Timken Case Essay

1734 words - 7 pages

The Timken Company – a leader in the bearing industry, is considering acquiring the Torrington Company. Torrington Company, a leading manufacturer of needle roller bearings which is an engineering solution segment from Ingersoll-Rand. Both companies operate and compete in same business and therefore, Timken is seeking substantial operating synergies from this largest acquisition of its history. With this acquisition, Timken is increasing the size of company by almost 50 percent. And, Timken will continue to concentrate on what it do best by buying a company in an industry, where it has a leadership position built on decades of expertise. Timken expects to expand its worldwide business base ...view middle of the document...

). Therefore, The Company’s debt rating is expected to be A (Exhibit-6). Hence, Industrial yield for this rating is 5.84% (Exhibit-9) and is used as cost of debt for Ingersoll.
Cost of equity: Using CAPM [Rf+ β(Rm-Rf)], based on its debt rating , 4.97% is used as risk free rate of return (Rf). An average beta of the industry (0.85) is taken because it reflects the average risk of industry on the whole and hence is a better approximation for target’s risk. A market risk premium (Rm-Rf) of 5.9% is used as a common practice. See sheet 1 for WACCs for both Timken and Torrington.

Secondly, I used the estimated future cash flows of Torrington, from 2003 to 2007 to determine Torrington's current value. The FCFs for Torrington are assumed to grow at an average GDP growth rate 2.5% constantly forever after year 2007. Afterwards, Forecasted FCFs (NOPLAT+ Depreciation-Capital expenditure+ change in NWC) are discounted by Ingersoll’s (parent firm of Torrington) weighted average cost of capital 7.57. Hence, the PV of Torrington $1100.15 million is evaluated. sheet2: Stand-Alone Valuation of Torrington-DCF Method.

The second Stand-Alone Valuation approach is using Multiples. I used the information from exhibit 8 to process this valuation. The ratios of Enterprise value/ EBITDA are given on the exhibit; therefore the peer companies’ average Enterprise value/EBITDA is evaluated to be 7. Then, I calculated Torrington’s 2002 EBITDA to be $106.2(operating income +depreciation expense).Hence, Torrington company’s enterprise value $760 ($106.2*7=$760) million is estimated. In addition, the EV/Sales is also applied in my stand-alone valuation. The average EV/ Sales is 0.96 and Torrington’s 2002 net sales are $1204 million, therefore the enterprise value of Torrington is evaluated at $1154.7million with this approach. Sheet 3: Multiples valuation method

With-synergies valuation is also based on DCF analysis method. Estimated FCF is discounted by Timken’s WACC. If the two entities have the same business risk and Timken is the purchaser and surviving entity, we can use its WACC of 8.39% in the valuation, assuming same growth rate 2.5% as before. Analysts estimate that the $80 million in cost saving could be realized after the acquisition , however certain other costs associated with the integration approximately $130 million would occur .Hence, I take these cost savings and integration costs into consideration for the with-synergies valuation. Incorporating the effects of 80million cost savings for the merged firm (to be achieved by end of 2007 and assumed to incur in perpetuity then on) and 130 million integration costs (half of this accounted at the beginning years) in the estimated EBITs for Torrington, a new horizon value is estimated, the new FCF is discounted by acquiring company’s WACC 8.39%. Torrington company’s with- synergies valuation $1386.38 million exceeds the value as a stand-alone entity by approximately $286 million. sheet2: With-synergies...

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