Timken brief
Individual Case Brief-The Timken Company
Main Issue
The Timken Company was intended to acquire the Torrington Company from Intersoll-Rand (IR). If the acquisition succeeded, Timken would get synergies such as boosting world market share and cutting costs substantially. However, considering the large size of this acquisition, Timken would face the stress of below-investment-grade rating and series of future financing problems if IR required a cash deal. A feasible financing structure must be considered carefully by Timken.
Financial Analysis
Total debt financing
Financing this acquisition 100% by raising debt was absolutely irrational. Timken now has already been lingering around investment-grade rating (BBB/Baa1). With $800 million debt added in the company’s book, Timken’s level of debt would be drag to around 54% (Exhibit 1). Timken, as a result would suffer both higher rate of borrowing money and limited funds for future project financing. What’s more, Timken now had already carried $140 million debt to refinance existing debt and support investments. There is no reason to drag the company to a more dangerous leverage edge.
Total equity financing
By using 100% equity issuing method to finance this acquisition, Timken would keep its investment rating above BBB/Baa1. However, the Timken management considered an investment-grade rating priority in order for accessing public debt market. Additionally, by issuing $800 million equity, Timken would raise its shares outstanding up to 111 million (Exhibit 1). Current shareholders’ shares would be diluted because of this around 75% percent shares increase.
Combination of debt and equity financing
In order to both stand right upon the investment-grade rating line (Exhibit3) and take into account Timken’s current debt condition, a combination of debt financing and equity financing would be more feasible. By adjusting Timken’s leverage rate to 47% (Exhibit 1), the financing combination would be around $170 million (a
Main Issue
The Timken Company was intended to acquire the Torrington Company from Intersoll-Rand (IR). If the acquisition succeeded, Timken would get synergies such as boosting world market share and cutting costs substantially. However, considering the large size of this acquisition, Timken would face the stress of below-investment-grade rating and series of future financing problems if IR required a cash deal. A feasible financing structure must be considered carefully by Timken.
Financial Analysis
Total debt financing
Financing this acquisition 100% by raising debt was absolutely irrational. Timken now has already been lingering around investment-grade rating (BBB/Baa1). With $800 million debt added in the company’s book, Timken’s level of debt would be drag to around 54% (Exhibit 1). Timken, as a result would suffer both higher rate of borrowing money and limited funds for future project financing. What’s more, Timken now had already carried $140 million debt to refinance existing debt and support investments. There is no reason to drag the company to a more dangerous leverage edge.
Total equity financing
By using 100% equity issuing method to finance this acquisition, Timken would keep its investment rating above BBB/Baa1. However, the Timken management considered an investment-grade rating priority in order for accessing public debt market. Additionally, by issuing $800 million equity, Timken would raise its shares outstanding up to 111 million (Exhibit 1). Current shareholders’ shares would be diluted because of this around 75% percent shares increase.
Combination of debt and equity financing
In order to both stand right upon the investment-grade rating line (Exhibit3) and take into account Timken’s current debt condition, a combination of debt financing and equity financing would be more feasible. By adjusting Timken’s leverage rate to 47% (Exhibit 1), the financing combination would be around $170 million (a