Case Study 43

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Case Study 43 RSE acquisition of FVC

Group: Brad Lindquist, Rajesh Verma, Kevin Bednarz, Oana Dancescu

1. Using the case and the supplementary data in Appendix TN1, how do you see FVC’s situation? What are the strengths and weaknesses of FVC and RSE? Why should the two companies want to negotiate?

FVC is a company with lots of growth potential, but it lacks infrastructure to manage growth. This is why a potential sale to RSE makes sense, because RSE is investing heavily in future IT systems integration.

Strength and weaknesses of the two firms can be summarized as below?

FVC Strength | FVC Weakness | RSE Strength | RSE Weakness |

Excellent Engineering team | Logistically structured for small production | Modern infrastructure | Engineering expertise |

Government Contract | | Low cost producer | |

Future Commercial Potential | | Production Knowledge | |

| | High Tech IT infrastructure | |

As shown above, they are each in a position to complement each other to reap the benefit of each other’s strengths and therefore they should negotiate. Also, we can see that RSE has little Debt, but ability to take more debt, thus we can estimate possible synergies coming from a possible merger.

2. What is FVC worth? What are the key value drivers?

There are multiple ways in which FVC could be valued;

a) Enterprise value based on its debt and Equity

CAPM: 4.52% +1.14* 7.2%.

Risk free rate- Treasury Bonds( 30 years)

Average Beta as given in exhibit 7

Risk premium – Arithmetic average as given in exhibit 9.

b) Market Capitalization as of May 1, 2008 after the acquisition announcement

a. @$39.5/share * 2,440,000 = $98,380,000

c) Terminal value and the present value of the cash flows

Based on the exhibit 10;

d) Using the Industry average P/E multiple of 2007

a. 14X (exhibit 9)= 14*$5,575,000 = $78,049,000 at 2007

b. 18.5X (exhibit 7) = 18.55* 7,447,000 =$ 138,141,850 at 2008...