Analysis

This portion of the report is based on analyzing the before merger valuation of Flinders Values
and Controls Inc. (FVC) and RSE International Corporation. In addition to this, expected
performances of both the companies after the merger have also been evaluated. In order to
evaluate the expected performance of these companies before the merger, WACC is calculated
and the value of WACC for FVC and RSE is 9.2% and 9.4% respectively (Exhibit 3).

For the WACC calculations, risk-free rate is assumed to be 4.52 % (30-year bonds) whereas,
Market premium is assumed to be 5.5 % (geometric average) for both the companies. However,
Based on the performance of past, the growth rate of the future expected performance is
calculated during the time period 2008 to 2013.

From the analysis of the before merger valuation of Flinders Values and Controls Inc. (FVC), it is
determined that the enterprise value of a company is $856,518 while the share per value is
$351.03 according to the DCF valuation method. However, the enterprise value of RSE
International Corporation is $32,514,074 whereas; share per value is $0.52. Furthermore,
expected sales and net operating profit after taxes (NOPAT) of both the companies for the year
2008 to 2013 are calculated on the basis of average growth rate of the past years given in the
exhibits.

The sales of FVC have assumed to increase at 8.63% growth rate from 2008 to 2013 while sales
of RSE projected to increase at 9% growth rate during the same time period. The Cost of Goods
Sold is assumed to be 70% for FVC while for RSE it is assumed to be 79% of the revenue for all
the six years. The expenses are assumed to be growing at a 5.82 % rate for FVC while expenses
for RSE are supposed to be at 4%. The Tax rate is expected to be 40% for both the companies.
The equity value/market capitalization of both the companies is around $100 million and $1.4
billion for FVC and RSE respectively. In addition to this, the current price per share of the FVC and
RSE are $39.75 and $0.52 respectively (Exhibit 1 &2).The per share premium of the RSE
International Corporation is expected to be $0.48 whereas, expected per share premium value of
FVC is $ 0.45 from examining the after merger worth of both the companies (Exhibit 4).

This means that both the companies will get the expected premium over their current per share
price as well as expected inflation is 7% of determining the value of both companies after
merger. Moreover, expected PV of the cash flow value of RSE after merger is $30,144,789 while
expected PV of cash flows of FVC is $1,091,150. The growth rate and discount rate are
calculated while considering the expected inflation for evaluating the post-merger worth of both
the companies (Exhibit 4).

Recommendation

From the above analysis of expected pre-merger performance Of FVC and RSE as well as their
after merger expected worth and performance it is recommended that both the companies
should go for the merger. As this merger would provide both the companies great opportunities
for growth and also enhance the value of these companies in the industry.
Furthermore, post-merger results are promising for both the companies and allow the companies
to get the benefits from the opportunities that explore after the merger. However, there are
several benefits for both the companies that would help them to increase the worth of their
shares and to get the understanding and hold of the synergies from the merger (Exhibit 4).
Therefore, due to all these advantages, it is recommended that RSE should acquire FVC as FVC
has strong and experienced management team as well as expected high performance in the
future

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