1) Flinder Valves and Controls (FVC), a manufacturer of specialty valves and heat exchanges, is considering an acquisition offer from RSE International, a large conglomerate technology company. 2) The acquisition could benefit both companies by providing FVC with greater financial resources for research and development, while expanding RSE's product portfolio. 3) Key challenges include the debt load and international presence of RSE, as well as ensuring FVC retains its brand identity and management team.

1. 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 RSE’s 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.

2. Pros/Strengths: FVC sell itself to RSE
1) 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.
2) 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.
3) 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 RSE’s intention to invest in and grow the FVC operation. The management
team of FVC is what caught RSE’s attention.
4) FVC had Auden Company as an important non-distribution channel under a
nonexclusive distributor arrangement.
Cons: FVC sells itself to RSE
1) FVC doesn’t 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 RSE’s shares
2) The need to increase profit margin

3. 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 FVC’s
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 company’s
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 company’s 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.