The Raid by The Simmons Company

Monmouth was not alone in its interest in Robertson. The Simmons Company, a conglomerate with wide-ranging interests in electrical equipment, tools, nonferrous metals, and rubber products, had acquired 44,000 shares of Robertson stock in 2000 and had been an attentive stockholder ever since. On March 3, 2003, Simmons informed Robertson management of its plan to tender immediately for 437,000 of Robertsons 584,000 outstanding shares at $42 per share in cash. The offer would terminate on April 4, unless extended by Simmons; and the company was unwilling to acquire fewer shares than would constitute a majority.

Robertson's management was alarmed by both the proposal and the proposer. The company would contribute less than one-sixth of the combined sales and would clearly be just another operating division of Simmons. It was feared that Simmons quest for higher profits might lead to aggressive cost-cutting and the elimination of marginal product lines.

Loss of control seemed both painful and likely. The $42 cash offer represented a $12 premium over the most recent price of the stock and threatened to create considerable stockholder interest. The disappointing performance of the stock in recent years would undoubtedly increase the attractiveness of the $42 offer to Robertsons 4,200 stockholders. And the Robertson family and management-owned only 20% of the outstanding sharestoo few to ensure continued control.

Immediately after learning of the Simmons tender offer, Harry Vincent and Michael Rudd approached the Robertson management with an offer of help. It was clear that Robertson had to move immediately and forcefully; the first 10 days of a tender offer are critical. Messrs. Vincent and Rudd stressed that Robertson had to find a better offer and find it fast. Indeed, Monmouth was willing to make such an offer if Robertsons management and directors would commit themselves to itnow.

But Robertson was not ready for such decisive action and three days passed without any decision. With each day the odds of a successful counteroffer diminished. Finally, the Monmouth officers decided the risks were too great and that Simmons would learn of the offer of help and might retaliate. Monmouths stock was depressed, and it was possible that an angry Simmons management might strike for control of Monmouth. The offer was withdrawn.

By late March the situation was increasing in seriousness. Robertsons management moved to block the raid. It talked with the large shareholders personally and made a strong public statement recommending against the offer. But announcements by Simmons indicated that a substantial number of Robertson shares were being tendered. It was no longer a matter of whether to be acquired; the issue was, by whom?!

Management sought to find an alternative merger that would ensure the continuity of Robertson's management and operating independence. Several companies had communicated with Robertson in the wake of the Simmons announcement, but no one other than Monmouth had made a specific proposal. This was largely due to their reluctance to compete at the price levels being discussed or to enter into a fight with Simmons. Finally, on April 3, an agreement was reached with NDP Corporation on the terms of a merger with it. NDP was a broadly diversified company with major interests in publishing and original and replacement automotive equipment. Under the merger terms, five shares of NDP common stock would be exchanged for each share of Robertson common stock. (See Exhibit 3 for a financial summary of NDP.)

Assured of continued operating independence, management supported the NDP offer. In a letter to the stockholders, Paul Robertson pointed out that the exchange would be a tax-free transaction with a value of $53.10 (NDP common stock had closed at $10.62 on the day before the offer). He felt confident that the necessary majority of the outstanding common stock would be voted in favor of the proposed merger when it was brought to a vote in the fall.

Simmons quickly counterattacked by pointing out that NDP common stock had recently sold for as low as $458, which would put the value at only $23.12. Furthermore, anyone who accepted the NDP offer would suffer a sharp income loss, since NDP paid no common dividend.

Opportunity for Monmouth

Harry Vincent and his staff were still attracted by the potential profits to be realized from Robertson. It was felt that Robertsons efforts to sell to every market segment resulted in an excessive number of products, which held down manufacturing efficiency and ballooned inventories. Monmouth estimated that Robertsons cost of goods sold could be reduced from 69% of sales to 65%.

The other major area of cost reduction was selling expenses. There was a substantial overlap between Robertsons sales force and that established by Monmouth for its Dessex-Kroll-Keane hand tool lines. Elimination of the sales and advertising duplications would lower selling, general, and administrative expenses from 22% of sales to 19%. (Exhibit 4 provides pro-formas for Robertson Tool.)

There were other possible sources of earnings, but they were more difficult to quantify. For instance, 75% of Robertsons sales were to the industrial market and only 25% to the consumer market. In contrast, sales by Monmouths hand tool group were distributed between the two markets in virtually the exact opposite proportions. Thus, sales increases could be expected from Robertsons pulling more Monmouth products into the industrial markets and vice versa for the consumer market. Also, Monmouth was eager to use Robertsons strong European distribution system to sell its other hand tool lines.

The battle between Simmons and NDP seemed to provide Monmouth with an unexpected, second opportunity to gain control of Robertson. Simmons had ended up with just 133,000 shares tendered in response to its offerfar short of the 249,000 shares needed to give it majority control. Its slate of directors had been defeated at the Robertson annual meeting on April 21. Simmons now feared that Robertson might consummate the merger with NDP and that Simmons would be faced with the unhappy prospect of receiving NDP common stock for its 177,000 shares of Robertson stock. Simmons knew that the NDP stock had been a lackluster performer and might not show any significant growth in the near term. Finally, Simmons feared it would be difficult to sell a large holding of NDP stock, which traded in small volumes.

On the other hand, a merger of Monmouth and Robertson would allow Simmons to convert its shares into a common stock of Monmouth. This was a much more attractive alternative, assuming that an acceptable exchange rate could be set. Simmons anticipated that earnings should rebound sharply from the cyclical downturn and that Monmouth stock would show significant price appreciation. Furthermore, the stock was traded on the New York Exchange, which provided substantial liquidity. At a private meeting in late April, Simmons tentatively agreed to support a Monmouth-Robertson merger on the condition that the price be at least $50 for each Robertson share he held.

Mr. Vincent was now faced with the critical decision of whether to move for control. If he decided to seek control, it would be necessary to establish both the price and the form of the offer. Clearly, the terms would have to be sufficiently attractive to secure the shares needed to gain majority control.

Mr. Vincent also felt that the terms should be acceptable to management. Once the merger was complete, Monmouth would need to work with the Robertson family and management. He did not want them to feel that they and other Robertson stockholders had been cheated by the merger. As a matter of policy, Monmouth had never made an unfriendly acquisition, and this one was to be no exception. The offer should be one that would be supported by the great majority of the stockholders.

However, the price and the form of the payment had to be consistent with Monmouths concern that the acquisition earn a satisfactory long-term return and improve the trend of Monmouths earnings per share over the next five years. The company anticipated making additional acquisitions, possibly in an exchange for the stock. Stocks of Monmouth and Robertson closed at $24 and $44, respectively.

1. A Brief History of Monmouth Inc.
2. What are the issues in this case?
3. Assess the strategic fit of Robertson Tool Company for Monmouth. If you were Mr. Vincent, the Executive Vice President of Monmouth, would you try to gain control of Robertson Tool in May 2003?