1) What forces are motivating Giddings & Lewis's interest in Cross Trecker? There were several motivating factors for Giddings & Lewis's interest in Cross Trecker. The US Machine Tool Industry was undergoing significant changes in the markets that Giddings & Lewis had dominated for several years. In 1985 Japan was selling machining centers to many U. S.
customers at prices that were as low as half that of U. S. firms. Also, U. S. auto manufactures investments had fallen well below previous historic levels.
This combination of the depressed machine tool market and the 50% market share claimed by imports proved devastating to smaller U. S. machine tool makers. These smaller companies could not keep up with the rising development cost needed to compete with Japanese standards. Giddings & Lewis recognized that if they were to survive they would have to grow their business. Many of the larger machine tool makers were successful in offering flexible machining centers that were custom engineered for the customer.
Cross Trecker was well known for their name in transfer lines, milling machines and machining centers and provided an opportunity in this area if acquired. Thus, acquiring them would make Giddings & Lewis a "full-line" machine tool company and would give them established alliances and production facilities in Japan and Europe to help them better compete. Additionally, an acquisition of Cross & Trecker by Giddings & Lewis would make Giddings & Lewis one of the top five machine tool companies in the world and provide a complete line of available machines. Access to the European markets and an already established presence would also come as a benefit for Giddings & Lewis. Both these objectives lined up with Fife's strategic objectives. Giddings and Lewis's CEO felt the time was right because the stock price for Cross Trecker had dropped from a high of $15/share in the summer of 1989 to a low of $3/share in 1990.
2) Should Giddings & Lewis proceed without first arranging for the financing? Given that there may be some resistance, what steps should be taken to weaken / remove the resistance? Giddings & Lewis had been advised that a successful acquisition could result in a sudden fall in stock price and that if the lenders and rating agencies did not pay attention to the new business plan they could conclude that the combined companies had a lower credit profile than investment grade. Thus, an attempt to have financing in place before proceeding should be made. Giddings & Lewis should try to work out an agreement with Cross Trecker. As stated by Ryker, Cross & Trecker's CEO, this would put Giddings & Lewis at risk to be acquired by Cross & Trecker. Entering into an unfriendly takeover rarely turns out positive. In the 1980 s many firms' management implemented defensive measures to secure their positions from a hostile raider.
3) What price should Giddings & Lewis be prepared to pay? A Discounted Cash Flow Analysis could also be formulated. Steps would include: i. Calculate Cost of Capital (Kc) Risk Free rate of return K (rf) 4%Exp Rate of Return K (m) 15%Beta b 1. 5 Cost of Capital Kc 20. 5% ii. Determine Free Cash Flow PROJECTED POST MERGER CASH FLOW 1991 1992 1993 1994 1995 Net Sales $473, 943 $521, 337 $573, 471 $630, 818 $693, 900 Cost of Goods Sold $379, 154 $312, 802 $344, 082 $378, 491 $416, 340 Selling expenses $71, 091 $78, 201 $86, 021 $94, 623 $104, 085 G&A Exp $71, 091 $78, 201 $86, 021 $94, 623 $104, 085 EBIT -$47, 394 $52, 134 $57, 347 $63, 082 $69, 390 Interest $1, 000 $1, 000 $1, 000 $1, 000 $1, 000 EBT -$48, 394 $51, 134 $56, 347 $62, 082 $68, 390 Taxes (%40) -$19, 358 $20, 453 $22, 539 $24, 833 $27, 356 Net Income -$29, 037 $30, 680 $33, 808 $37, 249 $41, 034 Net Cash Flow -$29, 037 $30, 680 $33, 808 $37, 249 $41, 034 iii.
Calculate Present Value of Cash Flows Value 1995 $57, 474. 26 iv. Add Present Value of Terminal Value 57, 474 + 42, 989 = 95, 463 v. Subtract Debt and Other Obligations Assumed 95, 463 - 25, 849 (long term debt) = 69, 614 (in thousands of dollars) 69, 614 1000/12, 393, 000 (shares) = $5. 62 per share In its simplest form, the DCF model can be sated as follows: Maximum Value of Target Firm to Buyer = Value to Seller + Value Added by Buyer + Change in Value to Buyer if Target Firm Acquired by Competitor.
Another approach may be to use the Capitalization Earning (P/E), where Po = "Multiple" x EPSi Po = price of share in year 0 EPSi = projected earning per share in year 14) Given there is a strategic fit, is there a reasonable organizational and cultural fit? From my reading of the case, it is hard to tell if there was a reasonable organizational and cultural fit for these two organizations. The facts presented were that the two CEOs were not best of friends. Upon Fife's offer to begin discussions on a possible acquisition, Ryker's response was very negative. Also, Wall Street analysts were very critical of Cross & Trecker's management team stating that they needed to cut their costs down in order to make any money. This may be an indication of a very slow grower making it hard to merge with a dynamic company.
Since Cross & Trecker did have an international presence whereas Giddings & Lewis do not thereby raising the possibility of some cultural and organizational challenges for Giddings & Lewis if the acquisition were to take place. However, at the same time this may be considered a strategic fit as it presents new markets.