1. How does Torrington fit with the Timken Company? What are the expected synergies? 2. What is your stand-alone valuation of Torrington? 3. Should Timken
1. How does Torrington fit with the Timken Company? What are the expected synergies?
2. What is your stand-alone valuation of Torrington?
3. Should Timken be concerned about losing its investment-grade rating? How do Timken's financial ratios compare with those of other industrial firms in 2002? How would those ratios change if Timken borrowed $800Million, for example, to purchase Torrington?
4. If Timken decides to go forward with the acquisition, how should Timken offer to structure the deal? Is Ingersoll-Rand likely to want a cash deal or a stock-for-stock deal, in your opinion?
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line and, eventually, more effective new-product development. Torrington had sophis ticated needle-bearing solutions for automotive power-train applications, which com plemented Timken's existing portfolio of tapered roller bearings and precision-steel omponents for wheel ends and drivelines. Industrial customers required a broad range f industrial solutions and services involving tapered and needle roller bearings a well as cylindrical, spherical, and ball bearings. Timken's cylindrical bearings, which reduced friction in giant dump trucks and industrial mills, provided an example of how Timken could benefit from acquiring Torrington and its product lines. Timken's cylindrical bearings could be married with flap-like parts from Torrington that lubricated moving pieces. Previously, Timken's customers had been combining the friction and lubrication functions themselves. By assuming that task, Timken hoped to distinguish itself from its foreign competitor and add enough value to increase margins. On a broader level, Timken executives planned to use the company's international distribution network to deliver Torrington products under the well-known Timken brand name and increase its range of products for aftermarket customers. With that acquisition, Timken would increase its penetration of the global bearing market from to 11%. The company would offer a broader range of complementary products, and its customer base would become larger and more diverse, with more end-use applications and significant cross-selling opportunities. In addition, being number three in the industry would help give Timken more clout in negotiations with customers and suppliers. Of particular interest to Timken's executives were the expected annual cost sav ings of $80 million by the end of 2007. According to Ward J. Timken, There will be certain redundancies in sales forces. You can identify where some of the areas will be." In addition to reducing the combined sales forces, Timken expected to realize significant purchasing synergies by giving much larger volume to a reduced list of suppliers in exchange for price reductions. Before the $80 million in cost savings could be realized, however, certain other costs associated with integrating the two companies were likely to be incurred. One industry analyst estimated that those inte gration costs would total $130 million over the first couple of years following the merge Regardless of the price paid for Torrington, Timken would face significant chal lenges regarding the financing of the deal. Both Moody's and Standard & Poor's had placed Timken's ratings of Baal/BBB on review. In view of Torrington's size, Timken knew it would be very difficult to raise the needed cash without significantly raising the level of debt on the books. For example, if IR agreed to sell Torrington for $800 million (analysts' estimated minimum value for the company) and Timken raised the entire amount with a debt offering, Timken's leverage ratios would suffer enough to virtually guarantee that Timken would lose its investment-grade rating. This was particularly troubling, not only because Timken would be forced to borrow the money EXHIBIT 1 Timken Corporate Income Statements, 2001-02 ( in millions, except percentages) 100.0% 16.4% 18.4% Sales, general, and administrative expenses Interest expense (net of interest income) Receipt of Continued Dumping and Subsidy Net income before cumulative effect of 20% Cumulative effect of accounting change (12.7 Depreciation EXHIBIT 2Timken Balance Sheet (S in millions) Net property, plant, and equipment Current portion of long-term debt Total current liabilities Total liabilities and owners' equity line and, eventually, more effective new-product development. Torrington had sophis ticated needle-bearing solutions for automotive power-train applications, which com plemented Timken's existing portfolio of tapered roller bearings and precision-steel omponents for wheel ends and drivelines. Industrial customers required a broad range f industrial solutions and services involving tapered and needle roller bearings a well as cylindrical, spherical, and ball bearings. Timken's cylindrical bearings, which reduced friction in giant dump trucks and industrial mills, provided an example of how Timken could benefit from acquiring Torrington and its product lines. Timken's cylindrical bearings could be married with flap-like parts from Torrington that lubricated moving pieces. Previously, Timken's customers had been combining the friction and lubrication functions themselves. By assuming that task, Timken hoped to distinguish itself from its foreign competitor and add enough value to increase margins. On a broader level, Timken executives planned to use the company's international distribution network to deliver Torrington products under the well-known Timken brand name and increase its range of products for aftermarket customers. With that acquisition, Timken would increase its penetration of the global bearing market from to 11%. The company would offer a broader range of complementary products, and its customer base would become larger and more diverse, with more end-use applications and significant cross-selling opportunities. In addition, being number three in the industry would help give Timken more clout in negotiations with customers and suppliers. Of particular interest to Timken's executives were the expected annual cost sav ings of $80 million by the end of 2007. According to Ward J. Timken, There will be certain redundancies in sales forces. You can identify where some of the areas will be." In addition to reducing the combined sales forces, Timken expected to realize significant purchasing synergies by giving much larger volume to a reduced list of suppliers in exchange for price reductions. Before the $80 million in cost savings could be realized, however, certain other costs associated with integrating the two companies were likely to be incurred. One industry analyst estimated that those inte gration costs would total $130 million over the first couple of years following the merge Regardless of the price paid for Torrington, Timken would face significant chal lenges regarding the financing of the deal. Both Moody's and Standard & Poor's had placed Timken's ratings of Baal/BBB on review. In view of Torrington's size, Timken knew it would be very difficult to raise the needed cash without significantly raising the level of debt on the books. For example, if IR agreed to sell Torrington for $800 million (analysts' estimated minimum value for the company) and Timken raised the entire amount with a debt offering, Timken's leverage ratios would suffer enough to virtually guarantee that Timken would lose its investment-grade rating. This was particularly troubling, not only because Timken would be forced to borrow the money EXHIBIT 1 Timken Corporate Income Statements, 2001-02 ( in millions, except percentages) 100.0% 16.4% 18.4% Sales, general, and administrative expenses Interest expense (net of interest income) Receipt of Continued Dumping and Subsidy Net income before cumulative effect of 20% Cumulative effect of accounting change (12.7 Depreciation EXHIBIT 2Timken Balance Sheet (S in millions) Net property, plant, and equipment Current portion of long-term debt Total current liabilities Total liabilities and owners' equity