Monmouth, Inc. Case Study

Monmouth, Inc.

Case Discussion Questions

Why do firms acquire other firms:

-Synergy- value maximization theories-which is the idea that by combining business activities, performance will increase and costs will decrease

-Managerial utility maximization theories:

-risk reduction

-size maximization

-growth maximization

-diversification/ sharpening business focus

-increase supply-chain pricing power

-tax avoidance

-superior information (undervalued target)

-eliminate competition

-economic efficiency and market power- economies of scope and scale, power to affect market prices, improved management

empirical implications of merger theories:

-Value maximization: acquiring and target firm shareholders gain, on average; net wealth is increased

-Managerial utility maximization: target firm shareholders

-target firm shareholders in the US and UK gain about 20% on average in acquisitions, more in contested acquisitions

-acquiring firm shareholders lose on average 1-2% or breakeven, depending on which study one looks at

-average net wealth creation is close to zero

1. If you were Mr. Vincent, executive vice president of Monmouth, Inc., would you try to gain control of Robertson Tool in May 2003?

*2. What is the maximum price that Monmouth can afford to pay, based on a discounted cash flow valuation?

3. Why is Simmons eager to sell its holdings of Robertson stock to Monmouth at $50 per share?  What are the concerns of and alternatives for each of the other groups of Robertson shareholders?

4. What offer would you make to gain the support of the Robertson family and the majority of shareholders and still be consistent with improving the trend of Monmouth’s earnings per share over the following five years?

*Each student group should prepare a written response to question 2 above.  Use discounted cash flow analysis to estimate the value of Robertson Tool under Monmouth management.   Explain your assumptions and methods carefully.  How did you project expected future cash flows?  How did you choose a discount rate?

Papers should be approximately 3 to 4 pages long, double spaced.

Emily Dechand

Monmouth Inc.

Paul Malatesta

To estimate the maximum price Monmouth can pay for Robertson, I first started out by estimating Robertson’s weighted average cost of capital. To do this I found that their amount of debt is $12 million from exhibit 2 in the case and found their value of equity by multiplying their shares outstanding by current market price found in exhibit 1 of the case: 584,000*44=25,696,000. This would make the value of the firm 12 M + 25,696,000=37,696,000. This implies a debt/equity ratio of 46.7%. In exhibit 2 of the case I found debt/value= 28%, which implies equity/value=72%. I found Robertson’s tax rate by dividing income tax by income before tax and averaged all 5 years to get an average tax rate of 40%.