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This report presents the valuation of YVC for the proposed acquisition by TSE, who will acquire the majority shareholding (?). The main objective is to ensure that we account for every value of YVC and their brighter future prospects, as well as to identify the best price to sell YVC. In addition, the following objectives have also been identified in the case study:Acquisition of Yeats Valves by TSE International CorporationCreation of shareholders wealth for YVCTSE Financial stabilityYVC brighter future prospectsGrowth strategy for YVCW.B. “Bill” Yeats, chairman, CEO and founder of YVC is about to retire and he is concerned about what’s going to happen to YVC going forward. His major concern is what will happen to the shareholders value as his top management is very specialised compared to the multi-skill business management person that YVC needs to run successfully. In addition, a number of other compelling reasons existed besides his retirement and the problem of management succession. i.e. the company needed a deep-pocketed partner in order to expand and to bankroll more research and development projects; YVC also believed that the company would benefit from gaining access to a large marketing and distribution networks and lastly as the company continued to grow, it needed to gain more expertise on high-volume manufacturing.  2.STRATEGIC ANALYSIS2.1Rationale for MergerStrategic reasons for the merger, i.e., reasons why the merger would be good for YVC. What are the synergies to be gained? Below are the ones I had picked up from the case. Please expand on them. ▪Succession issue▪Need for deep pocketed partner to finance expansion and more research (R&D Projects)▪Need to acquire or gain production know-how for high volume manufacture. YVC currently does not have this expertise. ▪Consolidation taking place within industry and there is a possibility of being ‘swamped’ by stronger competitionFor more info to add here, please refer to page 587 in the Financial Management textbook for synergies to be gained, but should be qualified by facts from case study. Also refer to chapter 25 in same book. The corporate financial strategy text book pg 185 -187 3.QUALITATIVE ANALYSISThe qualitative analysis will look at the relative strengths and weaknesses of both companies and will focus on both rational and soft issues.  4.QUANTITATIVE ANALYSISIn this section, we will be conducting valuations of a) YVC, b) TSE c) Combined YVC and TSE. Please note that Yeats plans to have an ongoing relationship with TSE after the merger. Such deals are paid in shares (pg 193, corporate financial strategy). We will clarify this upfront in the exec summary. Thus in share-based deals, vendor shareholders (YVC shareholders) have to consider the following:▪Are both companies fairly valued? If YVC’s shareholders are to accept shares in TSE, they need to know that these shares are not overvalued (pg 193). ▪What are the prospects for the combined company? In a share-based transaction, the target shareholders are effectively agreeing to accept the risks and rewards of the ongoing company. ▪If a transaction is done for cash, the parties have to determine how the price is stated: as a fixed number of shares or a fixed value▪Earn outs? (pg 194)The above points are reasons why we need to conduct valuations separately. There are 4 different methods to conduct valuations. After conclusion of each valuation, please provide a conclusion and the implications of the value arrived at. 4.1VALUATION OF YVCP/E RatioHere we review the past earnings and establish maintainable earnings- look at the company performance in the past and see which earnings are sustainable. We will use earning before tax because tax rates may be different from year to year and this may result in distorted maintainable earnings. Given the provided information we assume that YVC is a private company and therefore we will be using information from our Peer companies which we assume that they are listed. In this case we will use Watts Industries as they are the closest peer company for YVC in terms of products manufactured. We will therefore use Watts P/E ratio and adjust it accordingly:Appropriate P/E RatioP/E ratio of similar quoted company (Watts) 10.4Financial Risk AdjustmentsShare marketability is restricted -1Transferabilility of shares is restricted -0.4Business Risk AdjustmentsCompany YVC is smaller than Watts -18The net income provided on Exhibit 2 has minor fluctuations from year to year and we will therefore calculate the average as the maintainable earnings ($8 460+ $9 256 + $8 808 + $10 980+ $9 612)/ 5 = $9 423Therefore using this method the maximum value of YVC shares will be 8 X 9 423 = $75 384Reasonable TestTo calculate the Net Asset Value, there are three methods that we can use: Replacement value; Market value and Net Book Values. We cannot use the Replacement value because replacement costs provided are not sufficient. We can only use Market Value because it reflects on cash that we can receive if the company were to sell its assets at this point in time. Net Replacement Value Calculation$’000Total Assets56 376Cash1 884U.S Treasury tax notes and other Treasury obligations 9 328Due from U.S.Government 868Accounts Receivable 2 316Inventories 6 888Other Current Assets 116Investments (Assumed that not quoted) 1 768Land 320Buildings 16 800Equipment 16 000Construction in process 88Less Total Liabilities3 360Total Current Liabilities 4 560Less Provision for deferal income tax 1 200Net Asset Value 53 016We have excluded depreciation because we are using the market value and the depreciation has
3VALUATION OF YVC AND TSE COMBINEDThe rationale for the combined valuation is to see how the merger would perform. Ehrhardt. 5 years from now. 2005.F. Provision for federal income tax.. The maximum price should be the calculated value of $75 384 000( see above) and the minumum price should be equivalent to the Net Asset Value of $53 016 000. etcb)qualitative assessments of both Yeats and TSE.e. Are they over valued currently? What are their future growth opportunities separately and combined?  .5.C. M. Deferred assets. then maybe there is no reason to merge with TSE.•Elimination of inefficient Management4. what conclusions did we derive from the valuations section regarding the values of each company.e “do not leave too much value on the table”.already been taken into account. South Western (part of the Thompson Corporation) . We also excluded intangible assets(Patents) becase we are only looking at fixed and current assets. e. “ YVC has technology to die for” and “There’s a lot of value in the company that is not reflected in the balance sheet” . “YVC’s prospects are brighter than ever”. then it’s good for the shareholders.g. E.6. Therefore the selling price should be negotiated between these two values. In the light of Financial advisors comments i. However. we will advise the board of the YVC to sell the company at a price very close to the maximum price of $75 384 000. Free Cash Flow ( Still to do)FURTHER QUESTIONS TO ANSWERDoes this deal increase sales growth?Does it increase the operating profit margin?Does this deal reduce our effective tax rate?Is TSE a profitable company?Would YVC have control over operations?Will demand for YVC shares increase?Will YVC dividends increase?Will YVC share prices increase?What would be the synergy benefits that will be derived as a result of acquisition?Also look at the followingLook at Revenue EnhancementoMarketable gains i.BIBLIOGRAPHY▪.1.  . i. If the combined valuation is better than in 4. What have we found out regarding better access to funds.. i.RECOMMENDATIONSWe recommend that we retain or merge with TSE due to the following reasons: (Tie in all the analyses).e greater operating revenues from improved marketing such as better advertising effort.Brigham. Financial Management: Theory and Practice. what is the bidding company saying and what is Yeats sayingc)the outcomes or conclusions from the valuations section.e. The recommendations should be based on the conclusions or outcomes ofa)the strategic analyses.. 11the Edition.2VALUATION OF TSEThe 4 different valuation methods to be applied here4. and Deffered federal tax have also been excluded because they cannot be converted into cash. if the combined is lower than alone. In addition we excluded Cash value of the life insurance because they are not selleable. strengthening of distribution networkoStrategic Benefits – taking advantage of competitive advantageoMarket or Monopoly power due to reduction in competitionCost Reduction due to•Sharing of complementary resources and. This will allow us to assess how YVC’s shareholder value is likely to have performed/grown as a result of the merger.