1) MRC is considering acquiring ARI for $40 million to gain $20 million in liquid assets and diversify, but ARI's rayon business is declining rapidly in the tire market. 2) While the acquisition appears financially attractive in the short-term, it does not align with MRC's long-term strategy and ARI's management style differs significantly from MRC's decentralized model. 3) Integrating the two companies would be difficult and rayon is a dying business, so the acquisition does not make strategic sense despite initial positive cash flows.

1. MRC Case
Study
By: Devorah Serkin, Dan
Saguy, Romy Ribitzky, Shimon
Zlotnick

2. MRC Inc.
• MRC is a Cleveland based manufacturer of car
parts
• The business plan is based on rapid diversification
by new acquisition to:
o keep themselves from becoming exposed to risk
o Stabilize earnings and cash flow
o Escape threat of backward integration by car manufacturers
• Currently overleveraged and need cash quick to
continue their strategy
o Currently, long term debt for MRC is $22.7mm
• Achieve management of many acquired
companies through decentralized management
o 7 divisions run by department heads who oversee operations
and report to MRC owner

3. ARI Inc.
• American Rayon Inc (ARI) is a Philadelphia based
corporation.
• Third largest producer of Rayon in the United States
• Rayon is currently used in tire production, though market
share in tires is decreasing yearly (as of 1960, only 64%
market share) Rayon’s market share in tire production
Million Market Yearly
year pounds share change
1955 406.9 86%
1956 343 83% -3%
1957 318.5 77% -6%
1958 233 71% -6%
1959 287.1 70% -1%
1960 251.3 64% -6%
• Has $20mm of liquid assets not needed for operations
that can immediately be sold upon purchase

4. Pro and Cons
• Pros to acquisition • Cons to acquisition
o $20mm in liquid assets o Company is losing market
which MRC needs to share
offset their debt. o Recent return to
o Allows MRC to continue profitability due to
with the strategy of reduction of cost rather
diversification than increase in sales
o Increases credit o Dying company with no
worthiness long term future prospects
o Stabilizes cash flows o Large company may not
o Undervalued company fit with MRC’s
costs them $40M in management model
common stock

5. MRC Inc.
• Assumptions for DCF calculations of ARI:
o Numbers are in real terms. Depreciation has been adjusted to
reflect the actual inflation rates between 1961 and 1967
o Capital spending over the next 6 years will be $300,000
annually (inflation in this case was ignored due to small
number and low rate of inflation -averaging under 2%)
o Working capital was calculated by assuming $5mm in cash
then taking (working cap - cash/sales) = working capital rate
was 66.42%
o Not including continuation value based off assumption that
company is dying
o Assumed discount rate of 12%
o Assuming no cannibalization because MRC and ARI have
different products and different clients
o Given that ARI has no debt

6. MRC Inc.
Forecasting for American Rayon Inc
1961 1962 1963 1964 1965 1966 1967
Net Sales 55,000 55,000 55,000 52,000 48,000 42,600 40,070
Earnings before taxes 4,840 5,390 5,390 3,640 2,724 1,917 841
Income taxes 2,323 2,587 2,587 1,747 1,308 920 404
Net earnings 2,517 2,803 2,803 1,893 1,416 997 437
Depreciation 2,968 2,929 2,891 2,851 2,772 2,511 2,476
Pre tax profit 5,485 5,732 5,694 4,744 4,188 3,508 2,913
Tax Rate 48% 48% 48% 48% 48% 48% 48%
inflation rate 1.07% 1.20% 1.24% 1.28% 1.59% 3.01% 2.78%
Less Capital Expenditures 0.30 0.30 0.30 0.30 0.30 0.30 0.30
Working Capital 36,532 36,532 36,532 34,539 31,883 28,296 26,615
Less Increase to Working Capital (4,668) - - (1,993) (2,657) (3,587) (1,680)
1. Calculated free Cash Flow 10,153 5,732 5,694 6,737 6,845 7,094 4,593
PV free CFs 9,065 4,569 4,053 4,281 3,884 3,594 2,078
3. Present Value of free cash flows 31,525
plus excess cash 5,000
value of firm 36,525
less value of debt -
per share value 19.73

7. MRC Inc.
• Based on forecasting of ARI future cash flows:
o Value of the firm is $36mm and MRC is willing to pay $40mm
o Of that $36mm, $20mm are liquid assets not needed for daily
operations that can be sold off immediately
• Would help pay off $22.7mm in long term debt and allow
them to continue to borrow
o Our per share value (19.37) is higher than the actual stock
price (15) -proves that ARI is an undervalued company
• Based on forecasting, ARI seems like a good
investment

8. MRC Inc.
Strategic Vision
• On the surface, buying ARI seems like it fits with MRC’s
strategy of rapid acquisitions, minimizing risk, and
stabilizing cash flows
• However, doing so is only a quick win, bringing in $20mm
in cash for the short-term but not in the long-term
• ARI’s profitability is largely based on cost-cutting, not
creating value—which doesn’t add value for MRC
• ARI’s core business is rayon, and market share is sliding
quickly, with sales dropping by 10%-15% by 1964
• Therefore, looking at the long-term, acquiring ARI
doesn’t fit with MRC’s strategy

9. MRC Inc.
Conclusion
• ARI is an undervalued company with $20mm in liquid
assets which would help MRC continue its strategy of
quick acquisitions by allowing them to continue to
borrow
• PV of future cash flows for ARI through 1967 are all
positive
• However, this acquisition does not align with MRC’s long-
term strategic vision
• ARI’s management style is vastly different than MRC’s
and integrating the two will be time-consuming and
costly
• Rayon is a material that is quickly losing market share
and going out of favor with tire manufacturers