Executive Summary:

On May 2, 2000 CEO of TSE International Corporation (TSE) Tom Eliot was preparing to meet president of
a target firm to be acquired named Yeats Valves and Controls (YVC). Serious negotiations of combining
the two firms started since Mar-2000 following casual conversations in late 1999. After focusing on the
broad motives and social issues of the acquisition during the initial phase, what still remained to negotiate
was the final term sheet on which definitive agreement would be drafted.

CEO Mr. Eliot had founded TSE in 1970 and grown it to a Fortune-1000 Company. In response to perceived
of growth challenges for the next decade, CEO persuaded the board to follow a policy of focused
diversification by acquiring firms and entering into more dynamic markets than the ones TSE presently
served.

YVC was among the several potential targets identified by TSEs Catherine MacAvity (Vice President,
Business Development). The CEO approved the transaction on the belief that YVC would be critical to TSEs
expansion plans because of its proven management and engineering skills, R&D capabilities and growth
prospects.

Key Facts and Details:

Problems Identified:

April-2000 was a time when markets saw many stock price declines due to dot-com bubble burst
and if the acquisition of YVC did not go through then the board might become discouraged and
on the other hand if TSE pays oo high price for the acquisition than the board might not provide
full support for any future mergers.
YVC management had asked for granting five year options to purchase 80,000 shares at 90% of
TSEs market price at the close of acquisition. In addition, Bill Yeats requested for incentive bonus
resulting in a salary increase of between $50,000 and $200,000 per year.
The reason behind recent rapid rise in YVCs stock price was unknown and whether expectations
from YVCs new widening-gyre technology had been fully reflected in the stock price or was it
because of the rumors of merger news with TSE.
The due-diligence research done by TSE indicated that the new widening-gyre technology could
have broad applications in nautical, aerospace and automotive products. However realizing the
benefits of applicability in multiple industrial applications was uncertain.
Since the deal was to be structured as a share-for-share exchange, TSE would need to propose an
offer based on a ratio of the number of TSE shares offered per YVC share. This was required to be
based on the relative contribution of YVC to Newco (i.e. merged TSE+YVC) and a cap of the
maximum that TSE would be willing to pay for YVC
Another concern was regarding earnings dilution that TSE might incur from the acquisition.
CEO of TSE was also worried about the shareholder control of Newco. TSE shares were widely
held while YVCs shares were 70% family held and 20% owned by Auden Company. The Auden
Company did not object to the merger but had already indicated that they would sell off their
share of YVC. 40% of YVC was held by Bill Yeats.
 Since other competitors were also interested in YVC, the CEO of TSE wanted to close the deal as
soon as possible. This also meant he had to ascertain that acquiring YVC would truly improve TSEs
competitive position.

Best Possible Solution:

The CEO of TSE wanted to estimate the value of YVC from multiple approaches. Using the
projected data given in exhibit-6 we can calculate the free cash flow generated by the Company.
Following table shows the numbers including the synergy possibilities of $1.5Mn in the year of
acquisition and $3Mn annually afterwards.

Conclusion/Recommendation: