The Timken Company - Strategic Financial Management

...

Elaborate on the ways in which the acquisition of Torrington facilitates the creation of synergy for Timken Company?

One of the major reasons for the acquisition of Torrington is the creation of synergy. The two companies customers’ list overlapped by about 80%. Thus it is expected that the combined companies would create more value for customers and will offer the product line in its entirety and will develop the products more efficiently. Through this synergy, the customer base of Timken would become larger and more diverse with more cross selling opportunities.by giving much larger volume to reduced list of suppliers in exchange for price reduction. Timken is expected to realize significant purchasing synergies. By detailed integration plan and Timken will extend its ongoing restructuring program to generate cost savings at Torrington and throughout the combined company. Torrington's sophisticated needle bearings solutions for automotive power train applications provide a strong complement to Timken's leading tapered roller bearings and precision steel component solutions for wheel ends and drivelines.so by this similarity in the products, the combined companies can achieve better productivity. One important result will be more integrated engineering solutions for new original equipment designs and the opening up of new market segments for the company.

As a financial analyst, recommend to Timken Company that whether it should opt for equity financing or debt financing for acquisition of Torrington. Assume that Timken Company does not opt for a combination of debt and equity financing.

Timken had experienced significant variation in its financial performance in the past years. The earning per share in 2001 came down from $2.73 with a loss of $ 0.69 per share whereas the EPS in 2002 reached $ 0.63. Timken leverage was increased with a high percentage in 2002 and reached 43.1 % from 20.5% in 1995. The increased trend of leverage placed Timken on BBB rating. Timken had relied solely on debt to raise $ 140 million for refunding existing debt and for investment purpose. As the Timken is highly leveraged company, if the Timken raise entire amount with a debt offering, to acquire Torrington, Timken’s leverage ratio will increase which virtually guarantee that Timken will lose its investment grade rating. Further the availability of future funds will become limited for the company to carry its non-investment grade ratings.

Timken should opt for equity financing by issuing shares to public to raise cash or by issuing shares directly to Ingersoll- Rand as consideration for Torrington. The larger a company's debt-equity ratio, the more risky the company is considered by lenders and investors. Equity financing places no additional financial burden on the company since there is no required monthly payments associated with equity financing, Timken has more capital available. Accordingly, Timken was already a highly leveraged company so it would become a risky company for the lenders. When Timken go for equity financing it will also help to improve its investment credit rating.