Timkken CompanyDanny Indi Puruhita Dian Permata SariFransiska SilabanRatu Hasanah Semarini

INTRODUCTION

• Tahun 2002 Timken mempertimbangkan mengakuisisi the Torrington Company dari Ingersoll Rand.

• Potensi penghematan biaya tahunan Timken dari akuisisi ini diperkirakan $80 juta.

• Apabila harga akuisisi yang dibayarkan terlalu tinggi, maka Ingersoll-Rand akan memperoleh nilai sinergi.

• Apabila akuisisi yang dilakukan Timken menggunakan utang baru, maka grade rating investasi Timken akan mengalami downgrade

THE BEARING INDUSTRY

• Bearing industry merupakan industri sekunder dalam industri baja, sehingga kebijakan dalam industri baja tidak selalu menguntungkan mereka.

• Pengiriman kawat gulung tumbuh sepanjang tahun 1990an dan puncaknya pada 1998, sales $5,8 miliar.

• Tahun 2001 sales turun menjadi $5,3 miliar, karena resesi ekonomi, dan serangan teroris 11 September 2001.

THE BEARING INDUSTRY

• Pada tahun 2003 diprediksi flat dan cenderung naik 2 sd 3%

• Penjualan tahun 2005 meningkat 6,5% menjadi $42 miliar

• Ekspansi Cina menghasilkan kebijakan antidumping.

• Pemain industri: SKF (Swedia, market share 20% di seluruh dunia); Timken; dan SKF.

THE BEARING INDUSTRY

COMPANY SALES 2002 EMPLOYEE 2002 BASIS AREA

SKF LTD. US$4,8 miliar 39.000 Swedia

NSK LTD.US$3,62 miliar

22.000 Tokyo, Jepang

TIMKEN LTD.US$2,55 miliar

18.000 Canton-Ohio, US

THE TIMKEN COMPANY

Timken Business Unit

Ingersoll-Rand

MERGEDMERGED

Ingersoll Rand’s Segment

25 % of consolidated sales

17% of income among all segments

27 % of consolidated sales

28 % of income among all segments

15 % of consolidated sales

43 % of income among all segments

33 % of consolidated sales

22 % of income among all segments

The Torrington Company

• Excelsior Needle Company didirikan pada 1866

• Melebarkan bisnis ke industri otomotif• WW II banyak memproduksi bearings • 1969 diakuisisi oleh Ingersoll-Rand• Torrington:

– Automotive– Industrial

The Torrington Company

• Sales– North America: 73%– Europe : 17%– Others : 10%

• 10.500 karyawan• 27 pabrik• 2002

– Revenues : $1,204 bio– Operating income : $85,2 mio

• 2007– Revenues : $1,65 bio– Operating Income : $116,7

Timken

• 2002: companywide restructure

• Berencana menambah produk baru ke dalam portofolio bundling

CASE QUESTION

1. How does Torrington fit with the Timken Company? What are the expected synergies?

2. What is your stand-alone valuation of Torrington? Be prepared to explain and justify all the major assumptions used in your estimate.

3. What is your with-synergies valuation of Torrington? Be prepared to explain and justify all the major assumptions used in your estimate.

4. 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 $800 million, for example, to buy Torrington?

5. 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?

6. What are the risks for Ingersoll-Rand of accepting Timken shares for some or all of the consideration?

Bagaimana Torrington Dapat Sesuai dengan Timken?

• Segmen bisnis yang sama otomotif dan industri

• Sifat produk komplementer, bukan substitusi portofolio Timken

• Memiliki keahlian masing-masing

Synergies

• Pemain terbesar ke 3

• Meningkatnya value added kepuasan pelanggan

• Penghematan biaya tahunan $80 juta

• Market share Timken 7% 11%

• Utilisasi jaringan distribusi Timken

2. Stand Alone Valuation of TorringtonAssumptions

Cost of funds Weighting Weighting Cost

Debt (462,20) 4.35% 0.30 1.31%

Equity (1,065.12) 10% 0.70 7.31%

WACC 8.62%

Stand Alone of TorringtonDiscounted Cash Flow Model

• Free CF : Operating Inconme + Depreciation expense – Tax expense – Capex – Change in WC

• Change in WC : 10.43% of change in sales• Terminal CF rate : 4% • Terminal CF : Final projected year CF * (1+

terminal value rate) (DR-terminal value rate)

Stand Alone of TorringtonDiscounted Cash Flow Model

CF 2002 2003 2004 2005 2006 2007Net sales 1204 1282 1,365 1,454 1,549 1,649.2

Depreciation Expense 80 84 90 96 102 108.5

Operating expense 1,039 1,107 1,179 1,255 1,337 1,424.0

Operating Income 85 91 97 103 110 116.70

Capital Expenditure ( 41) (175) (130) (140) (150) (160.0)

Tax Expense (34) (36) (39) (41) (44) (46.5)

changing in WC (8.14) (9) (9) (10) (10.5)

Free Cash Flow (44.4) 9.4 8.6 8.0 8.2

Terminal cash flow 183.7 Total ` (44) 9 9 8 192

Enterprise value 106

Stand Alone of TorringtonMultiples Valuation

• Enterprise Value / EBITDA : 5.90 (exhibit 8,refer to Timken Co)

• EBITDA : 165

• Enterprise Value : 5.90 x 165

: 975

3. What is your with-synergies valuation of Torrington? Be prepared to explain and justify all the major assumptions used in your estimate.

KETERANGAN 2002 2003 2004 2005 2006 2007

Cost Saving 40 50 60 70 80

Cost Saving (after tax) 24.5 30.06 36.07 42.08 48.09

Perpetuity Value 557.95

Integration Cost (65.00) (65.00)

CF (40.95) (34.94) 36.07 42.08 606.04

NPV (sinergy value) $391.89

Asumsi :1)Tarif pajak tidak berubah sejak tahun 2012 (39.88%)2)Cost saving terus meningkat hingga tahun 2007 mencapai US$ 80 juta, setelah itu cost saving diperkirakan konstan33)WACC :8.62%

4. 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 $800 million, for example, to buy Torrington?

Financial Ratio

Financial Ratio Cot’d

Financial Ratio Cot’d

Financial Ratio Cot’d

Financial Ratio Cot’d

Bearing Companies Kaydon

NN Inc Timken

Commercial

Metal Usa

Mueller Industries

Precision Castparts Corp. Quanex Corp.

Worthington Ind.

EPS 0.84 0.16 1.70 1.34 1.61 2.35 5.26 1.83 2.48

PE 23.86 59.96 9.88 13.39 0.00 11.02 4.12 18.94 7.53

EBITDA/Sales%

21.50%

15% 10% 6% 0% 13% 18% 13% 9%

5. 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?

Proforma

Cash Deal with IPO Stock for EFN

Before After 2002 7% 11%

DCR 43.09% 62,73% 62,67%

Adding EFN with Equity $777.23

Adding EFN with Equity

$792.99

DCR 43.09 % 45.24% 44.95%

Bond Rating = BBB

Financial ratio

Liquidity Ratio 2002

2002-7%

2002-11%

Current Ratio 1.53

1.54

1.55

Quick Ratio 0.76

0.76

0.77

Cash Ratio 0.13 0.13

0.13

Working Capital

334.20

365.37

383.18

Financial ratioLeverage Ratios 2002

2002-7%

2002-11%

Total Debt To Assets

0.09

0.04

0.04

Debt-Equity Ratio

0.32

0.10

0.10

Equity Multiplier 3.50 2.55 2.55

NPV Toringtoncash Acquisition

Net sales

1999 2000 2001 2002 2003E 2004E 2005E 2006E 2007E

$1,239.50 $1,161.00 $1,004.30 $1,204.00 $1,282.00 $1,365.30 $1,454.10 $1,548.60 $1,649.20

Operating income

$ 145.70 $ 172.60 $ 78.00 $ 85.20 $ 90.70 $ 96.60 $ 102.90 $ 109.50 $ 116.70

Sales growth   -6.3% 13.5% 19.9% 6.5% 6.5% 6.5% 6.5% 6.5%

Operating margin

11.8% 14.9% 7.8% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1%

Capital expenditures

$ 84.00 $ 85.00 $ 45.00 $ 41.00 $ 175.00 $ 130.00 $ 140.00 $ 150.00 $ 160.00

Depreciation expense

$ 75.00 $ 77.00 $ 79.00 $ 80.00 $ 84.20 $ 90.00 $ 96.00 $ 102.00 $ 108.50

OCF         $ (0.10)

$ 56.60 $ 58.90 $ 61.50 $ 65.20

Initial Outlay       $ (130.00)

$ (0.09)

$ 47.97 $ 45.96 $ 44.18 $ 43.12

        $ 181.14          

      NPV $ 51.14          

NPV Torrington dengan mempertimbangkan WACC 8.62%

6. What are the risks for Ingersoll-Rand of accepting Timken shares for some or all of the consideration?

• Valuasi harga saham yang tidak tepat

• Volatilitas harga saham

TERIMA KASIH