Yeat Valves and Controls inc Case Study Solution
Outline to Solve Case Study
-Identify problem
-Company background
-Yeats
-TSE
-Analysis
-Valuation techniques
-Values to consider in purchasing a company
-Quantify the various techniques
-Recommendation

Identify Problem
-Will merger benefit Yeats Valves Corp?
-What is the minimum price to ask to ensure stockholders profit?
Company Background - Yeats
-1980 small company organized for engineering and development work on experimental heat exchanger
-1986 Yeats Valves goes public
-Merger with Auden Co (Distributor) declined after anti-trust threats by Department of Justice
-May 2000 proposed acquisition of Yeats Valves by TSE Int'l
-Yeats will become independent operating division of TSE
-Merger would be beneficial.  Yeats:
-Needs a deep-pocketed partner to expand
-Would benefit from a larger marketing and distribution network
-Needs to gain production know-how for high-volume manufacturing
-Needs strong-muscled partner to compete against consolidated competition
-560 Stockholders
-70% of stock held within Board of Directors (20% Auden and 40% Bill Yeats)
-Auden will not object to merger but will sell their holdings of Yeats stock
-Yeats' current P/E = 10.3

Company Background - TSE
-Incorporated in 1970
-They manufacture products ranging from advanced industrial components to chains, cables, nuts and bolts, castings and forgings, and
 other similar products.
-One division produced parts aerospace propulsion
-A second division produced a wide range of nautical navigation assemblies and allied products
-A third division manufactures a line of components for missile and fire-control systems
-P/E = 11

Valuation Techniques
-A number of valuation techniques can be used.  Each technique produces a different valuation.  Taken together, several different              
 techniques could indicate the price level that a bidder should be willing to pay.
-Price / Earnings ratio, or multiples of income before interest and tax or free cash flow, using historical bid analysis or comparative            
 valuation of similar quoted companies.
-Discounted Cash Flow

Four Values a Purchaser Should Consider
-Its current market capitalization
-The minimum price that would have to be offered to persuade shareholders to sell their shares
-The value of the benefits the purchaser would expect to obtain from a takeover, from extra profits or asset sales, etc. this sets a                 
 maximum price a purchaser caught to pay
-A target price that will be conceded through negotiation, probably representing a compromise between the highest price the buyer will    
 pay and the lowest the sellers might accept.

A Range of Valuations
-The initial price they might bid based on pessimistic assumptions
-A price that they can negotiate comfortably based on the most likely assumptions
-The maximum price they ought to bid based on what are considered to be optimistic assumptions.

Price / Earnings Valuation (all companies)
-Mean = 11.1
-Low   =   7.0
-High  =  16.3

Beta (all companies)
-Mean = 0.81
-Low   = 0.65
-High  = 1.10

Dividend Yield (all companies)
-Mean = 2.00%
-Low   = 0.90%
-High  = 4.00%

P/E Ratio Valuation, Range of Values
-Range of values using comparable P/E ratios is $51.24 to $53.48 per share

Weakness of P/E Ratio Valuation Technique
-While P/E ratio valuation has the advantage of speed and simplicity, it also has several weaknesses
-The P/E ratios reflect the market's expectations of future earnings growth.  This differs between companies, making comparisons            
  difficult.
-Different companies have different capital structure.  Financial leverage affects the perceived risk, and therefore the market value              
 and the P/E ratio

Transaction Comparison Valuation
-Range of values is $28.81 to $176.54

Discounted Cash Flow
Tax Rate = 40%
Debt/Assets = 0%
Equity / Assets = 100%
Cost of Debt = 0%
Cost of Equity = 10.82%
WACC = 10.82%
Risk free rate = 6.6%
Market Premium = 5.5%
Beta = 0.77
The range of value using the DCF is $54.64 to $69.38 per share

Weakness of DCF
-The DCF model is only as good as its input assumptions
-Valuations are particularly sensitive to assumptions about the perpetuity growth rates and discount rates
-DCF focuses on long-term value
-Focusing too much on the DCF may cause you to overlook unusual opportunities

Reconciling Valuations (Triangulation)
-Range of values is $51.03/share to $75.32/share

Purchase of Yeats Valves with Stock
-Current Yeats Valves' Market Cap = 39.8 x 1440 = $57,312
-TSE should purchase Yeats Valves with between 3,343.49 and 4,934.71 shares of TSE stock
-A compromise would be to purchase with 4,139.10 shares of TSE
-Lowest value represents an approximate 28% premium on Yeats' current market cap

Conclusion and Recommendation
-To value the share price of Yeats Valves, 3 methods were used and the most weight (60%) to DCF, less weight (30%) to company           
 comparables and the least weight (10%) to M&A comparables.
-The appropriate range of values for Yeats Valves is $51.03 to $75.32 per share
-With this range of stock prices, we found the range of values for Yeats Valves to be $73,490 to $108,464.85
-From this range of values, we determined a range for the number of TSE shares TSE should buy Yeats with TSE stock to be 3,343.49 to
 4,934.71 shares
-TSE should buy Yeats with 4,139.10 shares of TSE stock (the median value of the range)