Monmouth Case

Memo Monmouth, Inc.
Date: March 2003
To: Harry Vincent, Executive Vice President
From: Thomas Harper; Travis Ham, Dorian Dolleman
Subject: Acquisition of Robertson Tool Company
Monmouth should try to gain control of Robertson Tools Company. When our companies merge
the sales force in Monmouth easily overlaps with Robertson which provides the possibilities of
decreasing the operation costs. Further, other costs can be lowered to experience higher profits.
The costs of goods sold can be reduced and also the advertising and sales expenses could be
reduced. Moreover, from the side of source of earning the two companies perfectly complement
each other, Robertson’s strength is in the industrial market and its strong European distribution
system, using it by Monmouth will push the product presence and sales in these markets. From
the last three acquisitions our company adhered to only leading companies in their respective
market segments and Robertson Tool Company is no exception.
Robertson Tool Company is one of the largest domestic manufacturers of cutting and edge hand
tools and a leader in its two main product areas. It holds a 50% share of the $75 million market
for clamps and vises and a 9% share of a $200 million scissors and shears market. Its
distribution center is its greatest asset. It has 15,000 retail outlets, 48 salespeople and 28 sales
engineers. Also, its products are sold in over 137 countries. Because of these strengths we felt
that Robertson could share fully in the 6 to 7% annual sales growth forecast for the industry.
We believe that the maximum that the company should pay for Robertson Tool Company is
$46.30 per share. This result is based on analysis of valuation using discounted cash flow
(Exhibit 1), calculation of Weighted Average Cost of Capital (Exhibit 2) and terminal value
determination. We also used a multiple comparison approach. We used both the EBITDA and
the P/E multiple which are shown in Exhibit 5. Our average per share value of Robertson using
these multiples is $46.85 and the overall best value is $46.30. This is over the amount that
Robertson wants at $44 per share.
Simmons is eager to sell its position to Monmouth for $50 per share because of the bad prospects
that it faces with a possible merger between Robertson and NDP after which Simmons will
receive NDP common stock with disappointing performance and often traded in small volume
which is going to affect performance of Robertson 177,000 shares which are in Simmons holding
and it would be difficult to sell them with NDP stock. Another reason for $50 per share is that
Simmons charged this price level since it needs to get return from shares after when it bought
them at $42 per share. The $50 per share is a little high by our valuation of the company. Our
best overall value of the company was at $35.56 per share which is $14.46 under the wanted
share price.
NDP Corp is offering Robertson Tool Corp five shares of NDP common stock that would be
exchanged for each share of Robertson common stock. We valued NDP common stock at
around $11.34, shown in Exhibit 4. This would bring acquisition price per share value of
Robertson to $56.70. The only reason we believe Robertson will not go through with the
acquisition is because NDP stock does not have a dividend and its value has recently been below
$5.00 per share.
Exhibit 3 shows the change in share price from changes in both the constant growth and sales
growth. Using a sensitivity analysis we found by changing the constant growth rate and sales
growth rate we used to value Robertson the valuation of the company can change significantly.
Just by changing the rate from 2.5% to 3% constant growth; our recommended share price goes
up to $49.92, which is closer to the per share value that Simmons wants. For Simmons Corp to
be satisfied with our acquisition price the sales growth would have to be close to 7% with a 2.5%
constant growth rate. The values in red indicate where both Robertson and Simmons Corp are
not satisfied with the price. Values in white indicate where Robertson is satisfied but Simmons
Corp is not. Green values indicate where both Robertson and Simmons are satisfied.
We believe that if we offer the Robertson Tools company an acquisition price of $46.30 per
share. Both the company management and investors would be satisfied. Simmons Corp will be a
little disgruntled that the share price is not closer to the $50 per share valuation but our price is
still over the $42 that they paid initially in their takeover attempt.
Appendix
Exhibit 1
Cash Flow
2003 2004 2005 2006 2007
EAT 1.68 2.54 3.50 4.16 4.56
Depreciation 2.3 2.5 2.7 2.9 2.9
Cap Ex 4.0 3.5 3.6 3.8 2.9

NWC 0.25 1.51 1.60 1.74 1.78
Cash Flow (0.26) 0.04 1.01 1.53 2.78
Exhibit 2
WACC
Beta 1.05
Cost of Equity 9.88%
Weight on Equity 72%
Cost of Debt 4.00%
Weight on Debt 28%
Tax Rate 40%
WACC 8.23%
Growth Rate 6%
Exhibit 3
Sensitivity Analysis of Sales

Growth Rate and Constant Growth Rate
Constant Growth Rate
1.0% 1.5% 2.0% 2.5% 3.0%
$ $ $ $ $
5.0% 32.08 34.35 36.98 40.07 43.75
$ $ $ $ $
Sales Growth
5.5% 34.37 36.79 39.59 42.89 46.81

$ $ $ $ $
6.0% 36.69 39.26 42.25 45.75 49.92
$ $ $ $ $
6.5% 39.06 41.79 44.95 48.67 53.10
$ $ $ $ $
7.0% 41.47 44.36 47.71 51.64 56.32
Exhibit 4
Share Prices at Year End 2002

Low $ 8.00 $ 16.00 $ 12.00 $ 19.00 $ 9.00
Average Low $ 12.80
$ 6.91
Times 5 $ 34.56
High $ 22.00 $ 30.00 $ 31.00 $ 48.00 $ 15.00

Average High $ 29.20
$ 15.77 $ 11.34
Times 5 $ 78.84
Average H/L $ 56.70

Exhibit 5
Multiples Comparison Value
EBIAT Multiple Value

Median 12.8 23.04
Mean 12.9 23.18
P/E
Median 13.8 31.90
Mean 13.5 31.32
EV Median 31.90
EV Mean 31.32
Best Guess Value 27.36
Per Share Value $ 46.85

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Memo Monmouth, Inc.

Date: March 2003

To: Harry Vincent, Executive Vice President

From: Thomas Harper; Travis Ham, Dorian Dolleman

Subject: Acquisition of Robertson Tool Company

Cap Ex 4.0 3.5 3.6 3.8 2.9

Cash Flow (0.26) 0.04 1.01 1.53 2.78

Sensitivity Analysis of Sales

5.5% 34.37 36.79 39.59 42.89 46.81

Share Prices at Year End 2002

High $ 22.00 $ 30.00 $ 31.00 $ 48.00 $ 15.00

Average H/L $ 56.70

Multiples Comparison Value

EBIAT Multiple Value

Best Guess Value 27.36

Per Share Value $ 46.85

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