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 strategy, the case illustrates the complexities of managing large-investment decisions that have a short-term impact on a firm’s capital structure. The case is best suited as a firm-valuation exercise in a first-year MBA finance course. It is also suitable for executive and undergraduate audiences.

Suggested Study Questions for Students 1. How does Torrington fit with the Timken Company? What are the expected synergies? 2. What is your stand-alone valuation of Torrington? Be prepared to explain and justify all the major assumptions used in your estimate. 3. What is your with-synergies valuation of Torrington? Be prepared to explain and justify all the major assumptions used in your estimate. 4. Should Timken be concerned about losing its investment-grade rating? How do Timken’s financial ratios compare with those of other industrial firms in 2002? How would those ratios change if Timken borrowed $800 million, for example, to buy Torrington? 5. If Timken decides to go forward with the acquisition, how should Timken offer to structure the deal? Is Ingersoll-Rand likely to want a cash deal or a stock-for-stock deal?

This teaching note was prepared by Professor Kenneth M. Eades. Copyright  2005 by the University of