Identification of Problem

RSE is considering acquiring FVC as it is interested in acquisitions since 1998; however, on that t
ime negotiation did not reach to the stage of working out an agreement. In the current scenari
o, both the parties are considering the negotiation of acquisition and decision making will be d
one on the basis of past performance and new projected data. The company is also considering
whether it should increase its enterprise value after acquisition or not and also it has to identif
y whether its projected cash flow will increase or not. Both the parties want to identify the valu
ation and term and conditions of acquisition in an active environment.

Important Considerations

Flinder Valve Cooperations net enterprise value, WACC and its future share price have been do
ne in the spreadsheet named as Flinders and also mentioned in appendix 1 and 2. The net pres
ent value of FVC of 2008 till 2013 is $27,081.58 which is derived from free cash flow, which sho
ws that the company has a secure projected cash flow as calculated by its past cash flow avera
ge growth rate as it is a positive signal for RSE, and after acquisition the company can generat
e a positive cash flow. If RSE does a merger then the old FVC management will remain employ
ed. As the companys current management at the time of acquisition is competitive enough, the
refore, RSE decided not to change its existing management. RSE appointed Bill Flinders to train
its new CEO. The organization pays yearly bonus to Bill almost about $50,000 to $200,000 whic
h is good compensation for Bill. FVCs recent merger also has good market growth which leads
to an increase in the firms value significantly. We have calculated net operating profit after tax
2008-2013 of both the firms. Depreciation and Net working capital were given already therefore;
Net operating profit, depreciation, Net capital expenditure are used in order to calculate free ca
sh flow. After that a change in net NOPAT is used to calculate NPV. According to Financial Ana
lysts point of view, FVC is the best acquisition for RSE as it has better NPV and as well as adv
anced technology which will also enhance FVC cooperate value.

Analysis
A premerger analysis is conducted on Flinders and RSE, as both companies enterprise valuation
is calculated in calculated in excel spreadsheet and also mentioned in the appendix. The calculat
ion of Flinders projected free cash flow which showed progress before merger and a discount o
f future cash flow with a discount in WACC which was positive. Projected cash flow estimation i
s conducted with the help of past trend of both the companies. The estimated revenue growth
rates of FVC and RSE are 8.63 and 8.75 respectively. Free cash flow is calculated by past trends
and then all cash flows are discounted with WACC as well as the terminal values and discount
ed terminal values are identified. The sum of free cash flow is used with the NPV being deduct
ed by the terminal value and then it is divided by the total outstanding shares; this is done in
order to identify the future share price of both the companies. The current share price of both
companies is given in exhibit 6. The calculation of incremental cash flow and share premium is
conducted in excel spread sheet named as Cost Synergy.

Recommendation

After analyzing both firms pre-merger acquisition, it is recommended for both the companies to
go with the merger as the pre-merger would be favorable for both the companies. The future s
hare price of FVC is estimated to be $70, whereas, the current share price of the firm is $39.75.
RSEs future share price is $114, whereas, its current share price is almost $20. Both firms show
ed a drastic increase in share price before merger as it indicates that the future of both busines
ses is profitable, therefore, after merger it is understood that both the firms share prices are aff
ected in a positive way, plus, there is an increase in their market reputation. The recommendati
on for both firms is to go with the merger. This merger will not only maximize their wealth, bu
t also make them a global leader