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UVA-F-1573
Flinder Valves and Controls Inc.

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UVA-F-1573
Nov. 17, 2008

FLINDER VALVES AND CONTROLS INC.

In early May 2008, W. B. Bill Flinder, president of Flinder Valves and Controls Inc. (FVC),
and Tom Eliot, chairman and chief executive officer of RSE International Corporation (RSE), were
planning to negotiate a possible acquisition of FVC by RSE. Serious discussions for combining the
two companies had started in March of that year, following casual conversations that dated back to
late 2007. Those initial talks focused on the broad motives for each side to do a deal, and on the
management issues, including compensation, in the new firm. What still remained was to negotiate a
final term sheet on which the definitive agreement would be drafted and signed.
In the background, the past 12 months had been associated with mounting difficulty for the
U.S. economy. The industries within which RSE and FVC operated were not immune from these
effects. A recent analyst report summarized the market view for industrial manufacturing.
Tighter borrowing standards and a severely weakened housing sector are weighing
on the domestic economy, prompting consumers to cut back on spending and
industrial manufacturers to reduce production. A similar situation now seems to be
taking hold in western Europe.1
Both corporate leaders were concerned about the opportunities and risks of doing a deal in this
increasingly challenging environment.

Flinder Valves and Controls Inc.

Flinder Valves and Controls, located in Southern California, manufactured specialty valves
and heat exchangers. FVC maintained many standard items, but nearly 40% of its volume and 50%
of its profits were derived from special applications for the defense and aerospace industries. Such
products required extensive engineering experience of a kind only a few firms were capable of
providing. FVC had a reputation for engineering excellence in the most complex phases of the
business and, as a result, often did prime contract work on highly technical devices for the
government.
1

Value Line Investment Survey, April 25, 2008.

This case was written as a basis for class discussion. The companies and characters featured are fictional. Copyright
2008 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies,
send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a
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photocopying, recording, or otherwisewithout the permission of the Darden School Foundation.

-2-

UVA-F-1573

FVC was an outgrowth of a small company organized in 1980 for engineering and
developmental work on an experimental heat-exchanger product. In 1987, as soon as the product
was brought to the commercial stage, Flinder Valves and Controls Inc. was organized to acquire the
properties, both owned and leased, of the engineering corporation. The president of the predecessor
company, Bill Flinder, continued as the president of FVC. Eventually, the company acquired the
patents it had licensed.
The raw materials used by the company were obtainable in ample supply from a number of
competitive suppliers. Marketing arrangements presented no problems. Sales to machinery
manufacturers were made directly by a staff of skilled sales engineers. The Auden Company, a large
firm in a related field, was an important foreign distribution channel under a nonexclusive distributor
arrangement. About 15% of FVCs sales came from Auden. Foreign sales through Auden and
directly through FVCs own staff accounted for 30% of sales. Half the foreign sales originated in
emerging economies, mainly Brazil, Korea, and Mexico. The other half originated in the United
Kingdom, Italy, and Germany.
Although competitive erosion in the mid-2000s had temporarily interrupted FVCs sales
growth, better economic conditions in the markets of developed countries, together with FVCs
recent introduction of new products for the aerospace and defense industries, offered the company
excellent prospects for improved performance. Sales in the first quarter of 2008 grew 23% over the
corresponding period in 2007, at a time when many of FVCs competitors experienced limited
growth prospects. Exhibits 1 and 2 show the most recent financial statements for FVC.
FVCs plants, all of modern construction, were organized for efficient handling of small
production orders. The main plant was served by switch tracks in a 15-car dock area of a leading
railroad and also by a truck area for the companys own fleet of trucks. From 2005 to 2007, net
additions to property totaled $7.6 million.
Bill Flinder, an outstanding researcher in his own right, had always stressed the research and
development involved in improved products, with patent protection, although the companys
leadership was believed to be based on its head start in the field and its practical experience.
FVCs success had brought numerous overtures from companies looking for diversification,
plant capacity, management efficiency, financial resources, or an offset to cyclical business. For
instance, when Flinder Valves was taken public in 1996, Auden Company, which later became a
holder of 20% of FVC common stock, advanced a merger proposal. Rumors of possible antitrust
action by the U.S. Department of Justice had circulated after the news of the proposed merger
became public, and Auden withdrew from the discussions. FVC received various proposals from
1998 on, but none reached the stage of working out an agreement until the advances of RSE
International Corporation.
FVC had come to RSEs attention with the FVCs disclosure of a U.S. government contract.
FVC was to develop an advanced hydraulic-controls system, code-named widening gyre, for use