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    Did United Technologies Overpay For Rockwell Collins

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    An analyst was asked to determine if United Technologies overpaid for Rockwell Collins by comparing the estimated standalone value of Rockwell Collins using a discounted cash flow model to the $30 billion acquisition price including synergies; the document provides financial details about Rockwell Collins such as free cash flows, cost of capital, and tax rates to estimate the standalone value and synergy value in order to determine if UT overpaid. Questions are also provided to walk through calculating values needed for the overpayment analysis.

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    Did United Technologies Overpay For Rockwell Collins

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    Rad
    111 views2 pages
    An analyst was asked to determine if United Technologies overpaid for Rockwell Collins by comparing the estimated standalone value of Rockwell Collins using a discounted cash flow model to the $30 billion acquisition price including synergies; the document provides financial details about Rockwell Collins such as free cash flows, cost of capital, and tax rates to estimate the standalone value and synergy value in order to determine if UT overpaid. Questions are also provided to walk through calculating values needed for the overpayment analysis.

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    Did United Technologies Overpay for Rockwell Collins (1)

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    An analyst was asked to determine if United Technologies overpaid for Rockwell Collins by comparing the estimated standalone value of Rockwell Collins using a discounted cash flow model to the $30 billion acquisition price including synergies; the document provides financial details about Rockwell Collins such as free cash flows, cost of capital, and tax rates to estimate the standalone value and synergy value in order to determine if UT overpaid. Questions are also provided to walk through calculating values needed for the overpayment analysis.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    111 views2 pages

    Did United Technologies Overpay For Rockwell Collins

    Uploaded by

    Rad
    An analyst was asked to determine if United Technologies overpaid for Rockwell Collins by comparing the estimated standalone value of Rockwell Collins using a discounted cash flow model to the $30 billion acquisition price including synergies; the document provides financial details about Rockwell Collins such as free cash flows, cost of capital, and tax rates to estimate the standalone value and synergy value in order to determine if UT overpaid. Questions are also provided to walk through calculating values needed for the overpayment analysis.

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    © All Rights Reserved
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    Did United Technologies Overpay for Rockwell Collins?

    Learning Objectives
     A methodology for determining if an acquirer overpaid for a target firm,
     How sensitive discounted cash flow valuation is to changes in key assumptions, and
     The limitations of discounted cash flow valuation methods.

    United Technologies (UT), a jet engine manufacturer, agreed to acquire aircraft parts company,
    Rockwell Collins (Rockwell), for $30 billion, including $7 billion in assumed Rockwell debt, on
    September 4, 2017. According to the terms of the deal, Rockwell shareholders are to receive
    $140 per share. The purchase price consists of $93.33 in cash plus $46.67 in UT stock. The
    purchase price represents an 18% premium to Rockwell’s closing share price the day before the
    announcement. UT’s aerospace business will be combined with Rockwell Collins to create a new
    business to be called Collins Aerospace Systems. UT anticipates about $500 million annually in
    cost savings by the fourth year following closing.
    Rockwell had completed its acquisition of B/E Aerospace on April 13, 2017. Free cash flow to
    the firm (FCFF) is projected to be $750 million in 2017 compared to $700 million prior to the
    acquisition. Free cash flow to the firm is expected to grow at 7% annually through 2022 and 2%
    thereafter. The firm’s beta is 1.22 and average borrowing cost is 4.8%. The equity risk premium
    is 5 percentage points. The 10-year Treasury bond rate is 2.2%. The debt to equity ratio is 1.39.
    The firm’s cost of capital in the years beyond 2022 is expected to be one-half of one percentage
    point below its level during the 2018 to 2022 period. The firm’s marginal tax rate is 40% and
    there is no cap on the tax deductibility of net interest expense.
    An analyst was asked if UT overpaid for Rockwell. She reasoned that to answer this question,
    she would have to estimate the standalone value of Rockwell and the present value of synergy.
    The upper limit on the purchase price should be the sum of the standalone value plus the present
    value of synergy. If the actual purchase price exceeded the upper limit, the firm would have
    overpaid for the Rockwell. In effect, UT would have transferred all the value created by
    combining the two firms (i.e., anticipated synergy) to Rockwell shareholders.

    Discussion questions
    1. Estimate the firm’s cost of equity and after tax cost of debt.
    2. Estimate the firm’s weighted average cost of capital. (Hint: Recall that the debt-to-
    total capital ratio is equal to the debt-to-equity ratio divided by one plus the debt-to-
    equity ratio.)
    3. What is the WAAC beyond 2022?
    4. Use the discounted cash flow method to determine the standalone value for Rockwell
    Collins. Show your work.
    5. Assuming the free cash flows from synergy will remain level in perpetuity, estimate
    the after-tax present value of anticipated synergy?
    6. What is the maximum purchase price United Technologies should pay for Rockwell
    Collins? Did United Technologies overpay?
    7. How might your answer to Question 5 change if the discount rate during the first five
    years and during the terminal period is the same as estimated in Question 2?
    8. What are the limitations of the discounted cash flow method employed in this case
    study?

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