Business Failure: The Bearing Industry

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The Timken Company is one of the worldwide leaders in the bearing industry with operations spanning over the past 100 years. Timken has recently been experiencing sluggish earnings, forcing a consolidation of their workforce and a cut in their dividend payout. Timken has been in contact with Ingersoll-Rand, a globally diversified manufacturer of commercial and industrial equipment and components, with the potential to acquire one of their subsidiaries that specializes in the bearing industry, Torrington Company. The U.S. bearing industry has been experiencing a variety of problems recently, including pressure from foreign competitors that are able to offer products with similar quality at lower prices. The bearing market has hit its peak, and now Timken has found a way to edge out the foreign competition, through customization of their products to match customer needs. For Timken to be able to achieve their goals, they’ve identified Torrington Company as a perfect match to help them accelerate past foreign competition and grow their business sustainably. To estimate the price Timken should offer to IR, we used a variety of different methods, including the discounted cash flow method of Torrington, and an industry earnings multiple method. Based on our analysis, we believe it is best for Timken to offer a total of $893.46M to Ingersoll-Rand for Torrington, the majority being cash raised through a debt issuance, and the rest an agreed upon equity stake in Timken. The details and analysis are explained in the memo as follows.

The potential benefits of the Torrington acquisition for Timken are unquantifiable. The automotive industry has been fairly volatile recently, and a concern to management. Torrington offers a strong potential ...

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... in new debt and $400M in equity through a rights offering. By doing this, Timken can raise $800M in cash to offer Ingersoll-Rand. The increase in debt allows Timken to maintain acceptable coverage ratio’s within the BBB investment rating [Exhibit 6 & 7]. To minimize Ingersoll-Rand’s exposure to our stock price volatility, we recommend the remaining 93.46M of the deal be a stock-for-stock deal or 4.92Million shares at the current price of $19 a share. A risk with this is that historically with acquisitions, the acquiring firm’s stock price declines. If the market can realize the growth potential of the acquisition and how much it can benefit Timken, then their stock price should appreciate. Ingersoll-Rand should be inclined to accept because the majority is in a cash offer, and once they do, Timken shareholders stand to reap enormous benefits with the acquisition.

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