Case 22 Precision Tool Company Special Topics Directed In late WEE, two executives of Workman Tml, Inc., the largest privater owned corporation in Ohio, deeided to start a companyr of their own. There were two prhnarg.r reasons for their decision. First. both men had the entrepncneurial spirit and longed to have a shot at their own business. Second, Tv'orltman's ownership structure precluded managers from receiving stock options as part of their compensation package. Thus, although the rm was generous- in its salaries and l't-onuses, everythhtg was subject to itnmediate taxation. Both men thought that a new business would give them the or|:Irpurtunil1tI to defer taxes on a large part of their overall eompensation. The two men, lul'to Rodriguez and Tots}.-I Fulton, tound a medium-steed precision tool mealty that was on Lhe market The company, Precision Tool Company, is wholly owned l'ty its founder, Nick Sanders. r'tlthough the company.? is in sound condition. Sanders. who is in his late #05. recently suffered a heart attack and was advised by his doctor to sell the rm and relaxor else. Sanders is asking 55350.90" for the rm. which works out to a Pricelaroings ratio of approximately '91:, and he has given Rodriguez and t-'ulton a Iii-month purchase option to allow the pair time to arrange nancing. Rodriguez contacted Paul Van Burcn, a parhicr in the New York City investment banking linn ul' Ahcrwald, Butler, 1tt'al't Euren St Company, to help arrange the needed ltarnring'. Rodriguez and Fulton each have some savings to put into the purchase, but the}: need a substantial amount of outside capital to oomptete the deal. htdieugh the funds could pa'ohaltdsr be borrowed, 'v'art Burcn is not enthusiastic about this altcmalive. For one thing. Precision Tool's debt ratio is r,:t.trrt:.:nLl_':.r at ill} penrent, which is the irnluer}I average {see Table l]. Second, Rtnlriguev. and Fullull envision using Precision "foot as a vehicle to acquire several smalter companies, and some reserve debt capacit}r wouhi be needed if this strategy is pursued. Van Buren proposes that the two partners obtain funds to purchase Precision Tool in acwrdarure with Lhr: mhetlule shown in Table 2. Precisiun Tuttl would] he resLmeLuretl will't 15 initlion common shares authoi'izedl.35,t}tl shares to he issued at the tinte of the sale and iol shares to be held in reserve for future aeouisitions. Rodriguez and Fulton would each purchase I shares at a price. ul' $| per share, the par value. Aberwald, Butler, Van Flurert Eh Company would purchase [llilil shares a1 a price "If l'i-E-j and Ihe remaining 340," shares would he sold to the [silitic at the $3.5" price. The underwriting fee to Aberwald. Butler. Van Buren 8r Compartv would be 5 percent of the pnarecrls [rum the public sale1 or $357,,{Jl}. legal fees, HL'tJIILlIIL'lrIg lees, and ulher charges wttulrl amount. to scarce. I'or Ltttal underwriting costs of MEDIW. After deducting the uotlerm'iting charges and the payment to Sanders, the restructured Precision Tool would have an additional Militia! in its cash account. Also as part of the agreement would be a provision which grants 1- }'tar options in purchase athlilionai shares. Rtalriguer. and Fulton could trolleelivial}.r purchase an additional lllttltltl shares, while Parks, 1v'an Huron dr. (.'ompangl.r could purchase an additional llHiJillll' shares, all at Sitijl}. @- 1954 Scum-Western, a part ofangage Lesrnlng