MRC Inc Case Study

PARINOV Sergei, MANKO Kirill

Acquire or not
Advantages
ARI had over $20 million in liquid

Disadvantages
From the early 1950s rayon began to

assets that were not needed for operations. No short or long term debt. ARI had a modern manufacturing facility. The president of ARI was willing to stay for two years after the acquisition, to give MRC personnel the chance to learn the business.

falter as competing synthetics became popular. ARI faced earning difficulties with a shrinking industry. Acquiring ARI might entangle MRC in a dying business. MRCs management lacked the technical know-how to contribute to the profitability of ARI.

Motives to acquire ARI

The benefit MRC might get is liquid and stable funds of ARI holding in forms of govt. securities. This excess funds ARI can fuel their diversification drive in more prosperous sectors which will have lower business risk and stable cash flows.

Total ARI value 51 980 K $ (DCF) is higher than 40 000 K $ selling proposal
1961 FCFF TV Discount factor PV (FCFF) 5517 1 0.91 5021 1962 5803 2 0.83 4806 1963 5803 3 0.75 4374 1964 4893 4 0.69 3357 1965 4416 5 0.62 2757 1966 3997 47217 6 0.57 2271 1967 3437

EV Cash Equity value Fundamental value of shares Share outstanding WACC Growth rate U.S. inflation U.S. Long-term treasury bonds U.S Treasury Bill Yeild

29392 2564 51980 28.08 1,851 10% 2.6% 1.50% 4.10% 2.70%

Liquidate ARI after acquisition

ARI Value
= working capital + tax benefit + cash equivalents

= 21 mln + 11,4 mln +20 mln = 52 400 000 $

40 000 000 $ =2,7 mln new issued shares * 14,5 $

Before acquisition EPS MRC 1,16 $ ARI 1,35 $ After acquisition EPS MRC+ARI 1,03 $

Final Recommendations
To continue with acquisition of ARI because of a very

attractive price To liquidate the company in a short-term prospective because of absence of operational synergy and negative prognosis for rayon industry To use liquid assets of ARI and cash generated in the process of ARI liquidation for the further implementation of MRC diversification programm