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Introduction
Bill Yeats, chairman, CEO and founder of Yeats Valves and Controls Inc. ... He had to meet with Edna Millay, an investment banker and member of Yeats Valves’ board of directors, to discuss the possible acquisition of Yeats Valves by TSE International Corporation. Yeats Valves engages in the manufacture of specialty valves and heat exchangers. ... As the company that is to be potentially acquired, it is Yeats’ job to find what he thinks is his company’s value or price that he thinks is acceptable and also captures the intrinsic characteristics of the firm such as its intellectual capital and the unforeseen benefits of its new “widening gyre” R&D program. Along with the target price, Yeats must find the lowest possible price that the company should set for negotiations.
Yeats, who is nearing retirement age, has yet more reasons to push the acquisition deal through with TSE International Corporation. Yeats desired acquirer, TSE International, is a large company that would be able to support and continue the company’s research and development projects. Furthermore, Yeats would be able to gain marketing, distribution channels and production know-how from TSE. Finally, Yeats would gain an incentive bonus from TSE, which would add to his retirement benefits.
The acquisition will be funded primarily through an equity exchange. The major remaining problem is to determine a basis on which shares of Yeats Valves common stock will be exchanged for those of TSE International. Yeats must be able to convince TSE that his company is worth much more than even his conservative forecasts show and he must be careful not be blinded by his own eagerness to complete the deal soon. ... This analysis will encompass both optimistic and pessimistic growth rates to provide a range of possible prices that Yeats would accept in the negotiations between it and TSE International. ... We first find the free cash flow values and then discount them at the cost of equity (Ke), since the companies will be using equity to finance the acquisition. ...
Constant Growth Model
In order to determine the nominal growth rate for Yeats, it is first necessary to come up with an accurate representation of inflation. Since Yeats is an international company with 30% of its sales coming from other countries, we calculated a weighted inflation rate for Yeats based on the amount of business done in each country.
Approximate Word count = 1845
Approximate Pages = 7.4
(250 words per page double spaced)
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