Tracy Kelly

Advanced Corporate Finance

February 26, 2015
Case #50: Flinder Valves and Controls, Inc.

Flinder Valves and Controls, Inc.

Flinder Valves and Controls, Inc. known as FVC is a manufacturer of
specialty valves and heat exchanges. FVC began in 1980 formally part of a
small company but separated to focus more on the engineering and
developmental work on experimental heat-exchanger products. A little less
than half of the products manufactured were special applications for the
defense and aerospace industries. Those products required expertise in
engineering due to the complexity of the projects. Because of this, they
often did prime contract work on highly technical devices for the
government. In 1987 FVC acquired the properties, both owned and leased of
the engineering corporation once FVC was organized. Bill Finder was the
President of the predecessor company and since became President at FVC.
FVC went public in 1996.
RSE International was founded in 1970 by Tom Eliot; it was taken public
and was a part of the Russell 1000 company. RSE was a three part company.
One section manufactured a diverse range of products including industrial
components, chains, cables, nuts and bolts, castings and forgings, and other
similar products. The second piece of the company focused on producing a
wide range of nautical navigation assemblies and allied products. The third
section of the company manufactured a line of components for missile and
fire-control systems.
FVC caught RSEs attention because of a U.S. government contract
they held to develop an advanced hydraulic control system, code-named
widening gyre. This system would be used in numerous military
applications. In May of 2008 both Bill Flinder, president of FVC and Tom Eliot,
chairman and CFO of RSE were planning to negotiate a possible acquisition
of FVC by RSE. The discussions had begun in the first quarter of 2007; after
a few casual conversations had taken place the previous year, 2007. The
U.S. economy had suffered in areas of finance, terrorism, war, etc. which
effected both companies. Both leaders were concerned about the

opportunities and risks of doing a deal in the increasingly challenging

environment. This is a case of a small technology company looking to be
acquired by a conglomerate technology company.
1)

2)

3)

4)

Pros/Strengths: FVC sell itself to RSE

Due to the economy and the tighter borrowing standards FVC would
benefit with stronger cash flows, net income when merged with a
larger company. The increase in equity will allow for more research
and development, something Bill Flinder has stressed in previous
years. Flinder wanted to improve products, with patent protection.
FVC became appealing the moment they went public; Auden Company,
a competitor that owned 20% of FVC stock proposed a merger in 1996.
By 1998 FVC had received various proposal requests but none reached
the stage of actually working out agreements except RSE. FVC is a hot
commodity and it is always a great decision to sell when you are highly
admired because you will receive fair pricing.
Part of the acquisition agreement is that FVC will keep its identity. The
company will continue its brand name and image which is priority to
most companies that have worked so hard to make a name for itself in
the industry.
Flinder would be retained along with his top management team and all
employees. That is a major benefit because most companies have to
deal with huge layoffs, exit interviews, severance pay, unemployment
payouts, etc. The no lay-off rule was a reflection of RSEs intention to
invest in and grow the FVC operation. The management team of FVC
is what caught RSEs attention.
FVC had Auden Company as an important non-distribution channel
under a nonexclusive distributor arrangement.

Cons: FVC sells itself to RSE

1) FVC doesnt have any long term debt; once the acquisition takes place
and they become a division of RSE the debt RSE already has in place
will be shared on the balance sheet.
2) 70% of FVC stock was owned by the Board of Directors and their
families.
Strengths of RSE
1) RSE is in Russell top 1000 companies.
2) RSE is a low-cost producer that possess unusual production knowledge
3) It is very competitive in its industry

4) Project CORE: a business wide initiative to improve and unify the

corporate wide information systems. CORE is an example that RSE
functions as a team amongst its employees.
Weaknesses of RSE
1) The market has undervalued RSEs shares
2) The need to increase profit margin
3) Notes payable to bank (one paid semi-annually
4) No international connection; it is clear that Auden Company does not
want to do business with RSE but continue their shares and
relationship with FVC
The two companies should want to negotiate because they both will
receive a benefit. It will allow both companies to focus on more research and
development of products servicing the government as well as large
distributors. With Auden Company being a huge competitor FVC continuing
to have its own identity will bridge the relationship that RSE will eventually
benefit from.
Flinder Valves and Controls, Inc is worth between $4,710,000.00 and
$8,478,000 the key value drivers are the book value is a key driver because
it will give RSE the total value of FVCs assets that that shareholders would
receive if the FVC would liquidate. RSE should not be sold for anything less
than $4,710,000.00 this was derived using annual cash flow and multiplying
it by 2.5 (industries average). Using the book value allows for comparison to
the companys market value, the book value can indicate if a stock is over or
under priced. The earnings capitalization is also a key value driver; based
upon FVC current cash flow and being able to predict their future earnings.
The cash flow is 4times greater than the companys liability including the
stockholders equity. FVC has a strong cash flow.
RSE should complete the deal with a cash transaction. Cash
transaction will allow for FVC to have more free cash flow for further research
and development of their products. Also the current pricing for RSE shares
are not quite up to par with the value of FVC shares. It would be beneficial
for FVC to be able to reinvest in themselves and continue to grow with a cash
transaction. If they were to be purchased with shares they would need to
sell them in order to avoid a loan to secure funding for growth opportunities.
For FVC there is risk in accepting stock as opposed to cash; if the value of the
stock price decline that will be a lost for FVC. The value of the RSE shares
can drop before the closing of the merger is complete. Cash is more of a risk
for RSE but beneficial for FVC. RSE has stated that the market has their

shares undervalued but it is not clear that FVC agrees therefore cash is the
only acceptance for this merger.