Expertly Crafted Case Study On Timken

Torrington is a perfect strategic fit for Timken because it would make the combined company to be the third largest ball bearing producing company in the world. In addition, the company would experience purchasing synergies that would yield the combined company annual savings of $80 million and the rationalization of the workforce would yield savings of $80 million.
Using Timken cost of debt of 7.23%, to discount the free cash flows of Torrington between 1999 and 2007 would result in an estimated value of Torrington to be $598.59 million. The free cash flows add the depreciation expense because it is anon cash flow expense and deducts the capital expenditure for the year. The calculations are as follows:
With synergies, the value of Torrington would increase from $598.59 million to $628.14 million. The assumption is that the purchasing synergies will be experienced in the first year, while the integration costs and labor savings will be accrue evenly over the first two years. The calculations are as follows:
Timken should be concerned about losing its investment grade because the firm will find it difficult to raise capital from creditors when it has a below investment-grade rating. This means that Timken would face a case of hard capital rationing and may not be able to raise enough funds from the bond market to finance its operations. Timken would have to raise debt capital at increasingly higher costs. For instance, according to Exhibit 6, if Timken bond rating is downgraded to BB its cost of debt would increase from 7.23% to 9.69%. A higher cost of debt would mean higher financing costs and lower operating income.
Since Timken does not have sufficient cash reserves to finance the acquisition then they should structure the acquisition as a hybrid of debt and equity with each financing equal proportions of the deal. Timken can structure a vendor placing scheme where they issue their shares and then place them with a vendor who would sell the shares and give the cash to Ingersoll-Rand. Timken can also raise the other amount by issuing bond. However, the scheme should be flexible enough to ensure that more funds can be raised through equity, to avoid dangerous levels of gearing. The risk of Ingersoll-Rand accepting the shares is that after the merger, the share value may decline in price. The uncertainty surrounding the price of the share after the merger makes a share exchange unattractive when compared to a cash consideration that is certain. Some of the synergies anticipated may not be realized or the P/E ratio of the merged firm may be significantly lower than the current P/E ratio.