Monmouth

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Case: Monmouth, Inc.

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

Pros:

* Synergies: An acquisition would both increase revenues and decrease costs.

* The revenue-enhancing cross-marketing could arise from the possibility to use the strong brand name to enhance the sales of Monmouth’s products.

* The cost-reducing synergies following the deal are estimated to reduce COGS with 4 percentage points and SGA by 3 percentage points.

* Financial synergies could be a result of a lower cost of capital due to the imperfect correlation of the two firms risky cash flows.

* Expansion: Growth is one of the most fundamental motives for M&As. An acquisition of Robertson could be the ticket to rapid growth due to the entering of new markets. Robertson’s unique distribution could result in cross marketing, making Monmouth a bigger player in both the industrial and consumer market. Through Robertson’s distribution to Europe, other geographical markets could be reached as well.

* Diversification: By acquiring Robertson, Monmouth will be less cyclical and dependent on the overall economy. Robertson is selling “small ticket” items, with no profit dependence to large single costumers. This corresponds well with the diversification program.

Cons:

* Synergies: The revenue-enhancing synergies can be hard to quantify and build into valuation models.

* Expansion: The attempt to grow could lead to less effective management. The expected profitability of the expansion needs to be closely examined to figure out if the growth is worth the cost. Monmouth and Robertson are players in different markets, which could be a challenge to manage.

* Diversification: There is found little evidence that diversification increases corporate values. A study by Berger and Ofek found that diversification...