Case 47 The Timken Company

The acquisition of Torrington from Ingersoll-Rand (IR) required a strategy that would meet both the investment and the financing objectives of the Timken Company. In that regard, the case provides an excellent example of the principle that investment and financing decisions can be considered independently. In effect, Timken captured the positive NPV of Torrington even though Timken was required to increase its leverage beyond its capital-structure objective. To retain its investment-grade rating, Timken used the capital market shortly after the acquisition to reduce its leverage by issuing equity and retiring debt. Because of Timkens sequential financing strategy, the case illustrates the complexities of managing large-investment decisions that have a short-term impact on a firms capital structure.

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How does Torrington fit with the Timken Company?

What are the expected synergies? What is your stand-alone valuation of Torrington?

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?

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?