Tse International Corporation

Abstract

Set in May 2000, these cases reflect the separate perspectives of the CEOs as they approach the negotiations of TSE International to acquire Yeats Valves. The task for the student is to complete a valuation analysis of the target and buyer, and to negotiate a price and exchange ratio with the counterparty. Each case contains a financial forecast only for that side; therefore an important element in the negotiation is to obtain the private information of the other side, analyze it, and successfully negotiate terms of acquisition. The cases are relatively simple, and are offered as a first exercise in the valuation of the firm and negotiation of an acquisition. The case may be used to pursue some or all of the following teaching objectives: 1) Exercise valuation skills. 2) Exercise bargaining skills. 3) Illustrate practical concerns about mergers and acquisitions.

Excerpt

UVA-F-1366

Version 2.8

TSE INTERNATIONAL CORPORATION

On May 2, 2000, T.S. “Tom” Eliot, chairman, chief executive officer (CEO), and founder of the TSE International Corporation, was preparing to meet with W.B. “Bill” Yeats, president of Yeats Valves and Controls Inc. (YVC) the following week. The meeting was to negotiate the terms of TSE International's acquisition of Yeats Valves. Serious negotiations for combining the two companies had started in March, following casual conversations that dated back to late 1999. Those initial talks focused on the broad motives for each side to do a deal and on the social issues (such as management and compensation in the new firm). What still remained was to negotiate the final term sheet on which the definitive agreement would be drafted and signed.

Eliot had founded TSE International in 1970, grown it, taken it public, and firmly rooted it as a Fortune 1000 company. In response to what he perceived to be the firm's growth challenges for the next decade, Eliot had persuaded TSE's board that the company should follow a policy of focused diversification, which would be achieved by an aggressive growth-by-acquisition program designed to create opportunities and entries into more dynamic markets than the ones TSE presently served. Although it had done well in the past, Eliot concluded that the company had produced few new breakthrough products in recent years. If this trend continued, TSE International would be left behind by its competition.

Yeats Valves was the first among several potential targets identified by Catherine “Cat” MacAvity, TSE's vice president of Business Development, and the architect of the acquisition program. Eliot approved the choice and believed a smooth and successful acquisition of YVC was critical to TSE's expansion plans. April 2000 had been a cruel month for stocks in general with the bursting of the dot-com bubble. It might chill the ongoing talks. If the merger fell through after going this far, Eliot feared his board might become discouraged. On the other hand, if YVC was acquired at too high a price or failed to produce adequate returns, the TSE board would be unlikely to give its full support to future mergers. Eliot decided he would carefully review the YVC deal before deciding on a negotiating strategy regarding the price/exchange rate issue.

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Keywords: Finance, cost of capital international