Tesla SolarCity CaseFIN 440Executive.docx

Tesla SolarCity CaseFIN 440
Executive Summary
Tesla’s CEO, Elon Musk, has declared the intention to acquire
SolarCity. SolarCity is a solar company that was founded by
Peter and Lyndon Rive in 2006. During times where, fossil fuel
prices are spiraling and the desire for clean energy is
increasing, the company became the number-one solar panel
installer in the United States. Its long-term financing
agreements with customers also provides recurring revenue for
this company. SolarCity had a five-year compounded annual
growth rate of 62.25 percent. Despite these facts, the company
has never had a profitable year. It is important to note that the
firm has become dependent on large amounts of debt to finance
its large capital expenditures.
On the other hand, analysts believe that SolarCity will finally
become profitable in 2017. With the acquisition of SolarCity,
both Tesla and SolarCity would increase their profits
significantly and experience significant cost synergies. At
present, Tesla specializes in designing, manufacturing, and
selling electric cars. The acquisition of SolarCity could provide

Tesla with a realistic opportunity to expand its market share,
increase operational efficiency, and access cheaper financing.
Tesla’s CEO, Elon Musk believes that he can increase
SolarCity’s operating margin to make it valuable, even though
he is unsure about the fair purchase price. However, Tesla’s
investors may not agree with the acquisition of SolarCity.
SolarCity is unstable and unprofitable. Tesla is also
experiencing cash and profitability issues and may not be able
to sustain another risky company. The first step in determining
if this acquisition would be beneficial is to conduct a valuation
on SolarCity and determine what a fair purchase price would be.
Analysis
The markets for solar power and automotive industries are
characterized by high level of competition, as the large-scale
companies must sustain their market size. This explain the
reason why SolarCity has required lots of financial supports to
gain and maintain competitiveness. Tesla’s CEO, Elon Musk,
has noticed the long-term growth opportunities for SolarCity,
especially, because of the expected growth in demand for the
Tesla model 3 and the proposed partnership with SolarCity to
launch Gigafactory. Acquiring with SolarCity can play a
significant role in helping to reduce Tesla’s operating costs and
increase the revenue.
On the other hand, this acquisition would also influence
economies of scale. It will provide a suitable stage for
SolarCity products and enable Tesla to upsurge its production
capacity. This merger and acquisition aims to eliminate the
overhead expenses and improve efficiency, service delivery, and
customers’ satisfaction. It will allow Tesla to downsize and
focus on the key business activities. This deal could enable
SolarCity to reduce the level of debt comparing to the other
competitors in the industry.
SolarCity’s recent poor financial performance could
significantly persuade SolarCity stockholders to accept Tesla’s

acquisition offer. As previously mentioned, the company has
already recorded losses for several consecutive years. Elon
Musk is adept in analyzing the market and applying to the
corresponding business strategies. He determines to restructure
SolarCity and help to change its bad financial status. To control
the overhead expenses will create a realistic means for Tesla to
increase its operating margin over time.
In the realistic world, the uncertainty should be taken into
consideration. These uncertainties will affect the income and/or
costs after the merger of Tesla and SolarCity. First, the
volatility of crude oil price. Electricity is produced by burning
crude oil. As a result, crude oil price has tremendous influence
on the production cost of electricity. If the crude oil price keeps
increasing, the price for electricity will increase proportionally.
Residents will look for alternative to supersede electricity.
Solar Power will be the major alternative and the income for
Tesla – SolarCity will be increased. Another one is
environmental issues. Society is becoming more aware of all the
environmental issues we are experiencing. The desire for clean
energy resources is increasing. Electric vehicles have become a
popular solution. And for end users, the way for them to save
cost will be solar power. In this case, end users can get the
automobile and the charger from one company. It will also save
end users time for shopping around for the solar panels
provider.
Until now, we assumed that the merger is good for both
companies. But there are uncertainties that will affect them
negatively. First is the entry of new electric car builders and
solar panel providers. Tesla is a well-known manufacturer for
fully electric cars. But some other car manufacturers have
already built fully electric cars, for example, BMW i3, Nissan
Leaf and Chevrolet Bolt. For people that do not purchase Tesla,
they will have more selections for solar panel providers. New
comers will probably cause Tesla’s and SolarCity’s revenue and
production to decrease by having lower manufacturer's
suggested retail price (MSRP) for the vehicle and a lower cost

for solar panels. For the cost perspective, to keep the
technology up-to-date, additional costs will be invested to the
research and development department. In addition, higher
welfare will be needed to prevent top technicians and engineers
from jumping ship.
To determine the value of SolarCity to Tesla we have used the
discounted cash flow analysis and the comparable valuation
approach.
The Discounted Cash Flow Analysis
To determine SolarCity’s value, we are required to calculate the
weighted average cost of capital (WACC) for the sake of all the
future cash flows.
After evaluating the balance sheet of SolarCity, we can easily
get the Debt, it should be current liabilities plus the long-term
debt, which is 4,070.85. After that, CAPM formula can be used
to calculate cost of equity (Re). The risk-free rate is the 30-year
U.S. treasury rate is 2.5%. Moreover, the market risk premium
is 5%. For beta we use the average range between 1.95-2.40
which is 2.175 due to different source. In addition, the cost of
debt is 6.8%. Accordingly, to all the figures we got, we can use
the CAPM formula to calculate the cost of equity and then the
WACC. As the following matrix shown, the cost of equity is
13.38% and the WACC is 8.28%.
Free cash flow represents the cash a company generates after
cash outflows to support operations and maintain its capital
assets. The essence of the free cash flow valuation is that the
value of a firm can be obtained by the present value of all future
cash flows. To value the firm today we are required to discount
all the future free cash flows with the WACC. First and
foremost, we should apply to all the figures we got to calculate
the cash flow of SolarCity. Among this, the most important is
we need to add the synergy to EBIT to get the new result.

All the data we can reach in the case, such as capital
expenditure, depreciation and amortization and net working
capital, as 23%, 3.5% and 10% of the revenue respectively.
Based on the information we can calculate them one by one.
Once we get the EBIT, the synergy of 20% of expenditures
should be applied to generate the new EBIT with synergy.
Synergy is the concept that the value and performance of two
companies which combined will be greater than the sum of the
separate individual parts. The same way to count Operating
Cash Flow (OCF) with synergy. So, the free cash flow (FCF) is
equal to new OCF minus the change of net working capital and
minus capital of expenditures (CAPEX). The Terminal Value
can be obtained by including all cash flow after the explicit
forecast period during 2017-2021. Using Vn= (1+g/(rwacc-
g))*FCFn, we can get the Vn then Enterprise Value EV (PV
Cash Flow + Terminal Value) can also be calculated, which is
6,048.82. At last, the market value of equity (MVE) is received
by EV minus debt 4,070.85, is 1,977.97. Given the current
number of total shares is 97.59, we can get the share price,
which is $20.27 per share.
When making a comparison between SolarCity without synergy
and with synergy, it is not difficult to see that synergy would
help SolarCity to improve its financial status, because it has
shown the negative data of FCF with no synergy.The acquisition
could definitely benefit the SolarCity. However, it may not be a
wise decision for Tesla to acquire SolarCity. The actual
SolarCity price per share is $20.27 instead of the asking price
of $29.35. To further confirm our results, we can also use the
comparable valuation approach.
Conclusion
Based on our data we have concluded that Tesla should not
acquire SolarCity. We came to this conclusion by using WACC,
discounted cash flow analysis, free cash flow analysis, and the
comparable valuation approach. Our findings all point to the
same conclusion, that SolarCity’s share price of $29.35 is
overpriced and does not correctly correlate with the value of the

company. It is our recommendation that Tesla not acquire
SolarCity unless SolarCity shareholders are willing to accept a
share price of at most $20.27.
http://time.com/5171819/christianity-slavery-book-excerpt/
How Christian Slaveholders Used the Bible to Justify Slavery
A Bible
Michael Dümmler— EyeEm&/Getty
Images
By NOEL RAE February 23, 2018
During the period of American
slavery, how did slaveholders
manage to balance their religious
beliefs with the cruel facts of the
“peculiar institution“? As shown by
the following passages — adapted
from Noel Rae’s new book The
Great Stain, which uses firsthand
accounts to tell the story of slavery
in America — for some of them that
rationalization was right there in the
Bible.
Out of the more than three quarters of a million words in the
Bible, Christian
slaveholders—and, if asked, most slaveholders would have
defined themselves as
Christian—had two favorites texts, one from the beginning of
the Old Testament and

the other from the end of the New Testament. In the words of
the King James Bible,
which was the version then current, these were, first, Genesis
IX, 18–27:
“And the sons of Noah that went forth from the ark were Shem,
Ham, and Japheth:
and Ham is the father of Canaan. These are the three sons of
Noah: and of them
was the whole world overspread. And Noah began to be an
husbandman, and he
planted a vineyard: and he drank of the wine, and was drunken;
and he was
uncovered within his tent. And Ham, the father of Canaan, saw
the nakedness of his
father, and told his two brethren without. And Shem and Japheth
took a garment,
and laid it upon both their shoulders, and went backward, and
covered the
nakedness of their father; and their faces were backward, and
they saw not their
father’s nakedness. And Noah awoke from his wine, and knew
what his younger son
had done unto him. And he said, Cursed be Canaan; a servant of
servants shall he
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pictures-and-press-releases/peculiar-institution
be unto his brethren. And he said, Blessed be the Lord God of
Shem; and Canaan
shall be his servant. God shall enlarge Japheth, and he shall
dwell in the tents of
Shem; and Canaan shall be his servant. And Noah lived after the
flood three
hundred and fifty years.”
Despite some problems with this story—What was so terrible
about seeing Noah
drunk? Why curse Canaan rather than Ham? How long was the
servitude to last?
Surely Ham would have been the same color as his brothers?—it
eventually
became the foundational text for those who wanted to justify
slavery on Biblical
grounds. In its boiled-down, popular version, known as “The

Curse of Ham,” Canaan
was dropped from the story, Ham was made black, and his
descendants were made
Africans.
The other favorite came from the Apostle Paul’s Epistle to the
Ephesians, VI, 5 -7:
“Servants, be obedient to them that are your masters according
to the flesh, with
fear and trembling, in singleness of your heart, as unto Christ;
not with eye-service,
as men-pleasers; but as the servants of Christ, doing the will of
God from the heart;
with good will doing service, as to the Lord, and not to men:
knowing that
whatsoever good thing any man doeth, the same shall he receive
of the Lord,
whether he be bond or free.” (Paul repeated himself, almost
word for word, in the
third chapter of his Epistle to the Colossians.)
The rest of the Old Testament was often mined by pro-slavery
polemicists for
examples proving that slavery was common among the
Israelites. The New

Testament was largely ignored, except in the negative sense of
pointing out that
nowhere did Jesus condemn slavery, although the story of
Philemon, the runaway
who St. Paul returned to his master, was often quoted. It wa s
also generally
accepted that the Latin word servus, usually translated as
servant, really meant
slave.
Even apparent abuses, when looked at in the right light, worked
out for the best, in
the words of Bishop William Meade of Virginia. Suppose, for
exampl e, that you have
been punished for something you did not do, “is it not possible
you may have done
some other bad thing which was never discovered and that
Almighty God, who saw
you doing it, would not let you escape without punishment one
time or another? And
ought you not in such a case to give glory to Him, and be
thankful that He would
rather punish you in this life for your wickedness than destroy
your souls for it in the

next life? But suppose that even this was not the case—a case
hardly to be
imagined—and that you have by no means, known or unknown,
deserved the
correction you suffered; there is this great comfort in it, that if
you bear it patiently,
and leave your cause in the hands of God, He will reward you
for it in heaven, and
the punishment you suffer unjustly here shall turn to your
exceeding great glory
hereafter.”
Bishop Stephen Elliott, of Georgia, also knew how to look on
the bright side. Critics
of slavery should “consider whether, by their interference with
this institution, they
may not be checking and impeding a work which is manifestly
Providential. For
nearly a hundred years the English and American Churches have
been striving to
civilize and Christianize Western Africa, and with what result?
Around Sierra Leone,
and in the neighborhood of Cape Palmas, a few natives have
been made Christians,

and some nations have been partially civilized; but what a small
number in
comparison with the thousands, nay, I may say millions, who
have learned the way
to Heaven and who have been made to know their Savior
through the means of
African slavery! At this very moment there are from three to
four millions of Africans,
educating for earth and for Heaven in the so vilified Southern
States —learning the
very best lessons for a semi-barbarous people—lessons of self-
control, of
obedience, of perseverance, of adaptation of means to ends;
learning, above all,
where their weakness lies, and how they may acquire strength
for the battle of life.
These considerations satisfy me with their condition, and assure
m e that it is the
best relation they can, for the present, be made to occupy.”
Reviewing the work of the white churches, Frederick Douglass
had this to say:
“Between the Christianity of this land and the Christianity of
Christ, I recognize the

widest possible difference—so wide that to receive the one as
good, pure, and holy,
is of necessity to reject the other as bad, corrupt, and wicked.
To be the friend of
the one is of necessity to be the enemy of the other. I love the
pure, peaceable, and
impartial Christianity of Christ; I therefore hate the corrupt,
slave-holding, women-
whipping, cradle-plundering, partial and hypocritical
Christianity of this land. Indeed,
I can see no reason but the most deceitful one for calling the
religion of this land
Christianity…”
Overlook Press
Adapted from The Great Stain: Witnessing American Slavery by
Noel Rae.
Copyright © 2018 by Noel Rae. Reprinted by arrangement with
The Overlook Press,
Peter Mayer Publishers, Inc. http://www.overlookpress.com. All
rights reserved.
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Slavery/dp/1468315137
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possible concepts for extra credit
— the following concepts are from
chapters 1 and 2 of the text book.
They are in no particular order. There
could still be some concepts in
chapters 1 and 2. There are most
definitely more concepts in the rest of
the book. This list is meant only as a
suggestion.
- socioeconomic status (SES)
- inequality
- definition of minority group
- definition of majority group
- characteristics of a minority group
- racial minority group
- ethnic minority group

- race
- ethnicity
- race as a social construction
- markers of group membership
- stratification
- theories of Karl Marx (proletariat,
bourgeoisie, means of production,
importance of the economy, conflict
as good
- living wage
- theoretical perspective proposed by
Weber
- theoretical perspective proposed by
Lenski
- subsistence technology (foraging,
agriculture, industrial, post-industrial)

- intersectionality (Patricia Hill Collins);
matrix of domination
- relationship between power,
competition, conflict
- evolution
- prejudice
- stereotypes
- gender
- discrimination
- ideological racism
- institutional discrimination
- miscegenation
- assimilation
- pluralism
- Anglo conformity
- social structure
- human capital theory

- multi-culturalism
- ethnic enclaves
- separatism, forced migration,
genocide, revolution
- industrial revolution
- any of the different immigrant groups
discussed in class
- chains of immigration
- anti-Catholicism
- anti-Semitism
- pogrom
- push factors; pull factors
- three generation model
- quota system
- ethnic succession
- labor unions
- structural mobility

- degree of similarity
- ethclass
- sojourners
- ethnic revival
Paper Organization
Executive Summary 1 Page
The case write-up begins with a single-page executive summary
which must be able to stand alone, and provide a busy top-level
decision-maker with a complete briefing of the problem, what
course of action to follow and a succinct description of why.
Identify the problem(s) concisely, using whatever case facts are
necessary to show significance and/or priority.
Analysis1-3 pages
Give a short list of the key assumptions you make in your
analysis, the logic of your argument leading to your conclusion
and the proposed solution. Assumptions should be justified if
possible, and the sensitivity of your recommendation to your
assumptions should be assessed. Note that key assumptions are
not numerical estimates -- defer numerical estimation
assumptions to the tables.
Avoid generalities in your analysis. Be as specific as possible.
Express your ideas clearly, supporting them adequately with

evidence, explanation, and references to appropriate exhibits.
The strengths and weaknesses of alternative courses of action
should be developed. The analysis should build to support your
recommendation. Reasons for accepting or rejecting alternatives
should be stated and, if necessary, defended.
State your recommendation clearly and in detail sufficient to
guide implementation. Make specific recommendations and
while your recommendations will rest on assumptions, your
job as a consultant to the decision-maker is not to give a list of
contingent recommendations. Discuss both the positive and
negative results of following your recommendation. Explain
why your recommendation should be followed. Make sure that
the recommendation follows logically from your analysis.
Exhibits
Tables, charts, spreadsheets, or any other supporting materials
may be attached as exhibits. Be reasonable on the number of
exhibits. Include only those exhibits that are needed to support
your arguments and tell the reader in the text of the paper what
exhibits to look at and why. All exhibits should be clearly
labeled so that readers know what they should learn from them.
Also any assumptions and formulas you use to derive figures in
the exhibits should be obvious to the reader. Care in preparing
your tables is important. A rule of thumb is that the tables
should be able to stand alone: i.e., they could be read by
someone without reading the text and the reader could discern
exactly what they should learn from the table.
The full case report shall not exceed 8 pages (including
exhibits). You should take the perspective of an external

consultant and write the case solution as a report to the decision
maker(s) such as the CEO, CFO, or Board of Directors. The
document is to be typed with one-inch margins and double
spaced. Use a 12 point font or larger to type the document.
IntroductionThis spreadsheet supports the INSTRUCTOR
analysis of the case "Flinder Valves and Controls Inc." (Case
50). September 15, 2008 Copyright © 2008 by the University of
Virginia Darden School Foundation. All rights reserved.
Exh1Exhibit 1FLINDER VALVES AND CONTROLS
INC.Balance Sheet as of December 31, 2007, for Flinder Valves
and Controls Inc.(dollars in thousands)AssetsCash$1,884U.S.
Treasury tax notes and other Treasury obligations9,328Due
from U.S. government868Accounts receivable
net2,316Inventories, at lower of cost or market6,888Other
current assets116 Total current assets$21,400
Investments1,768Land92Buildings36,240Equipment18,904Less:
allowance for depreciation7,056 Total plant, property, and
equipment—gross48,180Construction in process88 Total plant,
property, and equipment—net*48,268 Patents156 Cash value
of life insurance376 Deferred assets156 Total
assets72,124Liabilities and Stockholders’ EquityAccounts
payable2,016Wages and salaries accrued504Current Maturities
of Long Term Debt30,000Employees’ pension cost
accrued208Tax accrued72Dividends payable560Provision for
federal income tax1,200 Total current liabilities34,560
Deferred federal income tax800Common stock at par (shares
authorized and outstanding 2,440,000 shares)1,220Capital
surplus7,180Earned surplus28,364Total equity36,764Total
liabilities and stockholders’ equity72,124* Equivalent land in
the area had a market value of $320,000, and the building had
an estimated market worth of $16,800,000. Equipment had a
replacement cost of approximately $24,000,000 but a market
value of about $16,000,000 in an orderly liquidation.

INC.Summary of Earnings and Dividends for Flinder Valves and
Controls Inc.(dollars in thousands)(Unaudited)Three months
ended
3/302003200420052006200720072008Sales$36,312$34,984$35,
252$45,116$49,364$11,728$14,162Cost of goods
sold25,92424,20024,30031,58037,0448,73010,190Gross
profit10,38810,78410,95213,53612,3202,9983,972Selling,
general, and
administrative2,0202,1002,2522,6282,936668896Other
income—net925721087222814198Income before
taxes8,4609,2568,80810,9809,6122,3443,274Taxes3,2763,9813,
6204,7214,0371,0091,391Net
income5,1845,2755,1886,2595,5751,3351,883Cash
dividends1,6802,0082,0162,3042,304576753Depreciation78492
41,0881,2801,508364394Capital
expenditures1,4861,8262,0112,2132,433580640Working capital
needs1,8993,492-1,2004,2894,7571,1301,365Ratio
analysisSales100.0100.0100.0100.0100.0100.0100.0Cost of
goods sold71.469.268.970.075.074.472.0Gross
profit28.630.831.130.025.025.628.0Selling, general, and
administrative5.66.06.45.85.95.76.3Other income—
net0.31.60.30.20.50.11.4Income before federal
taxes23.326.525.024.319.520.023.1Net
income14.315.114.713.911.311.413.3
INC.Consolidated Balance Sheet for RSE International as of
December 31, 2007(dollars in thousands except per-share
figures)AssetsCash$46,480U.S. government securities, at
cost117,260Trade accounts receivable241,760Inventories, at
lower of cost or market179,601Prepaid taxes and
insurance2,120 Total current assets587,221Investment in
wholly-owned Canadian subsidiary158,080Investment in
supplier corporation104,000Cash value of life
insurance3,920Miscellaneous assets2,160Property, plant, and
equipment, at cost: Buildings, machinery, equipment671,402
Less: allowances for depreciation and amortization260,001

Property, plant, and equipment—net411,402Land22,082
Property, plant, equipment, and land—net433,484Patents, at
cost, less amortization1,120 Total assets$1,289,985Liabilities
and Stockholders’ EquityNotes payable to bank$5,795Accounts
payable and accrued expenses90,512Payrolls and other
compensation38,399Taxes other than taxes on
income3,052Provision for federal taxes on income refund,
estimated32,662Current maturities of long-term debt30,900
Total current liabilities201,320Note payable to
bank1119,100Deferred federal income taxes29,6682%
cumulative convertible preferred stock, $20 par,27,783
1,389,160 shares outstanding2Common stock, $2 par;
96,000,000 shares authorized; 125,38962,694,361 shares
issuedCapital surplus321,904Retained earnings764,821 Total
equity939,897 Total liabilities and stockholders’
equity$1,289,9851 $150,000,000 note, payable semiannually
beginning June 30, 2008; $30,900,000 due within one year,
shown in current liabilities. One covenant required the company
not to pay cash dividends, except on preferred stock, or to make
other distribution on its shares or acquire any stock, after
December 31, 1999, in excess of net earnings after that date.2
Issued in January 2007; convertible at rate of 1.24 common
share to one preferred share; redeemable beginning in 2012;
sinking fund beginning in 2016.3 Resulting principally from the
excess of par value of 827,800 shares of preferred stock over
the pay value of common share issues in conversion in 2007.
INC.Summary of Consolidated Earnings and Dividends for RSE
International(dollars in thousands)20032004200520062007Net
sales$1,623,963$1,477,402$1,498,645$1,980,801$2,187,208Cos
t of products
sold1,271,5631,180,4441,140,4691,642,0841,793,511Gross
profit352,400296,958358,176338,717393,697Selling, general,
and administrative58,46369,43874,93287,155120,296Earnings
before federal income
taxes293,937227,520283,244251,562273,401Tax

expense126,39395,558116,130101,883109,360Net
earnings167,544131,962167,114149,679164,041Depreciation19,
16020,00021,48024,20026,800Cash dividends
declared85,75477,05253,11677,34092,238
INC.Forecast Financial Statements for RSE Internationalfor the
Years Ending December 31, 2007–12(dollars in thousands
except per-share
figures)ActualProjected200720082009201020112012Sales$2,18
7,208$2,329,373$2,480,785$2,642,037$2,813,769$2,996,658Co
st of goods
sold1,793,5101,920,0852,064,2432,216,4702,367,2902,537,259
Gross
profit393,698409,288416,542425,567446,479459,399Selling,
general, and
admin.120,296129,786139,481151,027161,315169,826Income
before tax273,402279,502277,061274,540285,164289,573Tax
expense109,361111,801110,824109,816114,066115,829Net
income164,041167,701166,237164,724171,098173,744Cash
dividends92,238102,082108,714115,779125,185133,313Depreci
ation26,80027,95029,77031,70033,17035,960Net
PPE389,321426,522459,404498,497541,109587,580Net working
capital422,597447,956486,428528,407574,238624,303Earnings
per share1$2.62$2.60$2.58$2.56$2.66$2.70Divs. per share
common stock1$1.42$1.58$1.69$1.80$1.94$2.07Div. per share
preferred stock2$0.401 62,694,361 common shares in 2007.
Thereafter, 64,416,919 shares reflecting conversion of the
preferred stock.2 1,389,160 preferred shares in 2007.
Conversion into 1,722,558 shares of common stock assumed in
2008.
INC.Market Prices of Flinder Valves and RSE International
CorporationFlinder Valves and ControlsRSE International
CorporationCommon StockCommon StockPreferred StockHigh
Low CloseHigh Low CloseHigh Low
2003$16.25$8.75$15.00$12.31$10.05$11.88200424.7514.0022.6

314.3611.7713.16200525.0020.0022.2512.819.2711.132006
Quarter Ended:March 3124.3820.7521.5014.1312.8313.95June
3022.7520.3821.0013.6912.0411.78September
3022.7520.3821.5012.8310.4811.26December
3124.3620.1321.0012.3911.2611.872007 Quarter Ended:March
3123.5020.0021.7511.6010.2010.6713.6112.21June
3023.6319.8822.0011.6010.9010.9013.1512.04September
3022.7520.0022.5013.6111.1313.6114.2212.37December
3130.0022.2528.5017.0113.3016.7817.3213.772008 Quarter
Ended:March
3132.1326.0031.5020.7315.0820.6917.3213.98May 1,
2008$39.75$38.90$39.75$22.58$18.30$21.98$17.63$15.35
INC.Market Information on Firms in the Industrial Machinery
SectorExpected Price/Growth EarningsDividendRate Ratio
Beta Yield to 2010 Debt/CapitalCascade Corp.Manufactures
loading engagement devices10.50.951.7%5.1%29%Curtiss-
Wright CorporationManufactures highly engineered, advanced
technologiesthat perform critical
functions17.21.00.712.336%Flowserve Corp.Makes, designs,
and markets fluid handlingequipment (pumps, valves, and
mechanical seals)20.81.31.027.030%Gardner
DenverManufacturers stationary air compressors, vacuum
products, and blowers10.91.3NilNMF19%Idex
Corp.Manufactures a wide range of pumps and machinery
products16.11.051.510.822%Roper IndustriesManufacturers
energy systems and controls, imaging equipment, and radio
frequency products19.71.20.510.829%Tecumseh
ProductsManufactures compressors, condensers, and pumps
38.21.05NilNMF8%Watts IndustriesManufactures and sells and
extensive line of valves for the plumbing and heating and water
quality markets151.31.58.432%NMF = not meaningful
figure.Source: Value Line Investment Survey, April 25, 2008.
INC.Information on Selected Recent Related MergersEffective
DateAcquirerBusinessTargetBusiness5/25/06Armor Holdings

Inc.Law enforcement equipStewart & StevensonTurbine-driven
products6/26/06Bouygues S.A.ConstructionAlstom SAPower
generation equip9/20/06Boeing Co.AircraftAviall IncVehicle
parts11/10/06Daikin Industries Ltd.Air conditioning sysOYL
Industries BhdAirconditioners12/8/06Oshkosh Truck
Corp.Heavy duty trucksJLG Industries
IncExcavators/telehandlers4/11/07Rank Group Ltd.Investment
holding coSIG Holding AGPackaging/plastics
machinery6/22/07Meggitt PLCAerospace/defense systemK&F
Industries HoldingsAircraft braking systems7/31/07BAE
Systems Inc.Electronic systemsArmor Holdings IncLaw
enforcement equip12/3/07Carlyle Group LLCPrivate equity
firmSequa CorpAircraft engine component12/20/07ITT
Corp.Pumps/valvesEDO CorpElectn system
products2/6/08London Acquisition BVInvestment holding
coStork NVComponents6/5/08Ingersoll-Rand Co Ltd.Industrial
machinery/equipTrane IncAirconditioners
Exh8 cont'dExhibit 8 (Continued)FLINDER VALVES AND
CONTROLS INC.Information on Selected Recent Related
MergersAcquirerTargetTransaction Size ($mm)Target Net Sales
Last 12 Months ($mm)Equity Value/ Target Net
IncomeEnterprise Value/ Target Net SalesEnterprise Value/
Target Operating IncomeEnterprise Value/ Target Cash
FlowPremium 4 Weeks Prior to Announcement Date (%)Armor
Holdings Inc.Stewart &
Stevenson1,12372665.31.1233.123.740.6Bouygues S.A.Alstom
S.A.2,46717,679nmf1.4877.922.5-1.2Boeing Co.Aviall
Inc.2,0571,37128.91.5318.714.927.2Daikin Industries Ltd.OYL
Industries Bhd1,1521,58127.61.4121.516.819.4Oshkosh Truck
Corp.JLG Industries Inc.3,2522,28920.51.3011.910.752.3Rank
Group Ltd.SIG Holding
AG2,3141,41838.61.5664.814.219.3Meggitt PLCK&F Industries
Holdings1,80242420.34.2613.110.813.5BAE Systems Inc.Armor
Holdings Inc.4,3282,80530.51.7117.114.329.3Carlyle Group
LLCSequa Corp.2,0072,18134.41.2520.612.563.3ITT Corp.EDO
Corp.1,67894586.81.9934.023.940.5London Acquisition

BVStork NV2,3472,15317.10.02nana35.2Ingersoll-Rand Co.
Ltd.Trane Inc.9,7518,32821.21.3914.911.6na
INC.Capital Market Interest Rates and Stock Price Indexes
(averages per annum, except April 2008, which offers closing
values for April 25, 2008)20062007 April 2008U.S. Treasury
Yields3-month bills4.70%4.40%1.28%30-year
bonds5.00%4.91%4.52%Corporate Bond Yields by
RatingAaa5.59%5.56%5.58%Aa5.80%5.90%5.96%A6.06%6.09
%6.32%Baa6.48%6.48%6.98%Stock MarketS&P 500
Index1,4181,4681,398Price/earnings
ratio17.7×18.3×17.4×Industrial Machinery StocksPrice/earnings
ratio13.9×14.0×Dividend yield1.4%1.4%Historical return
premium of equity over government debt (1926-2007)
Geometric average5.5% Arithmetic average7.2%Data Source:
Value Line Investment Survey, April 25, 2008; Federal Reserve
Bulletin; Compustat
INC.Forecast of Financial Statements for Flinder Valves and
Controlsfor Years Ending December 31, 2008–12(dollars in
thousands)ActualProjected200720082009201020112012Sales$4
9,364$59,600$66,000$73,200$81,200$90,000Cost of goods
sold37,04443,81648,75054,10459,95866,200Gross
profit12,32015,78417,25019,09621,24223,800Selling, general,
and
administrative2,9363,6124,1244,5645,0525,692Depreciation$1,
508$1,660$1,828$2,012$2,212$2,432Other income—
net228240264288320352Income before
taxes8,10410,75211,56212,80814,29816,028Taxes4,0374,3014,6
255,1235,7196,411Net
income$4,067$6,451$6,937$7,685$8,579$9,617
UV 2405

Dec. 24, 2016
FLINDER VALVES AND CONTROLS INC.
In early May 2008, W.B. “Bill” Flinder, president of Flinder
Valves and Controls Inc. (FVC), and Tom Eliot,
chief executive officer of RSE International Inc. (RSE), were
planning to negotiate a possible acquisition of FVC by
RSE. Serious discussions for combining the two companies had
started in March of that year, following casual
conversations that dated back to late 2007. Those initial talks
focused on the broad motives for each side to do a deal,
and on the management issues, including compensation, in the
new firm. What remained was to negotiate a final term
sheet on which the definitive agreement would be drafted and
signed.
In the background, the past 12 months had been associated with
mounting difficulty for the U.S. economy.
The industries within which RSE and FVC operated were not
immune from these effects. A recent analyst report
summarized the market view for industrial manufacturing.
Tighter borrowing standards and a severely weakened housing
sector are weighing on the domestic economy,
prompting consumers to cut back on spending and industrial

manufacturers to reduce production. A similar
situation now seems to be taking hold in Western Europe.
Both corporate leaders were concerned about the opportunities
and risks of doing a deal in this increasingly
challenging environment.
Flinder Valves and Controls Inc.
Flinder Valves and Controls Inc., located in Southern
California, manufactured specialty valves and heat
exchangers. FVC maintained many standard items, but nearly
40% of its volume and 50% of its profits were derived
from special applications for the defense and aerospace
industries. Such products required extensive engineering
experience of a kind only a few firms were capable of
providing. FVC had a reputation for engineering excellence in
the most complex phases of the business and, as a result, often
did prime contract work on highly technical devices
for the government.
FVC was an outgrowth of a small company organized in 1980
for engineering and developmental work on
an experimental heat-exchanger product. In 1987, as soon as the
product was brought to the commercial stage, Fast
Vent Construction Inc. was organized to acquire the properties,
both owned and leased, of the engineering corporation.

The president of the predecessor company, Bill Flinder,
continued as the president of FVC. Eventually, the company
acquired the patents it had licensed.
This case was prepared by Robert F. Bruner. It was written as a
basis for class discussion rather than to illustrate
effective or ineffective handling of an administrative situation.
Information about the company has been disguised.
Some information on peer firms is fictional and has been added
for the sake of deepening student analysis. Copyright
copies, send an e-mail to [email protected] No part of this
publication may be reproduced, stored
in a retrieval system, used in a spreadsheet, or transmitted in
any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission
of the Darden School Foundation. Rev. 6/98.
The raw materials used by the company were obtainable in
ample supply from a number of competitive
suppliers. Marketing arrangements presented no problems. Sales
to machinery manufacturers were made directly by
a staff of skilled sales engineers. The Auden Company, a large
firm in a related field, was an important foreign

distribution channel under a nonexclusive distributor
arrangement. About 15% of FVC's sales came from Auden.
Foreign sales through Auden and directly through FVC's own
staff accounted for 30% of sales. Half the foreign sales
originated in emerging economies, mainly Brazil, Korea, and
Mexico. The other half originated in the United
Kingdom, Italy, and Germany.
Although competitive erosion in the mid-2000s had temporarily
interrupted FVC's sales growth, better
economic conditions in the markets of developed countries,
together with FVC's recent introduction of new products
for the aerospace and defense industries, offered the company
excellent prospects for improved performance. Sales in
the first quarter of 2008 grew 23% over the corresponding
period in 2007, at a time when many of FVC's competitors
experienced limited growth prospects. Exhibits 1 and 2 show the
most recent financial statements for FVC.
FVC's plants, all of modem construction, were organized for
efficient handling of small production orders.
The main plant was served by switch tracks in an IS-car dock
area of a leading railroad and also by a truck area for
the company's own fleet of trucks. From 2005 to 2007, net
additions to property totaled $7.6 million.
Bill Flinder, an outstanding researcher in his own right, had

always stressed the research and development
involved in improved products, with patent protection, although
the company's leadership was believed to be based
on its head start in the field and its practical experience.
FVC's success had brought numerous overtures from companies
looking for diversification, plant capacity,
management efficiency, financial resources, or an offset to
cyclical business. For instance, when FVC was taken public
in 1996, Auden Company, which later became a holder of 20%
of FVC common stock, advanced a merger proposal.
Rumors of possible antitrust action by the U.S. Department of
Justice had circulated after the news of the proposed
merger became public, and Auden withdrew from the
discussions. FVC received various proposals from 1998 on, but
none reached the stage of working out an agreement until the
advances of RSE.
FVC had come to RSE's attention with the FVC's disclosure of a
U.S. government contract. FVC was to
develop an advanced hydraulic-controls system, code-named
"widening gyre," for use in numerous military
applications. The technology was still in research and
development, but was expected to have broad commercial value
if the results were found to be economically successful.

RSE International Corporation
Tom Eliot had founded RSE International in 1970, grown it,
taken it public, and firmly rooted it as a Russell
1000 company. In response to what he perceived to be the firm's
growth challenges for the next decade, Eliot had
persuaded RSE's board that the company should follow 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 including
advanced industrial components as well as
chains, cables, nuts and bolts, castings and forgings, and other
similar products. RSE then sold them (mostly indirectly)
to various industrial users. One division produced parts for
aerospace propulsion and control systems with a broad
line of intermediate products. 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. These products
were all well regarded by RSE's customers, and each was a
significant factor in its respective market. Exhibit 3 shows
the RSE balance sheets for 2007; Exhibit 4 presents the income
statements from 2003 to 2007.

The company's raw material supply (sheets, plates, and coils) of
various metals came from various producers.
RSE International's plants were ample, modem, well¬ equipped
with substantially newer machinery, and adequately
served by railroad sidings. The firm was considered a low-cost
producer that possessed unusual production knowledge.
It was also known as a tough competitor.
Eliot and his management team had initiated several changes
to help increase RSE's profit margins. Chief
among them, in late 2006, had been the implementation of
Project CORE, a business wide initiative to improve and
unify the corporate wide information systems. This project had
already identified numerous opportunities for
improving profits and sales. As a result, RSE's latest sales and
earnings forecasts projected a steady increase over the
next five years. The current plan (excluding merger growth)
called for sales to hit $3 billion within five years (Exhibit
5). Despite Eliot's confidence and optimism for the future of the
company, he believed that the stock market still
undervalued his firm's shares.
The Situation

During the early part of 2008, a series of group meetings had
taken place between Tom Eliot and Bill Flinder
and their respective advisers. It seemed clear to both parties
that both FVC and RSE could profit-from the merger. By
early May, a broad outline of the merger seemed to be
developing. Fast Vents was to become a subsidiary of RSE
International-the deal would be structured in such a way as to
preserve FVC's identity. The two sides had explored
some of the governance and compensation issues in the merger.
Fast Vents would be retained along with his top
management team and all other employees. No layoffs were
contemplated. This reflected RSE's intention to invest in
and grow the FVC operation. FVC's solid management team was
one of the factors that had attracted RSE in the first
place, and Eliot wanted to keep the same management in place
after the merger. Flinder would receive a generous
option-based incentive bonus that could result in a salary
increase of between $50,000 and $200,000 per year. Because
Flinder was 62 years old and nearing retirement, the
compensation package was meant to retain him in the coming
years as he trained a new chief executive.
The price of the deal was less clear. FVC's shares traded on the
NASDAQ, whereas RSE's traded on the
American Stock Exchange. The market capitalizations for FVC

and RSE were approximately $100 million and $1.4
billion, respectively. Both companies had experienced recent
rapid rises in share price due to strong performance
despite the weak economic environment. (Exhibit 6) shows
recent share prices for FVC and RSE.
The financial advisors had collected a variety of relevant
capital-market data. Exhibit 7 provides valuation
information on exchange-listed comparables for Fast Vents and
RSE. Exhibit 8 presents information on recent related
acquisitions. Exhibit 9 presents historical money-market and
stock-return data through May 2008. FVC's debt was
currently rated Baa.
Flinder had shared FVC's current corporate-financial-statement
forecast with Eliot but had emphasized that
it did not include any benefits of the merger or the benefits of
promising new technologies, such as the widening gyre
(Exhibit 10). The company assumed PPE would be 37% of sales
and net working capital of 34% of sales. The
reluctance to include the widening gyre project stemmed from
the substantial uncertainty remaining regarding its
potential economic benefits. Tax rate was assumed at 40%. Eliot
expected the merger to generate significant cost
gains. RSE’s greater purchasing power would lower the cost of
materials and components for FVC. RSE’s new

resource management system could be expected to reduce
FVC’s in-process costs. Estimates from RSE’s due-
diligence process had identified cost savings of 7% of cost of
goods sold. He also recognized other synergy gains that
arose from RSE’s stronger marketing clout, cross-selling with
other RSE products, which he estimated to be 15% of
selling, general administrative costs. Eliot also believed that the
widening-gyre project could have a broad application
in nautical, aerospace, and automotive products. But for the
sake of conservatism, he chose not to include these in the
valuation.
The companies had yet to settle on the form of consideration,
either cash or RSE stock that would best serve
the parties to the deal. Eliot expected that RSE had the
financial capacity to borrow the entire amount through its
existing credit facilities. Roughly 70% of the FVS stock was
held by its board of directors and their families, including
the 20% owned by the Auden Company and 40% owned by Bill
Flinder. The Auden Company did not object to the
merger, but it had given notice that it would sell any RSE shares
received in the deal. The Auden Company was about
to undertake a new expansion of its own, and its executives
were not disposed to keeping tag ends of minority interests

in a company such as RSE. They saw no reason, however, for
not maintaining their satisfactory business relationships
with the FVC enterprise if it became a division of RSE
International.
Exhibit 1
Balance Sheet as of December 31, 2007, for Flinder Valves
and Controls Inc.
(dollars in thousands)
Assets
Cash $1,884
U.S. Treasury tax notes and other Treasury obligations 9,328
Due from U.S. government 868

Accounts receivable net 2,316
Inventories, at lower of cost or market 6,888
Other current assets 116
Total current assets
$21,400
Investments
1,768
Land 92
Buildings 36,240
Equipment 18,904

Less: allowance for depreciation 7,056
Total plant, property, and equipment—gross 48,180
Construction in process 88
Total plant, property, and equipment—net*
48,268
Patents
156
Cash value of life insurance
376
Deferred assets
156

Total assets
72,124
Liabilities and Stockholders’ Equity
Accounts payable 2,016
Wages and salaries accrued 504
Current maturities of long-term debt 30,000
Employees’ pension cost accrued 208
Tax accrued 72
Dividends payable 560
Provision for federal income tax 1,200

Total current liabilities
34,560
Deferred federal income tax
800
Common stock at par (shares authorized and outstanding
2,440,000 shares) 1,220
Capital surplus 7,180
Earned surplus 28,364
Total equity
36,764
Total liabilities and stockholders’ equity
72,124

* Equivalent land in the area had a market value of $320,000,
and the building had an estimated market worth of
$16,800,000. Equipment had a replacement cost of
approximately $24,000,000 but a market value of about
$16,000,000 in an orderly liquidation.
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Exhibit 2
Summary of Earnings and Dividends for Flinder Valves and
Controls Inc.

2003 2004 2005 2006 2007 2007 2008
Sales $36,312 $34,984 $35,252 $45,116 $49,364 $11,728
$14,162
Cost of goods sold 25,924 24,200 24,300 31,580
37,044 8,730 10,190
Gross profit 10,388 10,784 10,952 13,536 12,320
2,998 3,972
Selling, general, and administrative 2,020 2,100 2,252
2,628 2,936 668 896
Other income—net 92 572 108 72
228 14 198
Income before taxes 8,460 9,256 8,808 10,980
9,612 2,344 3,274
Taxes 3,276 3,981 3,620 4,721 4,037 1,009
1,391
Net income 5,184 5,275 5,188 6,259 5,575 1,335 1,883
Cash dividends 1,680 2,008 2,016 2,304 2,304 576 753
Depreciation 784 924 1,088 1,280 1,508 364 394
Capital expenditures 1,486 1,826 2,011 2,213 2,433 580 640
Working capital needs 1,899 3,492 -1,200 4,289 4,757 1,130
1,365

Ratio analysis
Sales 100.0 100.0 100.0 100.0 100.0 100.0
100.0
Cost of goods sold 71.4 69.2 68.9 70.0
75.0 74.4 72.0
Gross profit 28.6 30.8 31.1 30.0 25.0
25.6 28.0
Selling, general, and administrative 5.6 6.0 6.4
5.8 5.9 5.7 6.3
Other income—net 0.3 1.6 0.3 0.2
0.5 0.1 1.4
Income before federal taxes 23.3 26.5 25.0 24.3
19.5 20.0 23.1
Net income 14.3 15.1 14.7 13.9 11.3
11.4 13.3
(Unaudited)
Three months ended 3/30

Exhibit 3
Consolidated Balance Sheet for RSE International as of
December 31, 2007
(dollars in thousands except per-share figures)
Assets
Cash $46,480
U.S. government securities, at cost 117,260
Trade accounts receivable 241,760
Inventories, at lower of cost or market 179,601
Prepaid taxes and insurance 2,120

Total current assets 587,221
Investment in wholly-owned Canadian subsidiary 158,080
Equipment 270,000
Investment in supplier corporation 104,000
Cash value of life insurance 3,920
Miscellaneous assets 2,160
Property, plant, and equipment, at cost:
Buildings, machinery, equipment 671,402
Less: allowances for depreciation and amortization 260,001
Property, plant, and equipment—net 411,402
Land 22,082
Property, plant, equipment, and land—net 433,484
Patents, at cost, less amortization 1,120
Total assets $1,559,985
Liabilities and Stockholders’ Equity
Notes payable to bank $5,795
Accounts payable and accrued expenses 90,512
Payrolls and other compensation 38,399

Taxes other than taxes on income 3,052
Provision for federal taxes on income refund, estimated 32,662
Current maturities of long-term debt 300,900
Total current liabilities 471,320
Note payable to bank1 119,100
Deferred federal income taxes 29,668
2% cumulative convertible preferred stock, $20 par, 27,783
1,389,160 shares outstanding2
Common stock, $2 par; 96,000,000 shares authorized; 125,389
62,694,361 shares issued
Capital surplus3 21,904
Retained earnings 764,821
Total equity 939,897
Total liabilities and stockholders’ equity $1,559,985
1 $150,000,000 note, payable semiannually beginning June 30,
2008; $30,900,000 due within
one year, shown in current liabilities. One covenant required the
company not to pay cash
dividends, except on preferred stock, or to make other

distribution on its shares or acquire any
stock, after December 31, 1999, in excess of net earnings after
that date.
Exhibit 4
Summary of Consolidated Earnings and Dividends for RSE
International
2003 2004 2005 2006 2007
Net sales $1,623,963 $1,477,402 $1,498,645 $1,980,801
$2,187,208
Cost of products sold 1,271,563 1,180,444 1,140,469
1,642,084 1,793,511
Gross profit 352,400 296,958 358,176 338,717
393,697
Selling, general, and administrative 58,463 69,438
74,932 87,155 120,296
Earnings before federal income taxes 293,937 227,520
283,244 251,562 273,401

Tax expense 126,393 95,558 116,130 101,883
109,360
Net earnings 167,544 131,962 167,114 149,679 164,041
Depreciation 19,160 20,000 21,480 24,200 26,800
Cash dividends declared 85,754 77,052 53,116 77,340 92,238

Exhibit 5
Forecast Financial Statements for RSE International
for the Years Ending December 31, 2007–12
(dollars in thousands except per-share figures)
Actual Projected
2007 2008 2009 2010 2011 2012
Sales $2,187,208 $2,329,373 $2,480,785 $2,642,037 $2,813,769
$2,996,658
Cost of goods sold 1,793,510 1,920,085 2,064,243
2,216,470 2,367,290 2,537,259
Gross profit 393,698 409,288 416,542 425,567
446,479 459,399
Selling, general, and admin. 120,296 129,786 139,481
151,027 161,315 169,826
Income before tax 273,402 279,502 277,061 274,540
285,164 289,573

Tax expense 109,361 111,801 110,824 109,816
114,066 115,829
Net income 164,041 167,701 166,237 164,724 171,098 173,744
Cash dividends 92,238 102,082 108,714 115,779 125,185
133,313
Depreciation 26,800 27,950 29,770 31,700 33,170 35,960
Net PPE 389,321 426,522 459,404 498,497 541,109 587,580
Net working capital 422,597 447,956 486,428 528,407 574,238
624,303
Earnings per share1 $2.62 $2.60 $2.58 $2.56 $2.66 $2.70
Divs. per share common stock1 $1.42 $1.58 $1.69 $1.80 $1.94
$2.07
Div. per share preferred stock2 $0.40

Exhibit 6
Market Prices of Flinder Valves and RSE International
Corporation
High Low Close High Low Close High Low
2003 $16.25 $8.75 $15.00 $12.31 $10.05 $11.88
2004 24.75 14.00 22.63 14.36 11.77 13.16
2005 25.00 20.00 22.25 12.81 9.27 11.13
2006 Quarter Ended:
March 31 24.38 20.75 21.50 14.13 12.83 13.95
June 30 22.75 20.38 21.00 13.69 12.04 11.78
September 30 22.75 20.38 21.50 12.83 10.48 11.26
December 31 24.36 20.13 21.00 12.39 11.26 11.87
2007 Quarter Ended:

March 31 23.50 20.00 21.75 11.60 10.20 10.67 13.61 12.21
June 30 23.63 19.88 22.00 11.60 10.90 10.90 13.15 12.04
September 30 22.75 20.00 22.50 13.61 11.13 13.61 14.22 12.37
December 31 30.00 22.25 28.50 17.01 13.30 16.78 17.32 13.77
2008 Quarter Ended:
March 31 32.13 26.00 31.50 20.73 15.08 20.69 17.32 13.98
May 1, 2008 $39.75 $38.90 $39.75 $22.58 $18.30 $21.98 $17.63
$15.35
Flinder Valves and Controls RSE International Corporation
Common Stock Common Stock Preferred Stock

Exhibit 7
Market Information on Firms in the Industrial Machinery Sector
Expected
Price/ Growth
Earnings Dividend Rate
Ratio Beta Yield to 2010 Debt/Capital
Cascade Corp.
Manufactures loading engagement devices 10.5 0.95 1.7% 5.1%
29%
Curtiss-Wright Corporation
Manufactures highly engineered, advanced technologies
that perform critical functions 17.2 1.0 0.7 12.3 36%
Flowserve Corp.
Makes, designs, and markets fluid handling

equipment (pumps, valves, and mechanical seals) 20.8 1.3 1.0
27.0 30%
Gardner Denver
Manufacturers stationary air compressors, vacuum
products, and blowers 10.9 1.3 Nil NMF 19%
Idex Corp.
Manufactures a wide range of pumps and machinery
products 16.1 1.05 1.5 10.8 22%
Roper Industries
Manufacturers energy systems and controls, imaging
equipment, and radio frequency products 19.7 1.2 0.5 10.8 29%
Tecumseh Products
Manufactures compressors, condensers, and pumps 38.2 1.05
Nil NMF 8%
Watts Industries
Manufactures and sells and extensive line of valves
for the plumbing and heating and water quality markets 15 1.3
1.5 8.4 32%
NMF = not meaningful figure.
Source: Value Line Investment Survey, April 25, 2008.

Exhibit 8
Information on Selected Recent Related Mergers
Effective Date Acquirer Business Target Business
5/25/2006 Armor Holdings Inc. Law enforcement equip Stewart
& Stevenson Turbine-driven products
6/26/2006 Bouygues S.A. Construction Alstom SA Power
generation equip
9/20/2006 Boeing Co. Aircraft Aviall Inc Vehicle parts
11/10/2006 Daikin Industries Ltd. Air conditioning sys OYL
Industries Bhd Airconditioners
12/8/2006 Oshkosh Truck Corp. Heavy duty trucks JLG
Industries Inc Excavators/telehandlers
4/11/2007 Rank Group Ltd. Investment holding co SIG Holding

AG Packaging/plastics machinery
6/22/2007 Meggitt PLC Aerospace/defense system K&F
Industries Holdings Aircraft braking systems
7/31/2007 BAE Systems Inc. Electronic systems Armor
Holdings Inc Law enforcement equip
12/3/2007 Carlyle Group LLC Private equity firm Sequa Corp
Aircraft engine component
12/20/2007 ITT Corp. Pumps/valves EDO Corp Electn system
products
2/6/2008 London Acquisition BV Investment holding co Stork
NV Components
6/5/2008 Ingersoll-Rand Co Ltd. Industrial machinery/equip
Trane Inc Airconditioners
Information on Selected Recent Related Mergers
Acquirer Target
Transaction
Size ($mm)
Target Net
Sales Last 12

Months ($mm)
Equity Value/
Target Net
Income
Enterprise
Value/ Target
Net Sales
Enterprise
Value/ Target
Operating
Income
Enterprise
Value/ Target
Cash Flow
Premium 4
Weeks Prior to
Announcement
Date (%)

Armor Holdings Inc. Stewart & Stevenson 1,123 726 65.3 1.12
33.1 23.7 40.6
Bouygues S.A. Alstom S.A. 2,467 17,679 nmf 1.48 77.9 22.5 -
1.2
Boeing Co. Aviall Inc. 2,057 1,371 28.9 1.53 18.7 14.9 27.2
Daikin Industries Ltd. OYL Industries Bhd 1,152 1,581 27.6
1.41 21.5 16.8 19.4
Oshkosh Truck Corp. JLG Industries Inc. 3,252 2,289 20.5 1.30
11.9 10.7 52.3
Rank Group Ltd. SIG Holding AG 2,314 1,418 38.6 1.56 64.8
14.2 19.3
Meggitt PLC K&F Industries Holdings 1,802 424 20.3 4.26 13.1
10.8 13.5
BAE Systems Inc. Armor Holdings Inc. 4,328 2,805 30.5 1.71
17.1 14.3 29.3
Carlyle Group LLC Sequa Corp. 2,007 2,181 34.4 1.25 20.6
12.5 63.3
ITT Corp. EDO Corp. 1,678 945 86.8 1.99 34.0 23.9 40.5
London Acquisition BV Stork NV 2,347 2,153 17.1 0.02 na na
35.2
Ingersoll-Rand Co. Ltd. Trane Inc. 9,751 8,328 21.2 1.39 14.9
11.6 na

Exhibit 9
Capital Market Interest Rates and Stock Price Indexes
(averages per annum, except April 2008, which offers closing
values for April 25, 2008)
2006 2007 April 2008
U.S. Treasury Yields
3-month bills 4.70% 4.40% 1.28%
30-year bonds 5.00% 4.91% 4.52%

Corporate Bond Yields by
Aaa 5.59% 5.56% 5.58%
Aa 5.80% 5.90% 5.96%
A 6.06% 6.09% 6.32%
Baa 6.48% 6.48% 6.98%
Stock Market
S&P 500 Index 1,418 1,468 1,398
Price/earnings ratio 17.7× 18.3× 17.4×
Industrial Machinery
Price/earnings ratio 13.9× 14.0×
Dividend yield 1.4% 1.4%
Historical return premium of equity over government debt
(1926-2007)
Geometric average 5.5%
Arithmetic average 7.2%
Data Source: Value Line Investment Survey, April 25, 2008;
Federal Reserve Bulletin; Compustat

Exhibit 10
Forecast of Stand Alone Financial Statements for Flinder
Valves
Actual
2007 2008 2009 2010 2011 2012
Sales $49,364 $59,600 $66,000 $73,200 $81,200 $90,000
Cost of goods sold 37,044 43,816 48,750 54,104
59,958 66,200
Gross profit 12,320 15,784 17,250 19,096
21,242 23,800
Selling, general, and administrative 2,936 3,612
4,124 4,564 5,052 5,692

Depreciation $1,508 $1,660 $1,828 $2,012 $2,212 $2,432
Other income—net 228 240 264 288
320 352
Income before taxes 8,104 10,752 11,562 12,808
14,298 16,028
Taxes 4,037 4,301 4,625 5,123 5,719
6,411
Net income $4,067 $6,451 $6,937 $7,685 $8,579 $9,617
Projected
for Years Ending December 31, 2008–12
Flinder Valves and Controls Inc.Flinder exb

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