In 2008, FVC and RSE began negotiation a possible acquisition of FVSC by RSE. The initial discussions began in late 2007 and focused on the motives of the acquisition. These early discussions also covered various management issues and compensation issues in the combined firm. After all of these initial discussions, the only item remaining was the definitive agreement to be signed by both parties. However, during the past year, the U.S. economy had experienced increased difficulty. As such, FVC and RSE were both affected by these difficulties. In fact, the most recent analyst report summarized that industrial manufacturing would suffer a loss of sales. This is because of tighter borrowing standards and a severely weakened housing sector. As a result, consumers would spend less, causing production needs to decrease. This same situation is occurring in Western Europe. This meant that both companies are concerned about the opportunities and risks of this acquisition within this increasingly challenging environment.
The company manufactures specialty valves and heat exchangers. Almost half of the company’s profits were from products provided to the defense and aerospace industries. The specialty products required experience that few firms had. The Auden Company accounted for about 15% of FVC’s sales and was a significant distribution channel. However, FVC’s staff contributed about 30% of sales. Half of the foreign sales were in emerging economies and the other half were in developed economies. Despite competition, the economy in developed countries improved, and this, combined with new products designed for the aerospace and defense industries, allowed the company the opportunity to improve its performance. As such, sales in the first quarter of 2008 grew 23% more than the first quarter of 2007, at a time when many of FVC’s competitors experienced limited growth prospects.
RSE was founded in 1970 and rooted as a Russell 1000 company. The firm faced growth challenges, causing the creation of 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 RSE then served. In 2008, RSE manufactured a broad range of products to be sold (mostly indirectly) to various industrial users. In fact, one division produced parts for aerospace propulsion and control systems with a broad line of intermediate products, while 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. Raw material supply of various metals came from various producers. Significantly, RSE’s plants were modern and had newer machinery, while being adequately served by railroad sidings. RSE was a low-cost producer that possessed unusual production knowledge and a tough competitor.
To increase profit margins, Project CORE was initiated as a business wide initiative to improve and unify the corporate wide information systems. Numerous opportunities for improving profits and sales had been identified, allowing RSE’s latest sales and earnings forecast projected a steady increase over the next five years. Current sales plans, excluding merger growth, would allow sales to hit $3 billion within 5 years. However, it was believe that the stock market undervalued the firm’s shares.
Both parties would profit from the merger, especially if FCV maintained its distinct identity. However, the company would also benefit from RSE’s knowledge. Furthermore, it was established that no layoffs were to occur from FCV, signifying RSE’s intention to invest in and grow the FVC operation. However, FVC was traded on NASDAQ and RSE was traded on the American Stock Exchange. Market capitalization was $100 million for FVC and $1.4 billion for RSE. Furthermore, both companies had experienced recent rapid rises in share price due to strong performance despite the weak economic environment.
Current ratios are designed to determine whether or not the company can pay short term obligations. It is calculated by dividing current assets by current liabilities (Investopedia, 2014). In 2007, the current ratio for FVC was 4.7, calculated as 21,400/4,560. In 2007, the current ratio for RSE was 2.9, calculated as 587,221/201,320. The quick ratio measures liquidity. It is calculated by subtracting current assets and inventories, then dividing the difference by current liabilities (Investopedia, 2014). Thus, in 2007, the quick ratio for FVC was 3.18, calculated by (21,400-6,888)/4,560. In 2007, the quick ratio for FSE was 2.02, calculated by (587,221-179,601)/201,320. These two ratios suggest that RSE would gain immense benefits from the merger, perhaps, even more so than FVC.
Since RSE stands to gain tremendous knowledge from FVC, a significant amount should be paid. However, FVC needs to keep in mind that RSE has all intentions of maintaining FVCs staffing. Considering the fact that RSE intends to maintain staffing and offer a generous compensation plan for the current CEO, the purchase price should be based on current market capitalization for FCV, which would cost RSE $100 million. The purchase price should be divided between cash and shares. Since Auden has no intention of holding shares from RSE, it should be offered cash. Other shareholders should have the option to accept either cash or shares. Although the initial purchase would be significant for RSE, the merger would pay for itself quickly due to the reputation of both companies. This can be combined in order to retain new consumers and increase sales. Therefore, RSE can expect to gain more financial liquidity.
