CASE 46

THE TIMKEN COMPANY
Teaching Note

Synopsis and Objectives
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 Timken’s sequential
financing …show more content…

Students might view such a large acquisition as running counter to the company’s strategy of reducing capital investment and conserving cash. The true measure of the merits of an acquisition, however, boils down to the price paid for the assets and the expected cash flows.
Timken viewed the acquisition of Torrington as both a strategic and a financial play: a company that provided complementary product lines as well as the opportunity to buy significant cost savings. The cost savings made Torrington much more valuable to Timken than to IR, making it likely that both seller and buyer would increase firm value because of the transaction.

Valuation
Torrington’s realized and forecast sales and operating profits for 1999–
Discussion
2007 are provided in case Exhibit 5. Exhibit TN1 reproduces those numbers and question 2 adds other data useful for the valuation. Students should recognize that
Torrington’s operation margins are projected to be higher than Timken’s recent margins. At 13.7%, however, the EBITDA margins are not dramatically higher than the industry’s median of 12.8%. Although we do not know the expected growth impounded in the valuations, it would appear that Torrington should carry a value similar to the average firm in the industry. In any case, students should flag operating margin as a variable for further examination.

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Case 46 The Timken Company

The first step in the discounted-cash-flow analysis is to