Monmouth Case Study free essay sample

In Table 1 we compare Robertson’s efficiency ratios to the industry average: Efficiency Ratio| Robertson| Industry Average| Collection Periods| 69| 52| Inventory % Sales| 15%| 5%| Operating Margin % Sales| 17%| 33%| Return on Capital| 13%| 6%| As the comparison suggests, there is considerable margin for improvement in Robertson’s inventory management and operating margin. However, even in these circumstances, the company has an above average Return on Capital and collection period; as such, there is considerable potential for upside under a new management team with tighter, more efficient controls. 2) In general, how might an acquisition benefit the acquiring firm’s shareholders (give four or five generic ways)? In the specific case of Robertson: Why is Robertson an acquisition target? Why are Monmouth and the other parties interested? Usually, an acquisition is pursued for some or all of the following reasons: * Increasing market share and geographical reach * Realizing revenue (cross sales / up sales) and expense synergies (redundancies, rents) * Diversification of products (or conversely, divesting to focus on core businesses) * Reducing tax liabilities (buying a loss maker) * Acquiring talent, especially if the target is a start-up * Vertical integration In many ways, Robertson is a textbook acquisition target; it has a large number of openly held shares, it trades below its book value and is managed in an ineffective way. We will write a custom essay sample on Monmouth Case Study or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page In essence, this means that taking over Robertson can be profitable even without any synergies. Simmons, whose actions are more typical of those of a financial buyer rather than strategic buyer, hopes to gain control, replace the board and unlock the underlying value of Robertson through broad changes to the way the business is run, including aggressive cost cuts and elimination of product lines. Monmouth, a typical strategic buyer, is looking to work together with existing management in 3 key areas: * Focusing on a limited number of profitable products, thereby reducing COGS from 69% of sales to 65% of sales, * Personnel redundancies reducing SGamp;A expenses from 22% of sales to 19% of sales * Revenue synergies, mostly focused on cross-selling and opening new markets for Monmouth’s products through Robertson’s European distribution system NDP, which most likely was approached by Robertson, rather than the other way around, is a â€Å"white knight† looking to capitalize on a good deal (and possibly other privileged terms) offered under the pressure of a hostile takeover. Valuation 3) Estimate Robertson’s value per? share using Firm Value/EBIAT and P/E multiples for all comps and both recent Robertson data and operating improvement forecasts (where Firm Value in Exhibit 6 refers to market value of equity plus book value of interest bearing debt). D etermine a price range. What pitfalls do you see in this exercise? What would you do to alleviate them? First, we assume that the definition of Firm Value refers to net debt, that is book value of debt minus cash. The only companies comparable with Robertson are Actuant, Lincoln Electric, Snap-On and Stanley Works; the other companies have a different business focus, and therefore must be excluded from the valuation. Even so, there is a large discrepancy between the size of Robertson, with an Enterprise Value of $29 million, and the average comparable company, with an Enterprise Value of $1. 5 billion. There may be little relevance towards Robertson, which carries significantly more risk due to its small size; it is evident from the information available that bond rating correlates well with company size. In the absence of a different set of companies, with a smaller market capitalization, we observe the following estimations for Robertson.