Bentley Industrial Services Management wants to acquire LernerIndustrial Services Management Corporation. Lerner is willing to beacquired at a minimum price of $121 million and nothing less.However, two of Bentley’s major shareholders are not in favor ofthis acquisition. Lerner had no scientific basis for asking for aminimum of $121 million.
Industry Structure
The industry is about $120 billion in Industrial facilityservices management including engineering energy needs that includeheating, ventilation, and air conditioning. The industry is verycompetitive with a few large companies offering integratedservices, and many small ones offering specific single and limitedservices. There is a great opportunity for large companies to offerintegrated solutions for “one stop shopping.” Large firms may havean advantage in that they can get premium pricing from integratedservices and can get economies of scale. Companies in this industrymay be able to distinguish themselves through branding anddiversifying their offerings in targeted industries.
The industry had experienced steady growth over the last decadeand the industry demand is expected to grow at 5% per year in 2015and 2016, whereas small companies with limited offerings, or singleservice offerings is expected to grow at 3% per year.
Lerner Industrial Services
Lerner is a large industrial services company withspecialization in integrated services solutions for a wide range ofcompanies. It grew from a small single service company to a largeintegrated company within 30 years. Its specialization includesstrong technical expertise in engineering and management serviceswith solutions targeted to the Fortune 500 bio tech companies,large hospitals, and pharmaceutical companies. The company ishighly respected and known for its high quality of services whichis an advantage that can make Lerner charge premium prices. Despitethis pricing strategy, the company had experienced decliningoperating profit margins, increase operating expenses, from 4% in2012 to about 1% in 2015, and declining cash balance on its balancesheet.
Bentley Industrial Services
Bentley Industrial facility services Management Company is notas large as Lerner, and its service offerings are limited. Thecompany service offerings including heating, ventilation and airconditioning services, as well as maintenance of buildings. Thecompany wanted to expand its services, and to become a fullyintegrated company which can offer services such as buildingengineering and energy solutions. Unfortunately, the company lacksthe expertise in this area. Bentley thinks that if it owns Lerner,it will have the advantage it lacks, and Bentley then will be ableto increase its customer base, and diversify its services to manyother industry sectors. Bentley is well known company for itsoperational efficiency as well. Bentley believes it can improveLerner’s financials by replacing its management, and cuttingexpenses.
Bentley was convinced that the acquisition of Lerner will begood for its shareholders and the company as Bentley can cut costswhen it combines the two companies and implement a premium pricingstrategy. Bentley expects Lerner revenues to grow 5%per year from 2016 to 2020, and thereafter, 4% per year into thefuture. Bentley did some forecasting and created the financialprojections for Lerner (see Lerner’s financials)
The news of the acquisition was publicly known, and the stockmarket had mixed results. The financial investment firms wereconcerned about whether Bentley could manage Lerner efficiently andcan achieve the reduction of expenses and other financial success.Some of the shareholders and Board members also were concerned.Nevertheless, Bentley convinced an investment company to providethe financing for the purchase of Lerner and decided to puttogether the financial information herein.
Lerner will have an acquisition debt ratio of 55% with a taxrate of 30%. The beta of Lerner is 1.5.
- Do you think that Bentley should acquire Lerner? Why?
- Should Bentley pay $121 million for Lerner? Can the companyjustify this price?
- What is the worst and best case value scenario for Bentleybased on your analysis of the financial forecast and analysis ofthe merger?
