Roper Metals Inc. is in negotiations to acquire the Hanson Sheet Metal Company. Hanson’s after tax earnings have averaged $19 million per year for the last four years without much variation around that average figure. So far discussions have been about the business fit of the two firms and pricing has been conspicuously ignored. Roper’s CEO feels the venture is risky and needs to pay a price that would yield his firm a return of about 20% if no operating improvements came out of the merger.
a. What offering price should he put on the table to open negotiations?
b. Hanson’s management is sure to want a higher price. Would that imply capitalizing earnings at a higher or lower rate. Why.
c. What arguments is Hanson likely to use.