Cooper Case

Executive Summary In the Case understand, annoy Industries is labeling to turn Nicholson read Comp whatsoever. However, at that place argon two a nonher(prenominal) companies that argon concerned in Nicholson as well VLN Corpoproportionn and H. K. doorman friendship. In 1971, VLN to take a shither with Nicholson counsel constructed a deal that, however, didnt get the support from the major(ip)(ip)ity of vernacular melodic line readers. After having d star a discounted permute flow analysis, I determined that Nicholson ocellus is under ranged. Also, Nicholson seems to be a undecomposed strategic fit for make.thitherfore, make could acquire Nicholson on friendly ground with a relatively large premium to attract the volume of the sh bes needed. The hassle for make is to determine how best to acquire Nicholson and the adequate nourish to cook up. 1. ) and 2. ) In my opinion, Mr. Cizik should make an attempt to gain control of the Nicholson File corporation. ba rrel maker Industries has been move a policy of expansion by the acquisition of other companies and this system appears to be toying well for them. They go acquired a number of companies and exact been successful in integrating them into cooper Industries.They name established tercet criteria that potential companies for acquisition must meet and Nicholson meets all three criteria. Nicholson holds 50% of the securities industry place share in files and rasps, its main fruits, thitherfore implying that barrel maker could be a major factor in this industriousness. Nicholson is similarly a starring(p) conjunction in their market places and it is a stable company in term of non being dependent on a few major customers. Nicholson has a great deal of potential for greater gross revenue offshoot as it is only growing sales at 2% compared with the industry average of 7%.Due to the strengths of its point of intersections and distri barelyion system they should be suitabl e of raising growth rates to the industry average. The company is further desirable to barrel maker as the two companies sales forces could be combined confidential in skeletal systemation to approach savings. Nicholsons European distribution system could similarly be very availful in expanding barrel makers sales in Europe. As make Industries rats more of their product to industry and Nicholson to the consumer market by combining the companies they whitethorn be able to increase sales of some(prenominal) product lines to the market segment they are weaker in. All in all, Mr.Cizik should try to gain control on Nicholson File company as it seems to be a good strategic fit. 3. Nicholsons firm evaluate derived by the means of DCF analysis amounts to $ 39. 86 mio. After subtracting net debt, the value of Nicholsons rectitude amounts to $ 28. 86 mio. importation an equity value per share of $ 49. 42 (undervalued). This should as well as be the maximum price that Cooper should afford to commit for Nicholson. 4. Cooper analyzed the benefits of the optical fusion with Nicholson. Cooper estimated that the cost of goods sold by and by getting Nicholson could be reduced from 69% of sales to 65% meaning a long horse value of this synergy of $ 11. 7 Mio. Also, SG&A could be reduced from 22% of sales to 19% of sales mattering in a dollar value of this synergy of $ 8. 45 Mio. These numbers are found on the combined net sales for 1972 victimization a 7% growth rate in sales from previous net sales (growth of industry level). The opposite distribution of production line activity in business and consumer market is likely to result in revenue growth. The numerical afterwardsmath of this revenue pulling, however, is highly vague at this point in time. 5. The telephone exchange value Cooper could afford to pay out without causing any dilution according to my calculation is $ 37. 2 per share meaning an Exchange symmetry of 1. 55. Thus, we could tenderise 1. 55 Cooper shares for every Nicholson share they need. This amounts to 133,013 of Coopers shares for 86,000 Nicholson shares. If they wanted to pay interchange in for the stay contrasts it would then be $37. 12 * 86000 = $ 3. 19 mio. for the remaining stocks needed to gain control via 50. 1% of all shares. Despite the nemesis of EPS dilution, Cooper might be resulting to pay a price high than $ 37. 12, if the negative short-term effect pull up stakes be outweighed by positive ones in the ong-run. In general, it is crucial to con viewr the effect of acquisitions on EPS as a signifi ba train, or enduring dilution of EPS exit harm the associations performance earthshakingly. 6. I do recommend a lend as cracking best-loved financing structure. This theatrical role of debt rather than equity financing for the acquisition of Nicholson causes a higher return on equity, as well as an increase in the efficiency of existing capital structure. Also, there are tax advantages to be r ealized with debt financing (tax shield).The ultimate goal would be to maximize shareholder value and this can be supported through a lower WACC resulting from a higher leverage (as effect outweighs increase of try). The interest on debt is tax deductible resulting in a higher Net Income and, thus, EPS. Nicholson direction had accepted an tenderize from VLN Corporation using transformible stock but rejected a cash passing from H. K porters beer. Nicholson may not want cash for their company. If that was the effect, Cooper would need to stretch cumulative translatable stock. 7. With an exchange ratio of 2, about 78% of the new firm would be owned by Cooper.The relatively high exchange ratio would result in a severe reduction of control to Nicholsons shareholder (22%). Under the given(p) circumstances with an exchange ratio of 2, the acquisition premium for paid would be $ 14 per share. The minimum synergies required that this fling makes sense would be $ 8. 18 Mio. Given m y synergy valuation from task 4, this would definitely be a realistic achievement. 8. Porter bought Nicholsons shares with the intention to take over the company themselves. However, as they werent able to acquire enough shares required to barter for the company, they are now looking to tender their shares.Obviously, theyd like to do this profitably and, thus, their primary concerns are the price- and liquidity-level. They try to get the intimately value out of their stocks, so price is of primary importance in a bargaining process with them. Nevertheless, they want to be able to quickly dash off their stocks meaning a preference for cash earningss. They expressed that convertible preferred stock was acceptable as they assume Cooper stock to be stable and easily tradable on the NYE. The speculators/ un nibed for shareholders would also be primarily have-to doe with with price.These shareholders may be tempted to buy or not to buy base on what Nicholson family and its focusing suggests they do. Thus, one possible way to reach these assembly of shareholders may be through management. Due to this influence, the family Nicholson and its management have a greater bargaining position as implied by their shares. They are interested in more than precisely the price. The management is not highly attracted to a takeover, but they know they no longer have a choice. So, at least, they wish to see Nicholson remain autonomous inwardly any acquiring company.Nicholsons management and family is most likely not willing to grapple the volume of their shares for cash They wish to hold back a stake in the company. As a result, Cooper would need to pr tin a stock exchange. VLN, as Coopers bidding competitor, is unlikely to be willing to sell their shares to Cooper for a reasonable price. Ex-Post In 1972 Cooper industries acquired Nicolson File Company deuce Cooper Industries Inc. Based on the given information in the case study regarding the acquisition of Nicholson F ile Company by Cooper Industries, there is no question that Cooper should try to gain control of Nicholson.This closing is based on an analysis of the bargaining positions of each meeting of Nicholson stockholders which have disparate goals and needs that need to be met. In addition, an let salary method and specific dollar value based on a competitoras snap and Cooper pecuniary data was decided. The remainder of this write up will provide the analysis and rationale for this determination. Should Cooper Industries Acquire Nicholson File Company? Cooper Industries has been expanding through diversification since 1996.Cooperas requirements to acquire a company has three major components. The engineer company must be 1. In an industry in which Cooper could become a major player 2. In an industry that is fairly stable, with a broad market for the products and a product line of a? small ticketa items and 3. A attracter in its market segment. When looking at the criteria that Ci zikas company (Cooper Industries), set forth relative to acquisitions, the acquisition of Nicholson meets all three objectives plus has significant potential short and long-run potential.Cooper management feels that by eliminating circumlocution and streamlining Nicholsonas operations this potential can be realized. Currently, Nicholsonas financial history boasts a 2% increase in profit yearly but this percentage is way below the industry average of 6%. Cooper management proposed that if Nicholson stops selling to every market, increased efficiencies would result and cut cost of goods sold from 69% of sales to 65%. It was also suggested that the acquisition could lower selling, general, and administrative expenses from 22% of sales to 19%.Nicholsonas position in the file and rasp market where it holds a 50% market share of a $50 one thousand one thousand million dollar market meets all three of Cooperas objectives. Furthermore, Nicholsonas brand name within the hand saw and saw blade industry is strong and Nicholson holds a 9% market share in the $200 million dollar a their only major competitor was Sears and Diston who held a larger market share. Shareholder Standings At the time of the proposed merger between Nicholson File and VLN, there were a native of approximately 584,000 Nicholson shares outstanding. H. K.Porter had not purchased enough shares to hold majority control, and this situation provided Cooper with hitherto another opportunity to acquire Nicholson. Nicholson and Porter stockholders had their own concerns, as well as bargaining positions, and if Cooper was to acquire Nicholson they had to address all of their concerns and convince them that the merger was a reciprocally in effect(p) proposition. The table below, Exhibit 7 in the case study, shows the estimated lust of shares in early 1972 Estimated Distribution of Nicholson File Company Stock_______________Shares supporting Cooper H. K. Porter 177,000 Cooper Industries 29,000206,000 S hares supporting VLN Nicholson family and management117,000 Owned by VLN 14,000 131,000 Shares owned by speculators 50,000 a 100,000 Shares unaccounted for 197,000 a 147,000 Total Nicholson shares outstanding 584,000 Shareholder Concerns There are three major concourses of shareholders that Cooper must assure when putting in concert their advise to acquire Nicholson. These groups are Nicholson, H. K. Porter, and the group of Unaccounted for Shares and Spectator Shares. Nicholson File CompanyLoss of control Nicholson managementas greatest fear was loss of operational control. The company had been in the Nicholson family for eld, and if Cooper expected to gain support for the supply by Nicholson and gain at least 86,000 shares to tip them over the majority (206,000 + 86,000 = 292,000 584,000/2 = 292,000) they would need to warranty them that they would work with the authoritative management to maintain the identity and image of Nicholson. Additionally, Wall Street investors w ould view the maintenance of Nicholson management as a stabilizing factor in the merger.Loss of product lines a Whichever company acquired Nicholson, there was no doubt that aggressive cost cutting measures would be complyd this would undoubtedly mean marginal product lines would cease to exist. Although Cooper could not emphatically guarantee that nothing would change, they could guarantee that they would work with Nicholson to determine if improvements could be made to product lines at risk and thereby maintain their existence, or at the leastinclude Nicholson management in the decision making alternatives. H. K. PorterStock valuation If the merger with VPN were successful, Porter would receive VLN preferred stock for their 177,000 Nicholson shares. VLN stock performance had been dreary, and did not show any signs of growth in the short-term. This would make it difficult for them to sell the shares of VLN on the American Stock Exchange which does not trade in large blocks. Addit ionally, from the years 1968 to 1971, VLN net sales had grown only 3% from $97 million to $100 million. Net income actually decreased by almost 7% for the same time period from $3. 2 million to $2. 98 million.Quick Sale a Porter will most likely sell their shares immediately after the deal is closed. They will do this because they no longer will have an interest in acquiring Nicholson, and history has shown many times over that share prices will decease rather quickly as mergers do not create synergies through added value or earnings growth. Unaccounted For Shares and Spectator Shares Valuation and Sustainability a This choose bloc has the same concerns as Porter relative to share pricing, but is more concerned with sustainability unlike Porter who is concerned with making a quick dollar.They own a lot more shares, estimated between 150,000-200,000 shares, and are not certain that VLN Corporation projected figures are truthful. VLN Corporation has not paid consistent dividends for many quarters, and has not shown any real growth, yet is still provideing to match Nicholsonas $1. 60 dividend rate as part of the merger deal. Shareholder Negotiations Both Nicholson and Porter had strong postures regarding the merger, and Cooper needed both companies to bless the merger to get it approved by a majority of the stockholders.Cooper only owned 29,000 shares and needed a total of 292,000 shares to gain a majority. Nicholson and Unaccounted Shares The Nicholson family and management owned 117,000 shares. However, the speculation was that 150,000-200,000 of the unaccounted for shares would choose with the Nicholson family. This amount of shares would give Nicholson immense bargaining power. Cooper knew that their offer would have to be as good, if not better than VLNas offer, as Nicholson management wholeheartedly supported the merger with VLN. H. K. Porter Porter owned 177,000 shares.This was a major voting bloc and gaining their support was essential. Luckily, Porte r was eager to work with Cooper because they believed their VLN preferred stock would only be worth $23. 12 in the first year (essentially worthless). Therefore, their support would be mutually beneficial and easier to garner. Cooperas Offer to Acquire Nicholson As has been detailed above, each group of shareholders has their own concerns and bargaining power. Cooper has to induce both Nicholson and Porter that their offer is more than fair, and as a result, all three companies and shareholders will profit.Since Nicholson has an offer pending from VLN, it is imperative that Cooperas offer is better than VLNas proffer. The VLN offer includes that (1) the exchange would be a tax-free transaction, (2) the $1. 60 preferred dividend equaled the current rate on the Nicholson stock, (3) a preferred share was worth a minimum of $53. 10. At the time of the proposed offer, the closing price of Cooper stock was $24 per share. In identify to match the bid by VLN, Cooperas offer would have to b e greater than two-for-one for each Nicholson share. The offer would need to be in the range of 2. 5/2. 501 to be greater than the $53. 10 offer pending. It is of extreme importance to Nicholson that they maintain control. In mergers, culture clashes are often the a? kiss-of-death. a? Cooper has a sincere offer to maintain the integrity of the company and Nicholson would be advised to consider Cooperas offer as their goals and interests for the long-run are mutual. Cooper has a history of successful mergers and acquisitions, which should be of some comfort to Nicholson as they will be acquired by some company or group of investors.H. K. Porter Requirements Since Porter was not able to gain a majority vote, they are willing to side with Cooper over VLN. Porter realizes that a merger between Cooper and Nicholson will give them the opportunity to convert shares of Nicholson into Cooper stock a a much more tempting proposition than that of VLN. Cooper needs to guarantee Porter that th e exchange will be tax-free, and that the Nicholson stock he converts will be worth at least $50 each. Unaccounted for Shares and Spectator SharesThe offer to this voting alliance will need to be greater than the $53. 10 per share offer by VLN. They will also want the exchange to be tax-free to evacuate capital gains taxes. As has been mentioned above, this group will most likely side with the Nicholson family so if the Nicholson family is satisfied, then this group will be also. Payment Considerations There are several considerations that Cooper management must take into account prior to deciding the specifics of the offer they will give Nicholson File Company in terms of dollar value and the form of payment.The form of payment may include an offer of cash, stock, debt or some combination of the payment options. Furthermore, Cooper not only has to consider Nicholson shareholders when determining what to offer, but it also needs to take into account the other 80% of the shares publ icly held, including a substantial percentage of shares held by competitor H. K. Porter. As previously described, one of the challenges Cooper is facing in this acquisition is to ensure a ok offer that appeals to a sufficiently broad range of shareholders with different interests.This includes H. K. Porter which currently holds about 25% of the total outstanding shares and which recently failed in its attempted acquisition of Nicholson. Also, the Nicholson family that founded Nicholson File Company currently owns approximately 20% of its own shares. The Nicholson family had also rejected Cooperas acquisition overtures three years earlier so Cooper management is aware of how precise the offer has to be to get Nicholson ownership to sign off on the deal. some other 50% of Nicholson shares are held by speculators and by other unfamiliar parties. contrive of Payment & Dollar Value The form of payment and the parameters for the dollar value offer that may be accepted by Nicholson mana gement is exhibited in the described failed and accepted acquisition offer in the case study of Cooper (see Chart 1 below). The acquisition offers by both H. K. Porter, $42 per share in cash and VLN Corporation, $53. 10 in convertible stock, help provide at least a range within which Cooper may tailor its offer. Based on these two offers, it appears that the appropriate form of payment should be Cooper cumulative convertible stock.The primary earth for this recommendation is that Nicholson management had already accepted an offer from VLN Corporation using convertible stock but rejected a cash offer from H. K Porter. This is consistent with Chang and Suk (1998) research which found that a? cash offers are more likely than stock offers to have termination initiated by the target firm. a? It is also believed that if Nicholson management signs off on any merger, speculators and the unknown portion of shareholders will go along with the merger. However, one negative view of using stoc k is that a? cquisitions of public targets result in insignificant bidder returns to the acquirer when stock is offereda?. (Chang & Suk, 1998) is this a direct quote, if so we need the reference) Cooper management believes strongly that the Nicholson acquisition will not result in negative returns due to the potential improvements that can be made through simple reorganization of some Nicholson operating businesses. Also, it appears an exchange of stock is appropriate because Cooper currently only has $9 million in cash on hand and would need to incur significant debt in order to offer a decent cash offer.It already has $5 million in long-term debt due and $34 million in long-term debt outstanding, levels significant enough that may prevent Cooper management from considering a cash offer for Nicholson. Competitor Acquisition Offer detail cause of offerOffer price per shareDividendsTax FreeOffer Accepted/Rejected H. K. CooperCash$42NoNoNo VLN CorporationConvertible stock$53. 10Yes YesYes VLN and Porter Offer Details Since Nicholson management has already accepted VLN Corporationas offer, it is clear that the terms Cooper needs to offer would have to give-up the ghost those already offered by VLN.VLNas offer included one share of VLN cumulative convertible stock for each individual share of Nicholson stock, preferred shares value at a minimum of $53. 10, $1. 60 preferred dividend equaling the current rate of Nicholson common stock, and convertible into five shares the first three years and four the fourth year. In addition, the offer was desirable since the exchange of stock would be tax-free as opposed to a cash offer. According to Dhaliwal et al (2005), to qualify as a a? tax-free acquisitionatax laws require that the acquirer use its own stock as payment. a? However, Cooper also has to consider the demands of H.K. Porter in order to get approval for the merger. H. K. Porter has indicated that it will not part with its shares (25% of total shares) and suppo rt the merger unless it receives a? Cooper common or convertible securities in a tax-free exchange worth at least $50 for each Nicholson share it holds. a? This demand is below the current book value of $51. 25 for Nicholson common stock, but above the $44 per share on the open market. The final examination consideration that assists with setting up the range for an appropriate offer that may be accepted by a simple majority of shareholders is the total value of Nicholson stock.With 584,000 shares of Nicholson File Company Stock and at $44 per share, this amounts to a total market value of $25,696,000. Therefore, in order to make the offer attractive, Cooper will have to make an offer that exceeds the market value of all of the stock but will have to ensure that the offer is not too high that it affects Cooperas long-term plans to continue to pursue acquisitions. A basic rule for Cooper acquisitions is that they bring significant long-term returns on the acquisitions as well as ste ady growth in earnings per share.Recommended Offer The number of convertible shares of Cooper stock at $24, the last closing price, for each Nicholson share would have to be just above 21 in order to match VLNas $53. 10 offer. So, Cooper should offer convertible stock fixed at 2-1/21 within the first five years after the offering. This amounts to an offer of $60 per Nicholson share. This would not only exceed VLNas offer per share but would also help make up the dearth in dividends, $1. 40 by Cooper and $1. 60 by VLN, and make the offer more attractive to Nicholson shareholders.Overall, this offer would not only exceed VLNas offer currently approved by Nicholson management, but would also likely gain the approval of the shares held by speculators and unknown investors. In addition, this offer meets the payment method required by H. K. Porter for its Nicholson shares, and actually exceeds the $50 minimum offer per share it had requested. As a result, it appears that Cooper should be successful persuading Nicholson shareholders and unaccounted for shareholders to accept the offer, and in return acquire at least 80% of the outstanding Nicholson shares of stock