Flinder Valves

The idea of selling FVC seems to be imperative. Bill Flinder was approaching retirement and despite FVS’s good top-management team, none of them were qualified enough to run the company alone. Additionally, FVC needed to fund and expand their R&D activities, and a well-financed partner capable of supporting that would be a good solution. FCV could also benefit from operating synergies of such partnership, i.e. gaining access to a large marketing and distribution network and gaining production know-how for high-volume manufacturing. Finally, FVC’s industry had been experiencing an increasing trend of M&A over the past year and the company feared it would face fierce competition if it did not consolidate with a financially strong partner. FVC had a reputation for engineering excellence, excellent prospect for improved performance, modern efficient plants, and its under-development “widening-gyre” project, if found to be economically sound, could have a broad application in nautical, aerospace, and automotive products. FVC is debt free and for the past 6 quarters its stock price has been increasing steadily (starting in Qtr-1.07). It has the highest dividend yield compared to the industry (3.9% - based on Qtr-1.08 data). With a beta equal to one, the company’s stock price will move with the market and is in-line with its industry. On the other hand, RSE had adopted an aggressive growth-by-acquisition program aimed at diversifying the company’s markets and prospects. RSE was not highly leveraged (Debt/Capital: 9.7% - industry avg.: 26%) and had the financial capacity to execute such a program. It is a good time for both companies to take advantage of the synergies of merging together (i.e. economies of scale, economies of scope, cross selling, and vertical and horizontal integration).

On May 1st 2008, FVC’s market value was worth $96.99 million (stock price: $39.75 x 2.44 million shares / no debt). The EV using the DCF valuation is estimated to be $113.3 million...