UVA-F-1365 Version 2.8
YEATS VALVES AND CONTROLS INC. On May 2, 2000, W. B. “Bill” Yeats, Chair, CEO, and founder of Yeats Valves and Controls Inc. (YVC), met with Kate Porter, his long-time adviser, investment banker, and a member of the Yeats Valves board of directors. The pair met to prepare for the final negotiations about the proposed acquisition of Yeats Valves by TSE International Corporation. Serious negotiations for combining the two companies had started in March, following casual conversations, which dated back to late 1999. Those initial talks focused on broad motives for each side to reach an agreement, and on the social issues, such as management and compensation in the new firm. The final term sheet on which the definitive agreement would be drafted and signed was still open for negotiation. Porter and Yeats had worked together to craft the outline of the agreement. So far, the social terms of the merger had been broached, although the specific details remained to be settled. YVC would become a subsidiary of TSE. Bill Yeats would remain as YVC’s CEO. Yeats had never thought seriously about a possible sellout before last November, when he had his 62nd birthday. “I began to wonder what would happen to the company after I retired or died,” he reminded Kate Porter. “I’ve got a good top-management team here, but they are all specialists. I don’t think any one of them could step in and run the show alone. It’s a tough business to learn, and I don’t think I could find a successor very easily—nor train him quickly. There’s stability in the TSE International combination that’s worth something personally to me.” “In your eagerness to sell, just don’t leave too much value on the table,” Kate Porter said. “YVC’s prospects are brighter than ever. You have technology to die for. With our intellectual property and new products coming along, there is a lot of hidden value in this company that’s not reflected on the balance sheet. Be a realist about the value.” Bill Yeats agreed. “There are lots of reasons for me to want to see the acquisition take place. However, I want to make sure it’s also going to be good for our shareholders. They’ve put a lot of faith in me at very critical times in the company’s history, and I wouldn’t want to let them down.”
This case was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 2001 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
[email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 10/05. ◊
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Yeats Valves and Controls Inc. Yeats Valves and Controls Inc., headquartered in Innisfree, California, was principally engaged in the manufacture of specialty valves and heat exchangers. The firm had many standard items, but nearly 40% of its volume and more than 50% of its profits derived from special applications for the defense and aerospace industries. Such products required extensive engineering work of the kind only a few firms were capable of matching. Yeats had a reputation for engineering excellence in the most complex phases of the business and, as a result, often did prime contract work on highly technical devices for the government. Yeats was an outgrowth of a small company organized in 1980 for engineering and developmental work on an experimental heat exchanger product. In 1987, as soon as the product was brought to the commercial stage, the company was organized to acquire the patents and properties, both owned and leased, of the engineering corporation. Bill Yeats, who founded the engineering firm, founded Yeats Valves and continued as its CEO. The raw materials used by the company were obtainable in ample supply from a number of competitive suppliers. Marketing arrangements presented no problems; sales to machinery manufacturers were made directly by a staff of skilled sales engineers. Auden Company, a large concern in a related field, was an important foreign channel of distribution under a nonexclusive distributor arrangement. About 15% of Yeats Valves’ sales came from Auden. Foreign sales through Auden and direct through Yeats Valves’ own staff accounted for 30% of sales. Half of the foreign sales originated in emerging economies, mainly Brazil, Korea, and Mexico. The other half originated in the United Kingdom, Italy, and Germany. Although the foreign-currency crises in the mid-1990s had temporarily interrupted sales growth for the company, better economic conditions in the markets of developed countries, together with its recent introduction of new products for the aerospace and defense industries offered the company excellent prospects for improved performance. As such, sales in the first quarter of 2000 grew 20%–25% over the corresponding period in 1999, whereas many of Yeats Valves’ competitors experiencing limited growth. Exhibits 1 and 2 show the most recent balance sheet for Yeats Valves and Controls Inc. and income statements from 1995 forward. Exhibit 3 presents five years of projected sales, earnings, and other data for Yeats Valves. The Yeats Valves plants, all of modern construction, were organized for efficient handling of small production orders. The main plant was served by switch tracks in a 15-car dock area of a leading railroad, and additionally served by a truck area for the company’s own fleet of trucks. From 1997 to 1999, net additions to property totaled $7.6 million. Bill Yeats, outstanding in research in his own right, had always stressed the research and development of improved products, with patent protection, although the company’s leadership was believed to be based on its head start in the field and its practical experience.
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The success of Yeats Valves and Controls Inc. had brought numerous overtures from companies looking for diversification, plant capacity, management efficiency, financial resources, or an offset to cyclical business. For instance, when Yeats Valves went public in 1986, Auden Company, which later held 20% of Yeats Valves’ common stock, advanced a merger proposal. Word of the proposal reached the financial commentators, who reported possible action by the U.S. Department of Justice in antitrust proceedings. Although lawyers for Yeats Valves were confident that they had a ready defense in an antitrust suit, the practical question was one of whether such a legal victory on principle would offset perhaps two or more years of litigation, possibly to the U.S. Supreme Court. Lawsuits did not build a business, as Yeats noted at the time, and they used up time and energy that management should devote to the company’s operating problems. Hence, the idea was not further developed. As Bill Yeats neared retirement, however, the idea of selling the company to a bigger firm seemed almost necessary. Compelling reasons existed in addition to his impending retirement1 and the problem of management succession. First, the company needed a deep-pocketed partner to expand, and to bankroll more research and development (R&D) projects. Conducting research to continue developing leading-edge products for aerospace and defense required sizeable investments. Second, Yeats believed that the company would benefit from gaining access to a large marketing and distribution network. Yeats Valves was highly successful in its own niche, but Yeats concluded that more segments could be tapped if Yeats Valves’ products were more aggressively marketed and more widely available. Third, as the company continued to grow, it would need to gain production knowhow for high-volume manufacturing. Yeats Valves did not have this kind of expertise. Finally, there had been an increasing trend of consolidation in Yeats Valves’ industry over the last year. Yeats feared that without a well-financed partner, the company would be swamped by competition. Thus, when the merger opportunity with TSE International Corporation came along in 1999, Yeats determined to make it work as best as he could. Bill Yeats believed that YVC had alternatives to this deal. Rockheed-Marlin Corporation, a large defense contractor (or any of a number of others), might be induced to make an offer for Yeats Valves, though Yeats preferred TSE International Corporation as a merger partner. YVC and TSE might establish a joint venture of some sort, though Bill Yeats suspected that joint ventures faced the same kinds of integration problems as did acquisitions; as a result, he thought joint ventures were an inferior alternative. YVC could move forward alone, but that would require raising large sums of new debt and equity to finance the rapid expansion of the firm’s “widening gyre” program. Yeats was concerned that he might lose voting control of the firm regardless. It seemed to him that doing a deal with a known and friendly partner today would prepare the way for an orderly transition for himself and the firm. Bill Yeats and Tom Eliot had known each other for four years, having been introduced at an industry conference where they were both speakers. As founders and significant stockholders of their firms, they liked and respected each other. Talks of a possible combination seemed to gain momentum following the announcement by Yeats Valves of a U.S. government contract to develop 1
For Yeats’ estate-planning purposes, selling his shares in Yeats Valves would also work to his advantage.
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an advanced hydraulic-controls system code named Widening Gyre for use in a wide array of commercial and military applications in aerospace, automotive, and transportation industries. The Widening Gyre program had already generated valuable patents, numerous options for ongoing R&D. Bill Yeats and his team were most interested in the R&D aspects of the program, and hoped that TSE or some other partner would assume the work on commercialization, and numerous possible product extensions. Yeats insisted that the financial forecasts for his firm were conservative, and included only the most predictable benefits of the Widening Gyre. He told Kate Porter, “I hope TSE will recognize the intellectual capital we have built up for the Widening Gyre program. We’re all very excited about it; it could be really big. We have one high-profile government contract. But right now the forecasts don’t show its promise. And the stock price doesn’t reflect our growth prospects. How should we build it into our negotiations?” TSE International Corporation TSE International Corporation was incorporated in 1970. By 2000, the company manufactured products ranging from advanced industrial components to chains, cables, nuts and bolts, castings and forgings, and other similar products, and they sold them, for the most part indirectly, to various industrial users. One division produced parts for aerospace propulsion and control systems with a broad line of intermediate products. A second division produced a wide range of nautical navigation assemblies and allied products. The third division manufactured a line of components for missile and fire-control systems. Those products were all well regarded by TSE’s customers, and each was a significant factor in its natural market. Financial statements for TSE International are provided in Exhibits 4 and 5—the firm’s debt was currently rated Baa. Porter had obtained an analysts’ consensus forecast of TSE’s earnings, dividends, and cash flow items as shown in Exhibit 6. The company’s raw material supply, in the form of sheets, plates, and coils—of various metals—came from various producers. The TSE International plants were modern, ample, equipped with substantially new machinery, and adequately served by railroad sidings. The firm was considered a low-cost producer, made possible by unusual production knowledge. TSE International was also known as a tough competitor. The Current Situation During the early part of 2000, a series of group meetings had taken place between Yeats and Eliot and their respective company’s counsel. From the very start of the negotiations for combining the two companies, the merits of alternative methods had been considered by counsel for both parties. A straight common-for-common exchange was expected to be the most likely outcome, although Yeats was willing to consider an assets-for-stock exchange. Both methods would be structured to provide a deferment of the tax liability. Whatever terms were finally worked out, the agreement would be subject to the approval of the stockholders of both companies.
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YVC had 560 stockholders. Roughly 70% of the stock was held within the board of directors and their families, including 20% owned by Auden Company and 40% owned by Bill Yeats. Yeats had kept the board of directors fully informed throughout the discussions with TSE International. The proposed merger was discussed with the president of Auden Company, whose approval was necessary because of his company’s 20% interest. Although the Auden executives were not convinced that the proposal had strict business merit, they decided not to object but, instead, gave notice that they would sell their company’s holdings of Yeats Valves stock. Auden Company was about to undertake a new expansion of its own, and its executives were not disposed to keep minority interests in a company like TSE International Corporation. However, they saw no reason for not maintaining their satisfactory relationships with the Yeats Valves enterprise when it should become a TSE International division. Social terms of the merger needed to be confirmed. YVC’s management team and employees would remain intact; no layoffs were contemplated. Bill Yeats sought a grant of five-year options to purchase 80,000 shares of TSE International stock at 90% of its market price at the close of the acquisition, and an incentive bonus between $50,000 and $200,000 per year. Yeats’ current salary at YVC was $300,000 per year. Kate Porter, as a director of Yeats Valves, had been kept fully informed regarding the merger discussions. She was intrigued with the possibility that Yeats Valves might be more fully valued if it were part of a larger, more diversified enterprise. Yeats Valves had recently traded at a price-earnings ratio of 10.3 times, perhaps reflecting the risks associated with a small, concentrated enterprise, possibly vulnerable to competition from larger firms. The American Stock Exchange listing of TSE International would be attractive to some shareholders, although Porter’s firm had earned significant commissions specializing in handling Yeats Valves’ NASDAQ trading. Exhibit 7 shows recent market prices of Yeats Valves and TSE International shares.2 Exhibit 8 provides valuation information on exchange-listed possible peer firms of Yeats Valves and TSE International. Exhibit 9 presents information on recent acquisitions within Yeats Valves’ industry. Exhibit 10 presents money market and stock return data for recent years. Porter believed that a 40% marginal tax rate was warranted for both TSE and Yeats. “Kate, what do you think of the merger?” Yeats asked his friend as they sat down to analyze the deal. “It looks good to me, yet maybe I’ve gotten too close to the situation to uncover all the things I should be seeing. I also worry that our people, who have gotten used to an independent, entrepreneurial culture here at Yeats Valves, would have trouble adjusting at a big firm like TSE International. Do you think that the merger will benefit Yeats Valves? And, if so, what is the minimum price we should ask to ensure that our stockholders profit from this merger?” “April, 2000 was pretty cruel to those dot-com companies,” Bill Yeats said. “Our firm is different. We’ve got a great growth outlook, but our valuation is still low. Is this merger a move that
2
TSE International’s stock had a beta of 0.85; the beta for Yeats Valves and Controls was 1.50, based on the most recent year’s trading prices.
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will help fetch a better multiple? Or, should we wait to see if our efforts are better rewarded?” With that comment, Yeats passed the following clipping to Kate Porter: Modest Valuations—In light of currently modest share prices, we believe that the number of acquisitions will increase in the future. Some valuations are so low, in fact, managers are considering leveraged buyouts of their individual companies…. We advise most investors to delay additional commitments until the stock market settles.3
3
Value Line Investment Survey, 5 May 2000, 1301.
UVA-F-1365
-7Exhibit 1 YEATS VALVES AND CONTROLS INC. Yeats Valves and Controls Inc. Consolidated Balance Sheet as of December 31, 1999 (dollar figures in thousands) Assets Cash U.S. Treasury tax notes and other Treasury obligations Due from U.S. Government Accounts receivable net* Inventories, at lower of cost or market** Other current assets Total current assets Investments Plant, property, and equipment, at cost Land*** Buildings Equipment*** Less: allowance for depreciation Construction in process Total plant, property, and equipment, net Patents Cash value of life insurance Deferred assets Total assets
$ 1,884 9,328 868 2,316 6,888 116 $21,400 1,768 92 6,240 18,904 7,056 $18,180 88 $18,268 156 376 156 $42,124
Liabilities and Stockholders’ Equity Accounts payable Wages and salaries accrued Employees’ pension cost accrued Tax accrued Dividends payable Provision for federal income tax Total current liabilities Deferred federal income tax
$ 2,016 504 208 72 560 1,200 $ 4,560 800
Common stock, par $0.50, authorized and outstanding 1,440,000 shares Capital surplus Earned surplus Total equity Total liabilities and stockholders’ equity
720 7,680 28,364 $36,764 $42,124
Current ratio Quick ratio
4.69 3.16
* Allowance for doubtful accounts: $190,392 (probably conservative). ** Obsolete inventories were written off semi-annually. *** Equivalent land in the area had a market value of $320,000, and the building had an estimated market worth of $16.8 million. Equipment had a replacement cost of approximately $24 million, but a market value of about $16 million in an orderly liquidation.
UVA-F-1365
-8Exhibit 2 YEATS VALVES AND CONTROLS INC.
Yeats Valves and Controls Inc. Summary of Earnings and Dividends, Years Ended December 31, 1995–1999 (dollar figures in thousands, except per-share figures)
Sales Cost of goods sold Gross profit administrative Other income, net Income before taxes Taxes Net income Depreciation Cash dividends Earnings per common share* Cash dividends declared: Per preferred share Per common share Capital expenditures Working capital needs
1995 $36,312 25,924 10,388 2,020 92 8,460 3,276 $5,184
1996 $34,984 24,200 10,784 2,100 572 9,256 3,981 $5,275
1997 $35,252 24,300 10,952 2,252 108 8,808 3,620 $5,188
1998 $45,116 31,580 13,536 2,628 72 10,980 4,721 $6,259
1999 $49,364 37,044 12,320 2,936 228 9,612 4,037 $5,575
(Unaudited) Three months ended 3/30 1999 2000 $11,728 $14,162 8,730 10,190 2,998 3,972 668 896 14 198 2,344 3,274 1,009 1,391 $1,335 $1,883
$784
$924
$1,088
$1,280
$1,508
$364
$394
$1,680 $3.74
$2,008 $3.61
$2,016 $3.60
$2,304 $4.35
$2,304 $3.87
$576 $0.93
$753 $1.31
$5.00 $1.00
$1.25 $1.40
$1.40
$1.60
$1.60
$0.40
$0.52
– –
$1,826 $3,492
$2,011 $3,867
$2,213 $4,289
$2,433 $4,757
$2,675 $5,273
$2,675 $5,273
Percent payout to common stock
27.8%
38.2%
38.9%
36.8%
41.3%
43.1%
40.0%
Ratio analysis Sales Cost of goods sold Gross profit administrative Other income, net Income before fed. taxes Net income
100.0 71.4 28.6 5.6 0.3 23.3 14.3
100.0 69.2 30.8 6.0 1.6 26.5 15.1
100.0 68.9 31.1 6.4 0.3 25.0 14.7
100.0 70.0 30.0 5.8 0.2 24.3 13.9
100.0 75.0 25.0 5.9 0.5 19.5 11.3
100.0 74.4 25.6 5.7 0.1 20.0 11.4
100.0 72.0 28.0 6.3 1.4 23.1 13.3
UVA-F-1365
-9Exhibit 3 YEATS VALVES AND CONTROLS INC. Yeats Valves and Controls Inc. Forecast of Sales, Earnings, and Other Items for Years Ending December 31, 2000–2004 (dollar figures in thousands except per-share figures)
Actual 1999 $49,364 37,044 12,320 2,936 228 9,612 4,037 $5,575
2000 $59,600 42,316 17,284 3,612 240 13,912 5,565 $8,347
2001 $66,000 47,850 18,150 4,024 264 14,390 5,756 $8,634
Depreciation
$1,508
$1,660
$1,828
Cash dividends Earnings per share Dividends per share
$2,304 $3.87 $1.60
$2,304 $5.80 $1.60
− −
100.0 75.0 25.0 5.9 0.5 19.5 11.3
Sales Cost of goods sold Gross profit administrative Other income, net Income before taxes Taxes Net income
Capital expenditures Working capital needs Ratio analysis Sales Cost of goods sold Gross profit administrative Other income, net Income before fed. taxes Net income
Projected 2002 $73,200 52,704 20,496 4,464 288 16,320 6,528 $9,792
2003 $81,200 58,058 23,142 4,952 320 18,510 7,404 $11,106
2004 $90,000 63,900 26,100 5,492 352 20,960 8,384 $12,576
$2,012
$2,212
$2,432
$2,880 $6.00 $2.00
$3,456 $6.80 $2.40
$4,320 $7.71 $3.00
$5,184 $8.73 $3.60
$1,826 $3,492
$2,011 $3,867
$2,213 $4,289
$2,433 $4,757
$2,675 $5,273
100.0 71.0 29.0 6.1 0.4 23.3 14.0
100.0 72.5 27.5 6.1 0.4 21.8 13.1
100.0 72.0 28.0 6.1 0.4 22.3 13.4
100.0 71.5 28.5 6.1 0.4 22.8 13.7
100.0 71.0 29.0 6.1 0.4 23.3 14.0
UVA-F-1365
-10Exhibit 4 YEATS VALVES AND CONTROLS INC. TSE International Corporation Consolidated Balance Sheet as of December 31, 1999 (dollar figures in thousands) Assets Cash U.S. government securities, at cost Trade accounts receivable Inventories, at lower of cost or market Prepaid taxes and insurance Total current assets Investment in wholly-owned Canadian subsidiary Investment in supplier corporation Cash value of life insurance Miscellaneous assets Property, plant, and equipment, at cost: Buildings, machinery, equipment Less: allowances for depreciation and amortization Property, plant, and equipment, net Land Property, plant, equipment, and land, net Patents, at cost, less amortization Total assets
$46,480 117,260 241,761 179,601 2,120 587,222 158,081 104,000 3,920 2,160 671,402 260,001 411,402 22,080 389,321 1,120 $1,245,825
Liabilities and Stockholders’ Equity Notes payable to bank Accounts payable and accrued expenses Payrolls and other compensation Taxes other than taxes on income Provision for federal taxes on income refund, estimated Current maturities of long-term debt Total current liabilities
$5,795 90,512 38,399 3,052 32,662 30,900 201,320
Note payable to bank1 Deferred federal income taxes 2 % cumulative convertible preferred stock, $20 par,
119,100 29,668 27,783
1,389,160 shares outstanding2 Common stock, $2 par; 96,000,000 shares authorized; 62,694,361 shares issued
125,389
Capital surplus3 Retained earnings Total equity
21,904 720,661 895,737
Total liabilities and stockholders’ equity
$1,245,825
$150,000,000 note, payable semi-annually beginning June 30, 2000; $30,900,000 due within one year, shown in current liabilities. One covenant required company not to pay cash dividends, except on preferred stock, or to make other distribution on its shares or acquire any stock, after December 31, 1999, in excess of net earnings after that date. 2 Issued in January 1999; convertible at rate of 1.24 common share to one preferred share; redeemable beginning in 2004; sinking fund beginning in 2004. 3 Resulting principally from the excess of par value of 827,800 shares of preferred stock over the pay value of common share issues in conversion in 1999. 1
UVA-F-1365
-11Exhibit 5 YEATS VALVES AND CONTROLS INC. TSE International Corporation Summary of Consolidated Earnings and Dividends for Years Ended December 31, 1995-1999 (dollars in thousands except per-share figures)
Net sales Cost of products sold Gross profit Selling, general, and administrative Earnings before federal income taxes Tax expense Net earnings
1995 1996 1997 1998 1999 $1,623,963 $1,477,402 $1,498,645 $1,980,801 $2,187,208 1,793,511 1,271,563 1,180,444 1,140,469 1,642,084 352,400 296,958 358,176 338,717 393,697 69,438 74,932 87,155 120,296 58,463 293,937 227,520 283,244 251,562 273,401 126,393 95,558 116,130 101,882 109,360 $167,544 $131,962 $167,114 $149,679 $164,041
Depreciation
$19,160
$20,000
$21,480
$24,200
$26,800
Cash dividends declared
$85,754
$77,052
$53,116
$77,340
$92,238
$2.55
$1.86
$2.01
$1.92
$2.23
$1.39 $0.00 51.2%
$1.25 $0.00 58.4%
$0.86 $0.00 31.8%
$1.25 $0.00 51.7%
$1.49 $0.40 56.2%
100.0 78.3 21.7 3.6 18.1 10.3
100.0 79.9 20.1 4.7 15.4 8.9
100.0 76.1 23.9 5.0 18.9 11.2
100.0 82.9 17.1 4.4 12.7 7.6
100.0 82.0 18.0 5.5 12.5 7.5
Net earnings per common share Cash dividends declared Per common share Per preferred share Cash payout Ratio analysis Sales Cost of goods sold Gross profit Selling, general, and administrative Income before federal taxes Net income
UVA-F-1365
-12Exhibit 6 YEATS VALVES AND CONTROLS INC. TSE International Corporation Forecast of Sales, Earnings, and Other Items for Years Ending December 31, 2000–2004 (dollar figures in thousands, except per-share figures)
Actual 1999 $2,187,208 1,793,511 393,697 120,296 273,401 109,360 $164,041
Sales Cost of goods sold Gross profit Selling, general, and admin. Income before tax Tax expense Net income
Projected 2000 2001 2002 2003 $2,329,373 $2,480,785 $2,642,037 $2,813,769 1,910,086 2,034,244 2,166,470 2,307,291 419,287 446,541 475,567 506,478 125,786 131,482 140,028 146,316 293,501 315,060 335,539 360,162 117,400 126,024 134,215 144,065 $176,101 $189,036 $201,323 $216,097
2004 $2,996,658 2,457,260 539,398 155,826 383,572 153,429 $230,143
Depreciation
$26,800
$27,950
$29,770
$31,700
$33,170
$35,960
Cash dividends
$92,238
$102,083
$108,715
$115,780
$125,185
$133,314
Earnings per share1
$2.23
$2.39
$2.54
$2.71
$2.93
$3.12
Divs. per shr. common stock1
$1.49
$1.58
$1.69
$1.80
$1.94
$2.07
2
$0.40
Div. per shr. preferred stock Ratio analysis Sales Cost of goods sold Gross profit Selling, general, and admin. Income before tax Net income 1 2
100.0 82.0 18.0 5.5 12.5 5.0
100.0 82.0 18.0 5.4 12.6 5.0
100.0 82.0 18.0 5.3 12.7 5.1
100.0 82.0 18.0 5.3 12.7 5.1
100.0 82.0 18.0 5.2 12.8 5.1
100.0 82.0 18.0 5.2 12.8 5.1
62,694,361 common shares in 1999. Thereafter, 64,416,919 shares reflecting conversion of the preferred stock. 1,389,160 preferred shares in 1999. Conversion into 1,722,558 shares of common stock assumed in 2000.
UVA-F-1365
-13Exhibit 7 YEATS VALVES AND CONTROLS INC.
Market Prices of Yeats Valves and Controls Inc. and TSE International Corporation Common Stock, 1995–YTD (year to date) 2000 (in dollars per share)
1995 1996 1997
Yeats Valves and Controls Common Stock High Low Close $16.25 $8.75 $15.00 24.75 14.00 22.63 25.00 20.00 22.25
TSE International Corporation Common Stock Preferred Stock High Low Close High Low $12.31 $10.06 $11.88 14.37 11.77 13.16 12.82 9.28 11.13
1998 Quarter Ended: March 31 June 30 September 30 December 31
24.38 22.75 22.75 24.38
20.75 20.38 20.38 20.13
21.50 21.00 21.50 21.00
14.13 13.70 12.83 12.40
12.83 12.05 10.49 11.27
13.96 11.79 11.27 11.88
1999 Quarter Ended: March 31 June 30 September 30 December 31
23.50 23.63 22.75 30.00
20.00 19.88 20.00 22.25
21.75 22.00 22.50 28.50
11.60 11.60 13.61 17.01
10.21 10.90 11.14 13.30
10.67 10.90 13.61 16.78
13.61 13.15 14.23 17.32
12.22 12.05 12.37 13.77
2000 Quarter Ended: March 31
32.13
26.00
31.50
20.73
15.08
20.69
17.32
13.99
$39.75
$38.90
$39.75
$22.58
$18.31
$21.98
$17.63
$15.36
May 1, 2000
UVA-F-1365
-14Exhibit 8 YEATS VALVES AND CONTROLS INC. Information on Peer Firms in the Industrial Machinery Sector
Price/ Earnings Ratio
Beta
Dividend Yield
Expected Rate of Growth to 2005
Debt/Capital
CASCADE CORP. Designs, manufactures, and markets hydraulically actuated products.
8.2×
0.85
4.0%
12.5%
49%
10.3×
0.65
1.4%
11.0×
0.80
Nil
14.6×
1.10
1.9%
9.0%
42%
16.3×
0.75
0.9%
15.5%
39%
7.0×
0.65
3.0%
8.5%
1%
10.7×
0.85
1.6%
9.5%
16%
10.4×
nmf
2.9
14.0
CURTISS-WRIGHT CORPORATION Manufactures precision components in motion (42%); flow (36%) control; & metal treatment (36% of sales).
10.0%
8%
FLOWSERVE CORP. Makes, designs, and markets fluid handling equipment (pumps, valves, and mechanical seals).
6.5%
39%
IDEX CORP. Designs, manufactures, and markets industrial pumps, compressors, and a wide range of industrial products.
ROPER INDUSTRIES Operates in three segments: industrial controls, fluid handling, and analytical instrumentation.
TECUMSEH PRODUCTS Manufactures compressors, condensers, and pumps for commercial, industrial, and agricultural applications. Foreign sales and exports totaled 43% of 1999 sales.
THOMAS INDUSTRIES Leading manufacturer of compressors and vacuum pumps.
WATTS INDUSTRIES Designs, manufactures, and sells an extensive line of valves for the plumbing & heating and water-quality markets.
nmf = not meaningful figure. Source of data: Value Line Investment Survey, 5 May 2000.
36
UVA-F-1365
-15Exhibit 9 YEATS VALVES AND CONTROLS INC. Information on Selected Recent Merger & Acquisition Transactions in the Industrial Machinery and Aerospace Sectors Effective Date 10/20/2000 6/11/1999 12/15/1999 7/10/2000 10/12/2000 8/19/1999 2/24/2000 6/17/1999 6/19/2000
Acquirer General Electric Co. United Technologies Corp. AlliedSignal Inc. Meritor Automotive Inc. DaimlerChrysler AG Goldman Industrial Group Siemens Energy & Automation TI Group PLC Ingersoll-Rand Co.
Acquirer General Electric Co. United Technologies Corp. AlliedSignal Inc. Meritor Automotive Inc. DaimlerChrysler AG Goldman Industrial Group Siemens Energy & Automation TI Group PLC Ingersoll-Rand Co.
Target Honeywell Int'l. Inc. Sundstrand Corp. Tristar Aerospace Co. Arvin Industries Inc. Detroit Diesel Bridgeport Machines Moore Products Corp. Walbro Corp. Hussmann Int'l. Inc.
na = not available. Source of data: Thomson Financial’s SDC Platinum.
Transaction Size ($mm) 45,204.7 4,408.3 269.8 1,138.4 581.2 57.0 168.6 630.3 1,837.2
Business Electrical, construction Aircraft engines, defense Aircraft engines, radar Car, truck equipment Automobiles and trucks Metal-working machinery Electronic parts Metal products Industrial machinery
Target Net Sales Last 12 Months ($mm) 31,052.0 2,024.0 205.1 3,010.3 2,256.2 197.0 168.9 697.4 1,306.8
Equity Value/ Target Net Income 24.70 16.70 10.00 7.50 12.20 29.00 63.00 19.80 27.30
Target Honeywell Int'l. Inc. Sundstrand Corp. Tristar Aerospace Co. Arvin Industries Inc. Detroit Diesel Bridgeport Machines Moore Products Corp. Walbro Corp. Hussmann Int'l. Inc.
Equity Value/ Enterprise Target Value/ Book Target Net Value Sales 4.8 1.61 6.8 2.13 2.7 1.37 1.1 0.38 1.3 0.29 0.8 0.37 2.5 0.96 4.0 0.79 7.2 1.45
Business Aerospace, automotive Aerospace, industrial equip. Aerospace hardware Auto parts, accessories Diesel, alternative engines Metal-cutting tools Control instruments Fuel system components Refrigeration systems
Enterprise Premium Value/ Enterprise (Discount) 4 Weeks Target Prior to Value/ Enterprise Announcement Operating Target Cash Value/ Net Date Income Flow Income 16.85 11.98 27.36 54.63 11.40 9.37 18.66 54.08 7.92 7.49 15.52 65.22 8.99 4.84 14.37 22.20 8.48 5.22 14.78 77.78 11.40 9.37 18.66 53.85 26.76 15.53 62.08 79.38 13.44 7.14 44.87 na 15.24 12.48 33.01 109.95
UVA-F-1365
-16Exhibit 10 YEATS VALVES AND CONTROLS INC. Capital Market Interest Rates and Stock Price Indexes (averages percentage per annum except for May 1, 2000, which offers closing prices)
1997
1998
1999
May 1, 2000
U.S. Treasury Yields 3-month bills 30-year bonds
5.06% 6.61%
4.78% 5.58%
4.64% 5.87%
6.60% 5.98%
Corporate Bond Yields by Rating Aaa Aa A Baa
7.27% 7.48% 7.54% 7.87%
6.53% 6.80% 6.93% 7.22%
7.05% 7.36% 7.53% 7.88%
8.67% 9.15% 9.35% 9.60%
Stock Market S&P 500 Index Price/earnings ratio
873 15.9×
1,085 17.4×
1,327 19.4×
1,481 18.8×
Industrial Machinery Stocks Price/earnings ratio Dividend yield
12.9× 1.8%
13.9× 1.5%
14.9× 1.6%
15.0× 1.6%
N.B.: The geometric average equity market-risk premium for the period 1926–1999 was about 5.5%.
The arithmetic average equity market-risk premium for that period was about 7.2%. Sources of data: Value Line Investment Survey, 5 May 2000; Federal Reserve Bulletin, April 2000; Wall Street Journal, 2 May 2000.
