Tse International Corporation

TSE INTERNATIONAL CORPORATION

CASE BACKGROUND

TSE International Corporation is a Fortune 1000 company founded by Tom Eliot in 1970. According to Eliot, the growth strategy of the firm in the time to come was supposed to be that of focused diversification, which would be achieved by an aggressive growth-by-acquisition program designed to create opportunities and entries into more dynamic markets than the ones which TSE International currently served. Although having done well in the past, the company had produced few breakthrough innovations in their products in recent years. If this trend wasn’t reversed, TSE international would lag behind its competitors.

Among several potential targets identified by TSE international, Yeats Valves was the most prominent one. The negotiations were on track, however, the stock market was not on a high around this time, amidst the backdrop of the dot-com-bubble-burst. This could stall the discussions going forward. If the merger fell after having come this far, this would discourage the board from undertaking such negotiations in future. Also, it was to be ensured that the price at which the acquisition was made was not too high, in case of which the Board would again be reluctant to support mergers in future. Therefore, it was imperative that the deal was thoroughly reviewed and the terms of the agreement worked out well.

The reason for selecting Yeats Valves was the fact that it offered TSE international considerable expertise in innovation-driven R&D and efficient handing of small production orders. On the other hand, TSE international was more of a low-cost producer, and cost leadership was its primary strategy in the market. So, there was a lot of synergy expected come out of this merger.

Key Financial Problems

1. Terms of the agreement:

The two negotiating parties had been considering some of the governance and compensation issues in the merger. The top management and other employees of Yeats were to be retained. It was decided that there would be no layoffs. The challenge was the implementation of this decision. How would the duplication of jobs be curtailed? How would cost efficiency be achieved after the merger? The intention of TSE International was to grow with the YVC operation, as the solid management of Yeats Valves and Controls was one of the primary reasons why it was attractive to TSE International.

Additionally, Yeats had asked for a grant of five year options to purchase 80,000 shares of TSE at 90% of its market price at the close of the acquisition. A generous incentive bonus of a salary increase ranging from $50,000 to $200,000 per year was also sought.

1. Adequate Price of acquisition

The crux of the problem here is to estimate the correct price of the acquisition of Yeats. A price too low would be unfavourable to Yeats, and might hurt the overall agreement. A price too high might be the end for more acquisitions like this, and cause a setback to the growth trajectory of TSE International. An adequate balance had to be made. To proceed with the negotiations, two prices have to be determined: Opening price, the price at which TSE international would open the negotiations; and the walk-away price, above which TSE international would not concede no matter what.