Company Background - Yeats
Yeats was established 1980 as a small company organized for engineering and
development work on experimental heat exchanger. In 1986 Yeats Valves went
public in order to raise capital. The proposed merger with Auden Co (Distributor)
fell apart after anti-trust threats by Department of Justice surfaced. In May 2000,
acquisition of Yeats Valves by TSE Int'l was proposed. Yeats, post-acquisition, will
become independent operating division of TSE. The merger would be beneficial
owing to following effects:
-Needs a deep-pocketed partner to expand
-Would benefit from a larger marketing and distribution network
-Needs to gain production know-how for high-volume manufacturing
-Needs strong-muscled partner to compete against consolidated competition
-560 Stockholders
-70% of stock held within Board of Directors (20% Auden and 40% Bill Yeats)
-Auden will not object to merger but will sell their holdings of Yeats stock
Company Background - TSE
Incorporated in 1970, they manufacture products ranging from advanced
industrial components to chains, cables, nuts and bolts, castings and forgings,
and other similar products. One division produced parts for aerospace
propulsion. A second division produced a wide range of nautical navigation
assemblies and allied products. A third division manufactures a line of
components for missile and fire-control systems.
Valuation Techniques
A number of valuation techniques can be used. Each technique produces a
different valuation. Taken together, several different techniques could indicate
the price level that a bidder should be willing to pay. Here, looking at companies
backgrounds, we have used DCF as the method for valuation.
Four Values a Purchaser Should Consider
-Its current market capitalization
-The minimum price that would have to be offered to persuade shareholders to
sell their shares
-The value of the benefits the purchaser would expect to obtain from a takeover,
from extra profits or asset sales, etc. this sets a
maximum price a purchaser caught to pay
-A target price that will be conceded through negotiation, probably representing
a compromise between the highest price the buyer will
pay and the lowest the sellers might accept.
A Range of Valuations
-The initial price they might bid based on pessimistic assumptions
-A price that they can negotiate comfortably based on the most likely
assumptions
-The maximum price they ought to bid based on what are considered to be
optimistic assumptions.
Discounted Cash Flow
Tax Rate = 40%
Debt/Assets = 0%
Equity / Assets = 100%
Cost of Debt = 0%
Cost of Equity = 10.82%
WACC = 10.82%
Risk free rate = 6.6%
Market Premium = 5.5%
Beta = 0.77
The range of value using the DCF is $54.64 to $69.38 per share
Weakness of DCF
-The DCF model is only as good as its input assumptions
-Valuations are particularly sensitive to assumptions about the perpetuity growth
rates and discount rates
-DCF focuses on long-term value
-Focusing too much on the DCF may cause you to overlook unusual opportunities
Purchase of Yeats Valves with Stock
-Current Yeats Valves' Market Cap = 39.8 x 1440 = $57,312
-TSE should purchase Yeats Valves with between 3,343.49 and 4,934.71 shares of
TSE stock
-A compromise would be to purchase with 4,139.10 shares of TSE
-Lowest value represents an approximate 28% premium on Yeats' current market
cap
Conclusion and Recommendation
-To value the share price of Yeats Valves, 3 methods were used and the most
weight (60%) to DCF, less weight (30%) to company
comparables and the least weight (10%) to M&A comparables.
-The appropriate range of values for Yeats Valves is $51.03 to $75.32 per share
-With this range of stock prices, we found the range of values for Yeats Valves to
be $73,490 to $108,464.85
-From this range of values, we determined a range for the number of TSE shares
TSE should buy Yeats with TSE stock to be 3,343.49 to
4,934.71 shares
-TSE should buy Yeats with 4,139.10 shares of TSE stock (the median value of the
range)
