Group 2

YEAT VALVES AND

CONTROLS INC.

Aditi Roy BD21056

Eshita Kare BD21068
Pavan Srinath BD21082
Rishikesh Promod Nair BD21087
Shivam Pandey BD21094
Table of contents
1. Executive Summary ....................................................................................................... 2
2. Problems Identified ........................................................................................................ 2
3. Alternatives available ..................................................................................................... 3
4. Analysis ......................................................................................................................... 4
5. Conclusion ..................................................................................................................... 5

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1. Executive Summary

Yeats Valves and Control Inc. (YVC) is a manufacturing firm specilaizing in valves
and heat exchangers. Repted for their engineering excellence in complex phases,
YVC specialized in curating highly technical devices for the government on contract
basis. The company had numerous ordinary goods, whereas specific applications for
the defence and aerospace sectors accounted for approximately 40% of its volume
and 50% of its profit. As soon as the product reached the commercial stage in 1987,
the firm was formed to acquire the engineering corporation's patents and properties,
both owned and leased. The raw material employed by the firm was readily available
from a variety of competing sources.
YVC's factories were designed to handle modest manufacturing requirements
efficiently. Additional investment in property totalled $7.6 million between 1997 and
1999. YVC's success drew several approaches from firms seeking diversity, plant
capacity, managerial efficiency, financial resources, or an offset to cyclical industry.
YVC was concerned that without a well-funded partner, the firm would be
overwhelmed by the competition. As a result, when the opportunity to combine with
TSE International Corporation surfaced in 1999, YLC was determined to make it work.
TSE International Corporation was established in 1970. By the year 2000, the
company had manufactured everything from intricate industrial components to chain,
bolts, nuts, cables, and other similar things, which it mostly provided indirectly to
various industrial users.
Both parties had evaluated the benefits of different techniques from the beginning of
the negotiations for integrating the two enterprises. Whatever conditions were
eventually agreed upon, the deal would be subject to ratification by both firms'
investors.
YVC and TSE need to finalize the terms of the acquisitions in light of the expectations
and limitations encircling the deal.
YVC’s major expectations revolve around:

• Continued capital infusion for Research and Development

• Proper support for the “Widening gyre” project
Majot potential limitations include:The possible weaknesses that needs to be
considered in way forward-

• Determining the correct valuation for YVC considering the stock prices does not
reflect it’s true value
• Future projects to be undertaken reflected in YVC’s income statements.

2. Problems Identified

YVC was faced with a number of dilemmas, few of which necessitated the need for a
transaction with another entity, and others that made Bill Yeats and Kate Porter to
reconsider their decision. These dilemmas are discussed ahead in detail:

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 i. Bill Yeats’ Retirement
With Bill soon reaching superannuation, the need for more strategic intervention at the
top management level seemed necessary to secure the future of the company and to
secure shareholder value. While the current crop of top management executives in
YVC comprised of able professionals, they were all specialists in their respective
domains and lacked the necessary skills to lead the business. In such a scenario,
selling off the business to a larger player having executives with wider experience of
running a full-fledged business was more rational to retain and preserve value for the
shareholders.
ii. Higher Capital Requirement for R&D
YVC’s business was predominantly catering to clients in the Defence and Aerospace
sectors. These industry demanded constant upgradation and upscaling of the solutions
offered by there vendors. As a result, YVC is required to indulge in research and
development activities on an on-going basis, which will require sizeable investments to
the business. Selling the business to a larger player with deeper pockets is a viable
option to counter this challenge.
iii. Increasing competition in the industry
Recent industry trends signified that many players in the industry opted to consolidate
their businesses to realised synergies from such associations. This exposed YVC to
greater competition that threatened to disrupt their position as leaders in their industry.
In order to counter the competitive threats, consolidating themselves with a bigger
player like TSE International seemed a viable solution.
iv. Valuation of YVC

The biggest challenge that faced YVC was to correctly value the firm to proceed with
the acquisition. Kate Porter is seen to repeatedly stress on the fact that there is a lot of
“hidden value” in YVC owing to a multitude of factors such as intellectual property,
cutting edge technology, new products and exciting government contracts.
Furthermore, she also felt that the current PE ratio of 10.3 reflected the market
sentiment that feared that the firm was exposed to risks from bigger players and
hence, failed to capture the real value of the firm that was to be relatively higher.

Valuing YVC adequately therefore turns out to be the most burning challenge for Kate
Porter and Bill Yeats.

3. Alternatives available

i. Cancel the acquisition

The acquisition may not make sense if Yeats is unable to extract a fair deal from the
acquiring company. This point is further developed by the Modest Valuations clipping
shown by Bill Yeats to Kate. The clipping mentions a tide of acquisitions with low
valuations and cautions sellers to wait for the stock market to settle. Although Bill is in
a hurry to sell the firm, he is also made aware by Kate that fetching a fair value for the
firm is also a priority. By waiting for the markets to stabilize, the firm may be able to

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 realize a higher price for the firm. This also provides Yeats Valves time to establish
their Widening Gyre technology.

ii. Sell to other competitors

Given the large number of competitors such as the Rockheed-Marlin Corporation,

Yeats can consider selling to firm to a company that will provide a higher price by
valuing the company’s assets such as the R&D and Intellectual Property such as
Widening Gyre, at a better price.

iii. Continue with the acquisition

Considering the need of finding a worthy generalist successor for Yeats Valves, as
well as the general inclination of Yeats to sell the firm to solve many of the current
problems enumerated in the section above, it would make sense for the acquisition to
take place as discussed in the analysis ahead.

iv. Joint venture

Although Bill Yeats did not initially consider the Joint venture route as attractive owing
to the fact that it suffered from the same integration problems as the acquisition, there
was scope for reconsideration of first trying the joint venture, as this option would help
in testing the waters of the potential partnership between the firms while avoiding the
high capital investment and risk exposure for the acquiring firm.

4. Analysis

i. Price-Earnings:
The P/E ratio expresses how much the shareholders are willing to pay for each unit of
profit generated by a company. The average P/E ratio in a specific industry may be
used as a reference to value a business on a relative front.
As understood from Exhibit 8, the industry average relative to YVC can be computed
as follows:
Price-Earning
Company
Ratio
Cascade Corp 8.2
Curtis Wright Corp 10.3
Flowserve Corp 11
Index Corp 14.6
Roper Industries 16.3
Tecumseh Products 7
Thomas Industries 10.4
Watt Industries 10.7
Industry Average 11.0625
Yeats Valve 10.3

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 From the above analysis, it can be observed that YVC’s PE ratio is lesser as
compared to the industry participants. This signifies that despite the overarching
intellectual properties, new products, and exclusive government contracts, YVC is
currently undervalued. Therefore, undertaking the deal at current share price will not
offer the desired value to YVC.
ii. Market Value:

In addition to above, Exhibit 7 clarifies that the per share market value of YVC is
$39.75 and $21.98, thereby indicating higher value for YVC among the market
participants. This provides YVC the incentive to demand and negotiate higher price to
go ahead with the transaction.

5. Conclusion

A retiring Bill Yeats worries for the future of his company and seems eager to sell his
firm to ensure future sustainability. Kate however is determined on helping Yeats
obtain a fair value for the firm that her friend has built all these years.
To satisfy both Yeat’s time constraints while also realizing the true value of the firm,
the optimal solution would be to continue with the acquisition but negotiate for a higher
price – which can be achieved by persuading TSE of the potential of the intangible
assets under Yeats, such as the potential of the Widening Gyre technology.