Table of Contents1|Page Executive Summary The case ‘The Timken Company’ is about the acquisition of the Torrington from ‘Ingersoll-Rand’ by the Timken Company. Torrington produces the best quality bearing while the Timken has many wings where bearing is an important division of their business. Both these companies has 5% of product and 80% of customers redundancy. After the acquisition Timken will be world’s third largest bearing company. The main point of this case is how the payment for this acquisition will be made. Expected value of this acquisition is estimated $800 million. How Timken will pay this large amount is the main question here. Timken can borrow or can issue stock for this amount. But this large debt will affect Timken’s leverage ratio, as well as Timken’s investment grading in the market. Another option for Timken is to offer stock in exchange for the purchase. But still Timken will be needing cash for this acquisition to be complete. However we have found several circumstances of the financing opportunities for this acquisition which will affect the value of Timken. we analyzed various risk related to these financing like Interest Rate Risk, Overall Business Risk, Financial Risk, Degree of Financial Leverage, and Bankruptcy Risk, Du point ratio. After calculating the NPV of the financing options we have run simulation technique for the potential investment. We have tried to focus on the best option for the acquisition that will increase the value of the firm most. 2|Page Introduction Objective of the study Usually we gather theoretical knowledge from course material. But it is also very much important to relate that theoretical knowledge with practical situation. The basic objective of conducting this case analysis is applying our theoretical knowledge in practical situation. The objective behind conducting this study is as follows: To analyze the ‘The Timken Company’ scenario To analyze the acquisition of Torrington from Ingersoll Rand Analyze the financing of the acquisition Finding out the synergy of the acquisition Scope of the study The study topic allows us to analyze the cases named “The Timken Company” We have gone through the case thoroughly, analyzed the problems of this company and tried to find out solutions of these problems. Finally we have reached recommendations that will help to take the decision. Some external information has been used for lack of information provided. Methodology For preparing our report we went through the text and information collected from case and applied our sense of finance which we gained from different course especially from corporate finance and capital budgeting to evaluate and justify our assigned topic. All the data used in this report have been gathered from the case. Financial techniques taught in our BBA and MBA courses have been used here. Some reasonable assumptions have been made because of lack of information provided. 3|Page To analyze and solving the problem Free cash flow method. Crystal ball software is to complete the simulation analysis Limitations of the study The limitations of the study are defined by the extensive of the facts covered by the study and those that left out. Learning all functions, moods of business, risk factors and protective covenants were quite tough within specified time framework. There was also time constraint. While attempting to solve the problem we have to assume some factors. The analysis could have been better if those data were provided Case Briefing The Timken Company is one of the largest bearing companies in the industry. The company was established in 1898 by Henry Timken. During the long life of the company the company faced many ups and downs in the life cycle. In 1982 the company suffered its first loss since depression for the increasing amount of competition. During the year followed the company engaged in joint venture. In 2002 the company decided to acquire ‘Torrington’ Company from ‘Ingersoll-Rand’. This acquisition would make The Timken Company world’s third largest bearing company. Through the acquisition the Timken Company would be able to produce bearing with lower cost, Timken’s worldwide brand value and world class distribution will produce high quality bearing with lowest possible cost. Potential annual cost saving from the consolidating manufacturing facilities is expected to be $80 million. 4|Page for this huge analysis is needed for the issuance and the no. chain and related products and services -. Timken makes the world more productive and keeps industry in motion.The main challenge for The Timken Company is how the acquisition will be paid. With $4. Timken apply deep knowledge of metallurgy. Timken’s last issuance occurred in 1987.000 people operating from 28 countries. Issuing debt. Timken has two options for the financing of this acquisition: 1. They engineer. manufacture and market mechanical components and high-performance steel.support diversified markets worldwide. engineered-steel bars and tubes -. friction management and power transmission to improve the reliability and efficiency of machinery all around the world. but this debt issue will affect the Timken’s leverage ratio enough to virtually guarantee that Timken would lose its investment grade rating. Their bearings.as well as transmissions. of share issuance will have to be double since it’s last issuance to raise the amount needed. 5|Page . Equity issuance. Both this for the cash payment or they can 2. gearboxes. Offer stock along with the cash payment for this acquisition Participators of the Acquisition The Timken Company As a global industrial technology leader.3 billion sales in 2013 and approximately 19. today's Ingersoll Rand offers market-leading solutions and services that enable customers to create progress through a variety of industries and markets that touch everyday life. sustainable and efficient environments. transport and protect food and perishables.The Ingersoll Rand With a history dating back to 1871. industrial and commercial markets. Ingersoll Rand and its family of brands represents a proven history in construction and mining. Ingersoll Rand (NYSE:IR) advances the quality of life by creating comfortable. which helps reduce friction and makes the bearing assembly last much longer. Their people and their family of brands—including Club Car®. none of them compare in quality and longevity to Torrington 6|Page . innovations and customer focus. Torrington is somewhat more expensive than some of its competitors. Thermo King® and Trane®—work together to enhance the quality and comfort of air in homes and buildings. Torrington Torrington is best known for its Torrington needle bearings and Torrington thrust bearings. Through acquisitions. All Torrington bearings are made using special lubrication and duplex cutting in order to ensure that they are all the same size. Ingersoll Rand®. They are a global business committed to a world of sustainable progress and enduring results. and increase industrial productivity and efficiency. however. The massive interest rate cuts enacted by the Federal Reserve during 2001 were finally showing up in the data in the form of spending. The massive flight to safety drove up prices on bonds and drove down bond yields. The roaring recovery of early January gave way to fear of a ‘doubledip’ recession by midsummer. economy had weathered a second recession GDP GDP growth in the first quarter of 2002 caught everyone by surprise.2% in the first three quarters after the recession ended. economy rose. conomy grew 2.S. But by fall it appeared the U.3%. recovered from the 2001 recession they will clearly see that it was on the backs of the U.S.S.700 –only 7% lower than its all-time peak.Economic Analysis: Like a battered champion in a heavyweight boxing match. the Dow Jones Industrial Average was at 10. This provided the funds in the banking system to finance consumer durables and housing in the second half of 2002. took a knee then resumed fighting in 2002. the U. Suddenly. Consumption If historians look back at 2002 and try to explain how the U. Coming out of the 1990 recession the U.S.7% in 2001:4. 1.S. Fueled by low interest rates and the mortgage-refinancing boom during the summer. stock market appeared to recover its legs in early 2002.0% and 2. consumer spending grew at impressive quarterly rates 7|Page . In early March. the U. GDP jumped a staggering 5% in the first quarter after a respectable 2. earning 12% on a savings account didn’t look too bad. Savings deposits at banks jumped a staggering 22% from 2001:10-2002:10 as households moved assets out of the equity markets into safe. While large growth rates are not uncommon after a severe recession such as 1981. Stock Market After the recession of late 2001. staggered. 5% growth is unusual coming out of such a shallow recession as we had in 2001.S. consumer. liquid assets. The GDP deflator. The unemployment rate increased through the first half of 2002 hitting 6% for the first time since 1994. the U. Inventories jumped 2. Investment After six consecutive quarters of negative growth. However.2%.9 billion in 2001:3 to $613. Transfer payments increased 9. From 2001:3-2002:3.7% increase for the period. The Consumer Price Index increased a mere 1.95% over the past year. As a result.6% and 1.5% from 2001:9-2002:9. Durable goods boom waned by the end of the year raising concerns that whatever consumption growth we saw in 2002 could disappear as we move into 2003. real personal consumption expenditures increased 4.1 billion in 2002:3 – a 7.8% during the same period as more people relied on welfare and unemployment compensation to get them through tough economic times.7% by October 2002. economy is an open question.2 percent in the third quarter.S. the unemployment rate began dropping and was at 5. Non-residential investment contracted during the first half the year. Real federal government spending increased from $568. compared with an increase of 1.8 percent in the second quarter. Government expending & Taxes Standard economic wisdom suggests that the federal government should increase spending during a recession to dampen the decline in output.3% in the first half of the year after six quarters of contraction as businesses rebuilt good stocks in the belief that the recession was over. Whether or not defense spending aimed at fighting terrorism stimulates the U. by the fall of 2002.S. gross private investment finally showed some life in the first half of the year but turned negative again in the third quarter. 1. Quarter to quarter. However. a broader measure of inflation increased a mere 1% over 2002.22% and 2. low inflation gives the monetary and fiscal authorities substantial room to pursue expansionary policies if need be.(annualized) of 4%. The median duration of unemployment also climbed in the first half of the year 8|Page . government clearly did its part (due also in no small part to the war on terrorism). Inflation & Unemployment Inflation remained well under control in 2002. almost 80% of that ($35 billion) went to national defense. Residential investment grew respectably in the first half but fell off during the third quarter. 2. So with porters five forces model it will be attempted to analyze different components of riskiness of this industry. Threat of new entrants: Low Bargaining power of sellers: Rivalry among existing competitor: Moderate High Bargaining power of buyers: Moderate Threat of substitute products: Low Figure: Porter’s five forces Bearing Industry 9|Page .6 in October.to 11.7 weeks before falling to 9. This is nearly double the 6 weeks duration observed in the last year of the nineties expansion Industry Analysis Porter’s 5 forces Analysis Porters five forces model is a helpful tool to assess the relative attractiveness and risks inherent in an industry. bearing is very important elements for automotive & mechanical industry.Threats of new entrants: Low Market is segmented to large companies. These company comprise of majority of the total market Required huge capital investment Brand image is required Rivalry among existing firms: High There are some major competitors exists in the market Severe economic and competitive pressure Increasing demand of the existing firms Threat of substitute products: Low No proper substitute products exist. Bargaining power of buyers: Moderate High switching cost Low cost products available in the market Threat of dumping by foreign producers Bargaining power of suppliers: Moderate Availability of suppliers in the market No scope for forward integration High maintenance of raw materials are required 10 | P a g e . substitute is not a strong option for this industries. . including aerospace. Henry Timken obtained a patent for the tapered roller bearing. construction. From Ploeisti. heavy industry. U.com) o S. Imagine the possibilities and multitude of applications where power must be generated.Company Analysis The company was founded by Henry Timken in St. o Timken XEMC (Hunan) Bearings Co. Louis in 1899 and incorporated as The Timken Roller Bearing Axle Company. For more than 100 years. Timken operates 9 technology and engineering centers dedicated to developing solutions for customers’ toughest application problems. LLC – Greenville.S. energy. power generation and rail. Market Segments Timken serve many diverse market segments. Timken influences the fundamentals of motion through the creation. defense.A. – Xiangtan.E. China 11 | P a g e . transfer and control of power. U. SC. transferred or monitored. Timken has refined the science of managing friction. SETCO Service Co.A.S. consumer. positioning control. Romania to Bangalore. GA. automotive. Ltd. In 1898. Joint Ventures o CoLinx. machine tool. India and beyond. – Norcross. industrial equipment. health. (PTplace. friction management and mechanical power transmission to create unique solutions used in demanding applications Differentiate Products offering a broad array of mechanical power transmission components. They: Applying Knowledge Using knowledge of metallurgy. services and channels to meet customer needs. wherever they are in the world Perform with Excellence Delivering exceptional results with a passion for superior execution SWOT Analysis 12 | P a g e . high-performance steel and related solutions and services Expanding Reach Extending knowledge. investors. products. communities and other stakeholders.Strategic Analysis The Timken team will continue to transform business and create unparalleled value for customers. Strength Custom-Made products for the buyers Sharing 80% customer with Torrington Familiar industry of both the acquirer and acquired firm Acquisition will reduce the production cost Weakness Issuing debt for acquisition will affect the leverage ratio of Timken High debt to equity ratio Higher price of Torrington’s products relative to market Opportunity Strong brand value in the market Acquisition will set the stage for international growth International distribution network Market leadership will give the opportunity to negotiate with suppliers and sellers 13 | P a g e . Threat Non-favorable bearing industry policy Threat of dumping by foreign producers Highly competitive market 14 | P a g e . Current Ratio 1. In 2002 Timken had NWC ratio 0.13 15 | P a g e . which relates the firm’s cash and short-term marketable securities to its current liabilities.13 and Ingersoll-rand’s was 0.53 iv.70 iii.08 d. a.7 and Ingersoll-rands was .53 and of Ingersoll-Rand is 1.Ratio Analysis Computation of Financial Ratios 1. In 2002 Timken quick ratio was 0.29 1. Cash Ratio: The most conservative liquidity ratio is the cash ratio.46 c.08 for the year 2002.NWC Ratio 0.53 0. Quick Ratio: the quick ratio relates current liabilities to only relatively liquid current assets (cash items and account receivable).05 0.Cash Ratio 0. which examines the relationship between current assets and current liabilities. Evaluating Internal Liquidity: Internal liquidity (solvency) ratios are intended to indicate the ability of the firm to meet future shortterm financial obligations. NWC Ratio: This ratio measures company’s net working capital available to run its day to day activities.This means that Timken does have liquid funds to cover their immediate needs more than Ingersoll-Rand b.29 0. Current Ratio: Clearly the best known liquidity measure is the current ratio.09 which indicates lower liquidity solvency Timken’s Liquidity Ratio Liquidity Ratio 2001 2002 i.53 and Ingersoll-rand .Quick Ratio 0.53 ii. In 2002 Timken’s cash ratio was 0. In our analysis we have found current ratio of The Timken Company is 1. NWC Ratio 0.15 0. Equity Multiplier 2. Equity Multiplier 3.47 0.Quick Ratio 0.46 iii.51 iv.49 0.37) 1. D/E Ratio 0.04 0.24 1.09 2. Evaluating Leverage: The Timken Company Leverage Ratio 2001 2001 i. Times Interest Earned (1.00 iii.00 2001 16 | P a g e 2001 ii.13 iii.57 ii. Debt-Asset Ratio 0.Cash Ratio 0.29 Leverage Ratio 8. DebtAsset Ratio .00 iv.Ingersoll-rand’s Liquidity Ratio Liquidity Ratio 2001 2002 i.08 iv.Current Ratio 1.24 0. Times Interest Earned 6.08 ii.00 4.24 4. 02 0.00 iv.62 Leverage Ratio 10.11 iv. Debt-Asset Ratio 0.26 0. Times Interest Earned 3.02 ii.02 0.05 0.06 iii. Equity Multiplier 2. Profitability Ratios: The Timken Company Profitability Ratio 2001 2002 i.Ingersoll-Rand Leverage Ratio 2001 2002 i. D/E Ratio 0. Net Profit Margin -0.74 0.00 2001 2002 3. ROE -0. ROA -0.84 3.60 ii.19 iii.01 17 | P a g e . Times Interest Earned 5.01 1. 10 i.03 -0.10 i. ROE iii. ROE 0. ROE iii. ROA Ingersoll-Rand Profitability Ratio 2001 2002 i.02 -0.00 2001 2002 -0.10 0. ROA 0.05 iii. Net Profit Margin ii.02 ii.10 0. Efficiency Ratio: The Timken Company 18 | P a g e . Net Profit Margin 0. ROA 4.Profitability Ratio 0.06 -0. Net Profit Margin ii.00 2001 2002 -0.02 Profitability Ratio 0. 32 0. TA Turnover 2.57 Efficiency Ratio 3. Equity Turnover 2.97 0.Efficiency Ratio 2001 2002 i.20 2. Equity Turnover 2001 19 | P a g e 2002 . TA Turnover 0.00 1.77 0. TA Turnover 0.00 0. Equity Turnover 0.83 ii.50 i. Equity Turnover 2001 2002 Ingersoll-rand Efficiency Ratio 2001 2002 i.93 ii. TA Turnover 1.50 ii.24 Efficiency Ratio 1.00 i.00 ii. The Du Pont identity is less useful for industries such as investment banking.93 d. firms operating performance was efficient but Timken was not good in this particular ratio.The total asset turnover ratio of both Timken & Ingersoll-Rand indicates the effectiveness of the firm’s use of its total asset base (net assets equal gross assets minus depreciation on fixed assets).02 0. Variations of the Du Pont identity have been developed for industries where the elements are weakly meaningful.97 0. DUPONT ANALYSIS 2001 2002 ROE -0. In 2002 Ingersoll-Rand’s efficiency ratio was good which indicates. Turnover 0.06 a=b*c*d 20 | P a g e .24 4. Du Pont Ratio: The Du Pont identity breaks down Return on. This analysis enables the analyst to understand the source of superior (or inferior) return by comparison with companies in similar industries (or between industries).51 -0.05 0. in which the underlying elements are not meaningful.02 Net profit Margin Total asset c. b.06 -0.05 0. 5. The equity turnover ratio reflects the firm’s utilization of equity. Financial Leverage 3. The Timken Company a. 00 2001 2002 -1.77 0.03 -0.83 d.00 Financial Leverage 0.00 Total asset Turnover 1.02 a.84 3. Turnover 0.00 Net profit Margin 2.00 -0.50 21 | P a g e 2001 2002 .50 ROE 3.00 1.50 2.50 0.11 a=b*c*d 0.Dupont ratio 5.00 ROE 4. b.00 Total asset Turnover 2.00 Net profit Margin 3. Financial Leverage 2.00 Financial Leverage 0. Net profit Margin Total asset c.05 Dupont ratio 3.06 -0.00 Ingersoll-Rand DUPONT ANALYSIS 2001 2002 ROE 0.06 -0.50 1.05 0. The Z-score uses multiple corporate income and balance sheet values to measure the financial health of a company.93 1 0.73709 Book value of Equity/Book value of total Score Z<3 Possibility of Default 22 | P a g e Grey Safe Zone Zone Z<3 . Z-scores are used to predict corporate defaults and an easy-tocalculate control measure for the financial distress status of companies in academic studies.27 1.6.64 2.04 Sales/TA 0.05 0.53 1.6 1.63 Retained Earning /Total Asset 0.01 0.13 debt 2.97 0.4 0.12 1.3 0. Here Z score Bankruptcy Model: Z = 0.29 0.420T4 + 0.93 2.847T2 + 3.35 0.04 3.998T5 The Timken Company ALTMAN Z Score Timken Coefficien 2001 2002 t 2001 2002 Working Capital /Total Asset 0. ALTMAN Z Score Analysis: The Z-score formula for predicting bankruptcy can be used to predict the probability that a firm will go into bankruptcy within two years. As Zoot is a private equity firm so we have used Z score estimation for private firms.717T1 + 0.107T3 + 0.97 0.2 0.00 0.74 0.00 0.00 1.00 EBIT/Total Asset 0. 12 0.83 1.81 <3 Z>3 Ingersoll-Rand ALTMAN Z Score Ingersoll-rand Coefficien 2001 2002 t 2001 2002 Working Capital /Total Asset 0.66 0.77 0.81<Z Z <1.08 0.04 0.03 Retained Earning /Total Asset 0.06 3.6 0.9 -“Safe” Zone 1.3 0.81 Zones of Discrimination: Z' > 2.00 Sales/TA 0.03 1.19 debt 1.78 2.00 1.81<Z Z <1.23 -“Distress” Zone 23 | P a g e <3 Z>3 Z<3 .06 0.00 0.35 1.77 0.81 1.05244 Book value of Equity/Book value of total Score Z<3 Possibility of Default Grey Safe Zone Zone 1.1.2 0.00 EBIT/Total Asset 0.83 1 0.9 -“Grey” Zone Z' < 1.4 0.00 0.23 < Z' < 2. The acquisition will cost more than $800 million (estimated minimum value for the company). Offering share of $100 million worth and cash payment $700 million through debt and stock 24 | P a g e . Cash payment for the acquisition through Issuing Debt Issuing Stock Issuing 50% debt & 50% stock 2. Whether Timken Company should pay for this acquisition by issuing debt or share.05.Here. Case Analysis Problem Statement The Timken Company is considering acquiring Torrington from Ingersoll Rand. Possible Alternatives 1. Both the companies are in safe zone. our calculated Z Score for Timekn is 2.75 and for Ingersoll-rand is 2. 40 Equity Value Per Share 22.Base case of the Acquisition Parties The Timken Company WACC Risk free Rate 3.1 Total Market Value of Equity 609.0% Beta Cost of Equity 1.80 Cash Asset value of the firm Debt Equity value of the firm 82.80 No of shares outstanding 63.36499166 Weight of Equity 0.1 Total Value(Debt+ Equity) 959.1 10.55% Market Return 10.90 350.63500834 Total Debt 350.34% Weight ot Debt 0.2 Income Tax 40% WACC 8.10 1395.65% Cost of Debt 7.10 1745.23% After Tax cost of debt 4.02 25 | P a g e .34% Enterprise Value 1663. 375581207 Weight of Equity 0.67 Shares outstanding 216.84% After Tax cost of debt 3.55% Market Return 10.50% Weight ot Debt 0.2 5570.20 Asset value of the firm 9681.10 Equity value of the firm 7589.29% Cost of Debt 5.57 Cash 342.30 40% WACC 8.624418793 Total Debt Total Market Value of Equity Total Value(Debt+ Equity) Income Tax 2092.Ingersoll-Rand Company WACC Risk free Rate 3.2 11.0% Beta Cost of Equity 1.85 Equity value per share 35.10 3478.17 26 | P a g e .77 Debt 2092.00 % of torrington shares outstanding 29.37% Enterprise Value 9339. 0% Beta 0.Torrington WACC Risk free Rate 3.08 .375581207 Weight of Equity 0.36 price per share Premium Price per share after premium 27 | P a g e 16.50% Weight ot Debt 0.44 1.55% Market Return 10.16% 714.39 Equity value of the firm 479.9 Cost of Equity 9.03 Asset value of the firm 760.21 40% 7.39 467.624418793 Total Debt Total Market Value of Equity Total Value(Debt+ Equity) Income Tax WACC Enterprise Value Cash 281.64 18.36% Cost of Debt 5.72 46.75 Debt 281.84% After Tax cost of debt 3.8179 749. 00% 8.Synergy Synergy is the combined value of the acquired and acquire firm.00% Terminal Cost Savings 1.00% Terminal Revenue Enhancement 2. a) Base b) Best & c) Worst are given below Assumptions for the base cases are: Base Case Revenue Enhancement 3.50% Discount rate for Revenue enhance 9.00% Discount rate for cost savings Discount rate for capex savings 10. There are four sources of synergy 1. Revenue enhancement 2. Capital expenditure savings Synergy of the acquisition in three situations. Operating expense savings 4. Cost savings 3.208 Operating expense savings 239 Capital expenditure saving 114 28 | P a g e .85% Capex Savings 2.769 Cost Saving 1.00% Value of the Synergy: Base Case Revenue Enhancement 1.00% Cost Savings 3. 00% Cost Savings 2.50% Capex Savings 3.50% Terminal Cost Savings 2.00% Discount rate for cost savings 9.00% Discount rate for Revenue enhance 8.50% Terminal Revenue Enhancement 1.859 Cost Saving 2.Assumptions for the best cases are: Best Case Revenue Enhancement 4.50% Terminal Cost Savings 1.00% Discount rate for capex savings 29 | P a g e 9.00% Discount rate for cost savings 12.50% Capex Savings 1.00% Discount rate for capex savings 7.00% Discount rate for Revenue enhance 10.00% .046 Operating expense savings 407 Capital expenditure saving 182 Assumptions for the worst cases are: Worst Case Revenue Enhancement 2.00% Value of the Synergy: Best case Revenue Enhancement 2.00% Terminal Revenue Enhancement 2.00% Cost Savings 4. 769 2859 860 Cost of revenue savings 1.25 Value*Weight 1.619152 .25 0.487 (-)integration cost net synergy 30 | P a g e Base 130 3356.208 2046 735 Operating cost savings 239 407 147 Capex Savings 114 182 50 Total Synergy 3.50 0.330 5494 1792 Weight 0.Value of the Synergy: Worst case Revenue Enhancement 860 Cost Saving 735 Operating expense savings 147 Capital expenditure saving 50 Net Synergy: Sources Best Worst Revenue Enhancement 1.665 1374 448 Estimated Total Synergy 3. The optimal capital structure will ensure Timken with highest amount of Net Acquisition Value (NAV) and highest equity value per share.Possible Alternatives Alternative 1: Acquisition of Torrington Company from Ingersoll-Rand by a cash deal: Timken could raise the needed amount of cash by using following financing options: Financing Options: a) Raising $800 million for the cash deal by issuing shares to the public b) Raising $800 million for the cash deal with a debt offering c) Raising $800 million with a combination of debt and equity financing(50:50 ratio) By using these three alternatives Timken could raise its needed amount of cash for the acquisition. 31 | P a g e . In each of the cases. Timken’s capital structure will be altered. 23% After Tax cost of debt 4.1 631. WACC Calculation for the combined firm: Timken(after acquiring Torrington) Risk free Rate 3.65% Cost of Debt 7.34% Weight of Debt 0.Financing Option A: Raising $800 million for the cash deal by issuing shares to the public A.55% Market Return 10.309 Weight of Equity 0.49 .0% Beta Cost of Equity 10.691 Total Debt 32 | P a g e 1. 51 (64. So they will issue 42. 33 | P a g e .Total Market Value of Equity 1409.69% Here. As a result.11 new shares at current market price which is 19 to raise $800 for the cash deal.2+42. Timken will raise $800 million by issuing shares to the public. Timken’s numbers of outstanding shares will become 105.10 Total Value(Debt+ Equity) 2040.11).59 Income Tax Terminal Growth rate WACC 40% 3% 8. 13 which is the combined cash value of Timken and Torrington. And the number of shares are given here as 105.95. The long term debt of 631.48 million and after adding goodwill and net synergy value we get 6086.By adding the values of Timken and Torrington we can get combined value of Timken after aquiring Torrington. Here we get enterprise value as 2102. Here goodwill is determined by deducting the market value of land and property of Torrington from purchase price (800-172.49 million is then deducted to find out the equity value of the firm which is 5583.59. 34 | P a g e .Then we have added cash value of 128.15=627.85).92 dollar which is quite higher than Timken’s equity value per share without acquisition.51 million and we got equity value per share as 52. 59 shares outstanding 105.Details ($ in millions) Enterprise value 2102.49 Equity value of the firm 5583.premium paid Net Acquisition Value for the combined firm for this financing option is $3535.95 Add: cash 128.13 Asset value of the firm 6215.(value of Timken + value of Torrington) .92 Net Acquisition Value: It is calculated by using following formula: NAV = Value of combined firm adjusted with synergy and integration cost .02 million 35 | P a g e .51 Equity Value Per Share 52.48 Add: Goodwill 627.85 Add: net synergy 3356.08 Less: Debt 631.62 Enterprise value with synergy 6086. 84% After Tax cost of debt 6.702 Weight of Equity 0.2 1431.50% Weight of Debt 0.69% Cost of Debt 10.Financing Option B: Raising $800 million for the cash deal with a debt offering WACC Calculation for the combined firm: Timken(after acquiring Torrington) Risk free Rate 3.0% Beta Cost of Equity 13.49 .298 Total Debt 36 | P a g e 1.55% Market Return 12. By adding the values of Timken and Torrington we can get combined value of Timken after aquiring Torrington.10 2040.Total Market Value of Equity Total Value(Debt+ Equity) Income Tax Terminal Growth rate WACC 609.49 million.65% Here. Timken will raise $800 million with a debt offering. So their total debt will increase by 800 million and will become 1431.59 40% 3% 11. 37 | P a g e . 216 Add: Goodwill 627.816 Less: Debt 1431.13 which is the combined cash value of Timken and Torrington.4 million and we got equity value per share as 64. Here goodwill is determined by deducting the market value of land and property of Torrington from purchase price (800-172.8535 Add: net synergy 3356.investment grade rating and that is not good for the company.Here we get enterprise value as 1407.48468 .Then we have added cash value of 128.49 Equity value of the firm 4088. Timken will be forced to borrow the money at “highyield” rates which will lead to non.328 shares outstanding 63.13 Asset value of the firm 5519.688 Add: cash 128.216 million and after adding goodwill and net synergy value we get 5391.49 million is then deducted to find out the equity value of the firm which is 4088. And the number of shares are given here as 63.68.85).619 Enterprise value with synergy 5391.48 dollar which is quite higher than Timken’s equity value per share without acquisition and financing option A.328.4 Equity Value Per Share 64. The long term debt of 1431. But in this option.15=627. 38 | P a g e Details ($ in millions) Enterprise value 1407. So it will not maximize Timken’s value Financing Option C: Raising $800 million with a combination of debt and equity financing (50:50 ratio) WACC Calculation for the combined firm: Timken(after acquiring Torrington) Risk free Rate 3.495 Total Debt 39 | P a g e 1.premium paid Net Acquisition Value for the combined firm for this financing option is $2109 million which is lower than the previous financing option.49 .505 Weight of Equity 0.0% Beta Cost of Equity 10.1 1031.65% Cost of Debt 7.(value of Timken + value of Torrington) .55% Market Return 10.Net Acquisition Value: NAV = Value of combined firm adjusted with synergy and integration cost .69% After Tax cost of debt 4.61% Weight of Debt 0. Here goodwill is determined by deducting the market value of land and property of Torrington from purchase price (800-172.607.45 million and we got equity value per share as 67.13 which is the combined cash value of Timken and Torrington. For raising 400 million Timken will issue new shares of 21.Then we have added cash value of 128.15=627.Total Market Value of Equity 1009.49 million is then deducted to find out the equity value of the firm which is 5668.59 Income Tax 40% Terminal Growth rate WACC 3% 7. By adding the values of Timken and Torrington we can get combined value of Timken after aquiring Torrington. Here we get enterprise value as 2587.49 million and after adding goodwill and net synergy value we get 6571.12 dollar which is quite higher than Timken’s equity value per share without acquisition and financing option A as well as B.10 Total Value(Debt+ Equity) 2040.05 at current market price which is 19. And the number of shares are given here as 84.49 million.60% Here.97.10. Timken will raise $800 million with a combination of debt and equity financing where they will issue shares worth of 400 million with a debt offering of 400 million. Equity will also increase by 400 million and will become 1009.85). The long term debt of 1031. Details 40 | P a g e ($ in millions) . So their total debt will increase by 400 million and will become 1031. 49 Equity value of the firm 5668. Alternative 2: Acquisition of Torrington Company from Ingersoll-Rand by stock offering to IngersollRand: Timken could acquire Torrington by offering its stocks to Ingersoll. As well as it can offer its stocks worth $100 million. For this purpose Timken could issue $400 million equity and $300 million debt and could make the payment of $700 million in cash.494 Add: Goodwill 627.619 Enterprise value with synergy 6571.12173 Net Acquisition Value: NAV = Value of combined firm adjusted with synergy and integration cost . In our case study analysis the new shares that Torrington would get have been calculated through exchange ratio.8535 Add: net synergy 3356.Enterprise value 2587. Exchange ratio: 41 | P a g e .(value of Timken + value of Torrington) .premium paid Net Acquisition Value for the combined firm for this financing option is $3655 million which is higher than previous financing options.094 Less: Debt 1031.13 Asset value of the firm 6700.966 Add: cash 128.45263 Equity Value Per Share 67.607 shares outstanding 84. Thus 29.11= 64. Here Torrington’s shares have been calculated assuming the accordance with the sales percentage of 13.New shares of target firm = α × Old shares of acquiring firm (1-α) Exchange ratio = New shares of target firm Old shares of target firm Here α has been calculated by dividing the purchase price $800 million of Torrington by the after acquisition equity value of the firm with stock and cash offering of $5770.45% of Ingersoll Company.4+1. New shares exchanged for existing shares of Timken Company to Ingersoll would be $1.17 shares have been calculated by the percentage of Torrington’s sales of Ingersoll company out of Ingersoll’s share outstanding shares of 216.17. Assumptions for the combined firm: Timken(after acquiring Torrington) Terminal Growth rate 42 | P a g e 3% . Exchange ratio comes from the new shares 1.58 million. Total shares outstanding would be the addition of new shares with the old shares by 63.52 shares.85.11 divided by the existing shares of Torrington of 29.11805204. 69% Income Tax 40% WACC Calculation for the combined firm: WACC Risk free Rate 3.59 Income Tax 40% WACC 7.49 Total Market Value of Equity 909.0% Beta 1 Cost of Equity 10. As $100 million worth shares would be given to Ingersoll equivalent amount would be deducted from the total value of equity.1 million.69% After Tax cost of debt 4.4939184 Total Debt 931. As well as new equity has been added by $400 million shares with existing equity of Timken of $609. 43 | P a g e .59% Risk free Rate 3.00% Cost of Debt 7.55% Market Return 10.49 million debt.10 Total Value(Debt+ Equity) 1840.61% Weight ot Debt 0.27% Here additional $300 million debt has been added with existing $631.0% Beta 1% Cost of Debt 7.55% Market Return 10.WACC 7.5060816 Weight of Equity 0. 53485 69.49 million is then deducted to find out the equity value of the firm which is $5770.21 million and after adding goodwill and net synergy value we get $3356. The long term debt of $931.683 (+)cash Asset value of the firm (-)Debt Equity value of the firm shares outstanding Equity Value Per Share Recommendation 44 | P a g e 2777. Timken will be able to borrow the money at “lower-yield” rates which will enable Timken to keep its existing investment grade rating and that is good for the company.8535 (+)net synergy 3356.13 which is the combined cash value of Timken and Torrington.4 million plus the new shares found from equity issuing worth of ($400/19=21.Then we have added cash value of $128.21 128.15=$627.58.619 Enterprise value with synergy 6761. Enterprise Value (+)Goodwill 627.Here we get enterprise value as $2777.13 6889.49 5958.32 85. And the number of shares are given here as 63. Here goodwill is determined by deducting the market value of land and property of Torrington from purchase price ($800-$172.619.05) million and we got equity value per share as $69.6596 .6596 which is quite highest than Timken’s equity value per share without acquisition and cash financing options. In this option.85).81 931. Positives: It will increase market share within Global Industry from 7% to 11% Will become 3rd largest producer of Bearings in the World 5 % overlap in product offerings and 80% consumer overlap Expected annual cost savings of $80 million annually by 2007 Financing method: Optimal capital structure is the combination of debt and equity. Equity value per share will be $89.44 and Net Acquisition value will be $3755 million which is the highest among all other alternatives.At the last of our analysis we would like to recommend that Timken should acquire Torrington form Ingersoll-Rand. Timken should acquire Torrington by a cash deal of $700 million and the additional $100 million worth of shares will be issued directly to Ingersoll-Rand as consideration for Torrington with an exchange ratio of .12 shares will be issued as new shares. Cash deal of $700 million will be financed by raising equity of $400 million and a debt deal of $300 million 45 | P a g e .038:1 where 1.