflectstheseparateperspectivesofchiefexecutiveofficersTomEliot
andBillFlinderastheyapproachthenegotiationsofRSEInternationalCorporationtoacquire
FlinderValvesandControlsInc.Yourtaskistocompleteavaluationanalysisofthetargetand
buyerandtonegotiateapriceandexchangeratiowiththecounterparty.
Thecasehasthefollowing goals:

Exercise valuation skills: The case affords opportunities for valuation based on
discounted cash flow, comparable transaction multiples, and current market prices. Also
included are such valuation details as options and contingent interests, operating
synergies, gains from horizontal expansion, and the need to satisfy various stakeholders.

Illustrate practical concerns about mergers and acquisitions: Additional questions the
buyers and sellers face include setting the exchange ratio of shares, tax exposure,
dilution, and voting power.
Questions for your report:
1. Using the case and the supplementary data in Appendices 1 and 2, how do you see FVCs
situation? What are the strengths and weaknesses of FVC and RSE? Why should the two
companies want to negotiate?
2. What is FVC worth? What are the key value drivers?
3. What opening price do you think Flinder should offer to sell the company to RSE? At
what price should he walk away from the negotiation? How did you estimate those
values?
4. Do you recommend that RSE pays in cash or stock? If stock, what exchange ratio do you
recommend?

In a merger there are two parties with asymmetric information, that is, when they come to the
negotiation table one party has information the other party does not and vice versa. For example,
top management has better information about the strengths and weaknesses of the firm, knows
about major structural changes in the firm, or is knowledgeable about a major expansion of the
firm into new foreign markets. The information in appendices 1 and 2 reflects the type of
information only the top management of firm posses. Use it for your analysis.
Appendix 1
FLINDER VALVES AND CONTROLS INC.
Confidential Supplementary Information for Management of Flinder Valves and Controls
As Bill Flinder neared retirement, the idea of selling FVC to a bigger firm seemed almost
necessary. He had a good top-management team, but he didnt think any one of them could step
in and run the show alone. He found stability in the RSE International combination that was
worth something to him. In the increasingly global market place with more costly development,
FVC needed a deep-pocketed partner to expand and to bankroll more research. Flinder believed
that the company would also benefit from gaining access to a large marketing and distribution
network. As the company continued to grow, it would need to gain production know-how for
high-volume manufacturing. Flinder Valves did not have this kind of expertise. Finally, there had
been an increasing trend of consolidation in Flinder Valves industry over the last year. Flinder
feared that without a well-financed partner, the company would be swamped by competition. He
was intrigued with the possibility that Flinder Valves might be more fully valued if it were part of
a larger, more diversified enterprise. Thus, when the merger opportunity with RSE International
Corporation came along in 2007, Flinder determined to make it work as best as he could.
Flinder believed that FVC had alternatives to this deal. Rockheed-Marlin Corporation, a large
defense contractor (or any of a number of others), might be induced to make an offer for Flinder Valves,
though Flinder preferred RSE International Corporation as a merger partner. FVC and RSE might
establish a joint venture of some sort, though Flinder suspected that joint ventures faced the same kinds of
integration problems as did acquisitions; as a result, he thought joint ventures were an inferior alternative.
FVC could move forward alone, but that would require raising large sums of new debt and equity to
finance the rapid expansion of the firms widening gyre program. Flinder was concerned that he might
lose voting control of the firm regardless. It seemed to him that doing a deal with a known and friendly
partner today would prepare the way for an orderly transition for himself and the firm.
Flinder expected the merger to generate significant cost gains. RSEs greater purchasing power
would lower the cost of materials and components for FVC. RSEs new resource-management system
could be expected to reduce FVCs in-process costs. Estimates from FVCs accounting group had
identified pretax constant-dollar cost savings of $2 million in the first year of operation and $4 million
thereafter. He also recognized other synergy gains that arose from RSEs stronger marketing clout, crossselling with other RSE products, and its deep financial pockets. He believed that the widening-gyre
project could have a broad application in nautical, aerospace, and automotive products. Based on the
investment required to bring such technology to market, he estimated the economic value at between $10
and $18 million
Bill Flinder had known Tom Eliot for several years, having been introduced at an industry
conference where they were both speakers. As founders and significant stockholders in their respective
firms, they liked and respected each other. Flinder hoped that RSE would recognize the fair value of his
company.

Appendix 2
FLINDER VALVES AND CONTROLS INC.
Confidential Supplementary Information for Management of RSE International

Flinder Valves was the first among several potential targets identified by Catherine MacAvity,
RSEs vice president of Business Development, and the architect of the acquisition program. Eliot
approved the choice and believed a smooth and successful acquisition of FVC was critical to RSEs
expansion plans. Recent news in the U.S. credit markets had been grim. MacAvity worried that the news
in the financial markets might chill the ongoing talks. If the merger fell through after going this far, Eliot
feared his board might become discouraged. On the other hand, if FVC was acquired at too high a price or
failed to produce adequate returns, the RSE board would be unlikely to give its full support to future
mergers.
In planning RSEs expansion, Eliot had considered several companies as possible acquisition
candidates. Eliot was seeking a small, well-managed manufacturer that could offer RSE strong growth
opportunities and bring it more specialized, higher-technology products that would be less susceptible to
succumbing to the competition. Although RSE had done well, Eliot felt the company lacked the ability to
be innovative. No new products had been developed over the past two years, and Eliot personally felt that
the research and development (R&D) group at RSE International had fallen behind its competitors. FVC,
with its proven management and engineering skills, seemed to offer the R&D capabilities and growth
prospects that Eliot sought. Eliot realized that time was of the essence, especially since other competitors
were also interested in Flinder Valves. Nonetheless, he wanted to be certain that acquiring it would truly
place RSE in a better competitive position. One concern was how well FVCs employees would handle
the transition from working in a small, entrepreneurial company to a much bigger place like RSE. The
two companies possessed quite different cultures. Another concern was about the earnings dilution that
RSE might incur from the acquisition. In fact, two directors had cautioned Eliot against impairing the
firms forecasted growth in earnings per share.
Eliot and MacAvity expected the merger to generate significant cost gains. RSEs greater
purchasing power would lower the cost of materials and components for FVC. RSEs new resource
management system could be expected to reduce FVCs in-process costs. Estimates from RSEs duediligence process had identified pretax constant-dollar cost savings of $1.5 million in the first year of
operation and $3 million thereafter. They also recognized other synergy gains that arose from RSEs
stronger marketing clout, cross-selling with other RSE products, and its deep financial pockets. But for
the sake of conservatism, they chose not to include these in the valuation. They believed that the
widening-gyre project could have a broad application in nautical, aerospace, and automotive products.
Based on the investment required to bring such technology to market, they estimated the economic value
at between $5 and $15 million
Tom Eliot had known Bill Flinder for several years, having been introduced at an industry
conference where they were both speakers. As founders and significant stockholders in their respective
firms, they liked and respected each other. Eliot hoped that RSE could put together a deal that not only
worked for the two founders but made broad economic sense.

The information below is for your own knowledge if you ever have to negotiate a
merger or any other form of financial transaction.

Supplemental Technical Note: Valuation and Merger Negotiation


Experienced financial decision-makers know that valuation is imprecise. Too many
parameters are uncertain, which renders any particular point estimate uncertain. This situation
leads to two important questions for negotiators of mergers and acquisitions: (1) What role can
quantitative analysis play? (2) How can one negotiate rationally and advantageously amidst this
uncertainty?
The Role of Quantitative Analysis
Two classic naive responses are made to the uncertainty of valuation: (1) to assert (with a
straight face) that the point estimate is the true value of the company, and (2) to chuck the
quantitative analysis out the window and to rely on some other method of guidance.1 The more
sophisticated response is to embrace the uncertainty and focus not on point estimates of value but
on a range of value. Quantitative analysis is essential for determining this range. The classic
ways of setting the range include:

Sensitivity analysis: Here, one identifies the key value drivers of a firm and determines
the variation in value as the drivers vary. One must take care to do this sensibly because
quickly generating a blizzard of numbers is easy.

Scenario analysis: This analysis is similar to the sensitivity analysis, but acknowledges
that many assumptions will tend to vary together. In this approach, one estimates values
of a company associated with different views of the future. These scenarios could simply
be based on a general sense of how things will turn out (i.e., optimistic, pessimistic, etc.)
or could be tied to specific events that have a competitive foundation (e.g., a major
foreign competitor enters your domestic market) or a political/economic foundation (e.g.,
Britain endures a long recession). Here also one must take care to do the analysis sensibly
because as the saying goes, garbage in, garbage out. Also, almost any scenario may be
framed in such a way as to produce the results that one wants.
Break-even analysis: At the least, knowing what assumptions are necessary to produce a
target value will be extremely useful. This approach explicitly solves the valuation in
reverse and leaves it to the decision maker to judge whether the break-even assumptions
are reasonable.

1 Investing folklore is replete with success stories in which the critical insights wereobtained from sources as
varied as astrology, gossip, and charting the height of womens hemlines.

Using these methods to produce a negotiating range, bounded on one side by the opening price
and on the other by the walk-away price, provides vital discipline for a negotiating team and may
help the team in its assessment of new information that could appear in the negotiations.
In short, quantitative analysis serves an important role in merger negotiations. The
sophisticated user acknowledges the uncertainty of value estimates and can use the insights
derived from careful analysis as a foundation for negotiation strategy.
Negotiating Well
Research on merger negotiations conducted in laboratory experiments suggests that 30% to 50%
of merger outcomes represent a significant adverse deviation from what the negotiators actually
wantedwalking away from negotiations where a satisfactory outcome was feasible or closing a
deal beyond the walk-away price. This finding is attributable to a significant psychological
influence on what, in theory, is a simple economic event. The psychological phenomena include
the following, adapted from Negotiating Rationally:2
1. Irrationally escalating to an initial course of action, even when it is no longer the most
beneficial choice
2. Assuming your gain must come at the expense of the other party and missing
opportunities for trade-offs that benefit both sides
3. Anchoring your judgments on such irrelevant information as the initial offer
4. Being overly affected by the way that information is presented to you.
5. Relying too much on readily available information, while ignoring more relevant data
6. Failing to consider what you can learn by focusing on the other sides perspective
7. Being overconfident about attaining outcomes that favor you

2 Max H. Bazerman and Margaret A. Neale, Negotiating Rationally, (New York: Free Press, 1992).

Analysis
We have conducted careful analysis and evaluation of the pre-merger scenarios of both
Flinder Valves and Controls Incorporation and RSE International Corporation and postmerger analysis of the proposed merged company. First, we have analyzed the historical data
and found out trends in the financial statements of the Flinder Valves and concluded that in
recent years.
The companys revenues have increased by an average rate of 9%, which seems pretty
logical because of the recent strong performance. Based on the historical data, we found out
the rate of Cost of Goods Sold over Sales was around 70% (average). General and Admin.
Expenses were assumed to be around 6% of the sales. Other net income was 1% of the sales.
Historical data showed that the Income before taxes or EBIT remained 25% of the sales and
that trend was expected to continue in the future as well. Income tax prevailing in the country
was approximately 40%. Net operating profit after tax (NOPAT) or earnings after tax was
assumed to be 14% (averaged) of the total revenues. Net increase or decrease in the working
capital of the company and investment in the fixed assets were given in the question, which
increased by 11% each year.
For the purpose of evaluating the future financial prospects of the company, we have
calculated the weighted average cost of capital (WACC) for the purpose of bringing future
cash flows in present terms. For the calculation of WACC, we have assumed the A credit
ratings for the Flinder Valves. On the other hand, we have assumed the 30-years US Treasury
yields as a risk free rate of return and geometric average rerun as market premium for the
calculation of cost of equity. Through WACC, we have calculated the NPV of the future cash
flows of the pre-merger estimates of the Flinder Valves Company and the terminal value at
the end of the projected life. After that, we were able to calculate the enterprise value and the
value per share on the basis of DCF. Refer to computations.
A similar process has been performed for the pre-merger valuation of RSE Internationals and
assumed the credit ratings of the company was Baa and assumed that the sales revenue of the
company will grow by the constant rate of 8.8% and by calculating cost of equity, which led
the computation to find out WACC, we have analyzed the potentials of the RSE company and
calculated its present value and terminal value. Then we were able to compute enterprise
value and the value of the shares on DCF basis. Then we have analyzed potential post-merger
synergies and economies of scale and found that both the companies will enjoy a premium
over their current share prices because of the merger, based on the expected 5% inflation rate
prevailing in the market.
Recommendation
Based on the above analysis and appendices shown below, we can suggest to the companies
to go for the merger, as the post-merger benefits would be favorable of both the companies
and both would be able to grab the synergies and would grow further.

This is just a sample partial case solution. Please place the order on the website to order your
own originally done case solution.
Set in May 2008, this case represents a separate chief executive officers prospects Tom
Elliott and Bill Flinder as we approach the negotiations RSE International Corporation
purchased Flinder Valves and Control Inc. task for the student is to complete the evaluation
and analysis of the target customer and agree on a price and exchange rate counterparties.
The purpose of design for students who will be organized into groups and assigned to play
the role of either valves or Flinder RSE International in negotiations. Housing provides
additional personal information for each of the parties. Thus, the only element in the case of
negotiating the terms of the acquisition under asymmetric information. The matter is
relatively simple and provides the first exercise in the negotiation of the acquisition. It could
also be taught in the usual case, the discussion fashion to an estimated joint negotiation
exercise Hide
by Michael J. Schill Source: Darden School of Business 14 pages. Publication Date:
November 17, 2008. Prod. #: UV1062-PDF-ENG
How We Work?
Analisis
Kami telah melakukan analisis yang cermat dan evaluasi skenario pra-merger kedua Flinder
Valves dan Kontrol Incorporation dan RSE International Corporation dan analisis pascamerger dari perusahaan gabungan yang diusulkan. Pertama, kami telah menganalisis data
historis dan menemukan tren dalam laporan keuangan Flinder Katup dan menyimpulkan
bahwa dalam beberapa tahun terakhir.
Pendapatan perusahaan ini telah meningkat dengan rata-rata 9%, yang tampaknya cukup
logis karena kinerja yang kuat baru-baru ini. Berdasarkan data historis, kami menemukan
tingkat Harga Pokok Penjualan atas Penjualan adalah sekitar 70% (rata-rata). Umum dan
Admin. Beban diasumsikan sekitar 6% dari penjualan. laba bersih lainnya adalah 1% dari
penjualan.
Data historis menunjukkan bahwa Laba sebelum pajak atau EBIT tetap 25% dari penjualan
dan tren yang diperkirakan akan terus berlanjut di masa depan juga. pajak penghasilan yang
berlaku di negara ini adalah sekitar 40%. laba operasi bersih setelah pajak (NOPAT) atau laba
setelah pajak diasumsikan 14% (rata-rata) dari total pendapatan. Kenaikan bersih atau
penurunan modal kerja perusahaan dan investasi di aset tetap diberikan dalam pertanyaan,
yang meningkat sebesar 11% setiap tahun.
Untuk tujuan mengevaluasi prospek keuangan masa depan perusahaan, kami telah
menghitung weighted average cost of capital (WACC) untuk tujuan membawa arus kas masa
depan dalam hal ini. Untuk perhitungan WACC, kita telah mengasumsikan A peringkat kredit
untuk Flinder Katup. Di sisi lain, kita telah mengasumsikan 30-tahun Treasury AS hasil
sebagai risk free rate of return dan tayangan ulang rata-rata geometrik sebagai premi pasar
untuk perhitungan biaya ekuitas. Melalui WACC, kami telah menghitung NPV dari arus kas

masa depan dari perkiraan pra-merger dari Flinder Katup Perusahaan dan nilai terminal pada
akhir kehidupan yang diproyeksikan. Setelah itu, kami mampu menghitung nilai perusahaan
dan nilai per saham atas dasar DCF. Mengacu pada perhitungan.
Sebuah proses serupa telah dilakukan untuk penilaian pra-merger dari RSE
INTERNASIONAL dan diasumsikan peringkat kredit perusahaan itu Baa dan diasumsikan
bahwa pendapatan penjualan perusahaan akan tumbuh dengan laju konstan 8,8% dan dengan
menghitung cost of equity, yang menyebabkan perhitungan untuk mengetahui WACC, kita
telah menganalisis potensi perusahaan RSE dan dihitung nilai sekarang dan nilai terminal.
Kemudian kami mampu menghitung nilai perusahaan dan nilai saham secara DCF.
Kemudian kami telah menganalisis potensi sinergi pasca merger dan skala ekonomi dan
menemukan bahwa kedua perusahaan akan menikmati premium lebih mereka harga saham
saat ini karena merger, berdasarkan tingkat 5% inflasi yang diharapkan berlaku di pasar.
Rekomendasi
Berdasarkan analisis di atas dan lampiran yang ditunjukkan di bawah, kita dapat
menyarankan kepada perusahaan untuk pergi untuk merger, sebagai imbalan pasca-merger
akan menguntungkan kedua perusahaan dan kedua akan mampu meraih sinergi dan akan
tumbuh lebih lanjut ...... ...................
Ini hanya solusi kasus parsial sampel. Harap menempatkan pesanan di website untuk
memesan solusi kasus awalnya dilakukan sendiri.
Ditetapkan pada Mei 2008, hal ini merupakan yang terpisah chief executive officer prospek
Tom Elliott dan Bill Flinder saat kita mendekati negosiasi RSE International Corporation
membeli Flinder Valves dan Pengendalian Inc. tugas bagi siswa adalah untuk menyelesaikan
evaluasi dan analisis target pelanggan dan menyepakati harga dan nilai tukar counterparty.
Tujuan dari desain untuk siswa yang akan diatur dalam kelompok-kelompok dan ditugaskan
untuk memainkan peran baik katup atau Flinder RSE Internasional dalam negosiasi.
Perumahan memberikan informasi pribadi tambahan untuk masing-masing pihak. Dengan
demikian, satu-satunya elemen dalam kasus negosiasi persyaratan akuisisi pada informasi
asimetris. hal ini relatif sederhana dan memberikan latihan pertama dalam negosiasi akuisisi.
Hal ini juga dapat diajarkan dalam kasus biasa, diskusi fashion diperkirakan latihan negosiasi
bersama "Sembunyikan
oleh Michael J. Schill Sumber: Darden School of Business 14 halaman. Tanggal publikasi: 17
November 2008. Prod. #: UV1062-PDF-ENG

The lessons of most studies of financial negotiation include the following:

Know thyself. Know thy counterparty. Risk aversion, optimism (or pessimism) about the
future, the desire to settle, and an expectation of settling are influential on bargaining
outcomes.

Do not abandon sound quantitative analysis. Do your homework before negotiating.


Estimate bargaining ranges; set walk-away prices.

Be disciplined in negotiating. Stick to predetermined walk-away prices unless you have


significant new information or other sound reasons for abandoning them.

Mastery of negotiating tactics pays. Anchoring or framing the other partys expectations,
the number of proposals, the pattern of concessions, the use of time, the use of
interruptionsall these affect outcomes.

Negotiate based on several attributes, such as price and terms, rather than one. Oneattribute negotiation often leads to deadlock.

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