Analysis of Cooper Industries, Inc. 1. If you were Mr. Cizik of Cooper Industries, would you try to gain control of Nicholson File Company in May 1972? In May of 1972, Mr. Cizik is faced with a decision to try to gain control of Nicholson File Company. Manufacturing efficiency and ballooned inventories were held down from Nicholson File Company due to their efforts to sell every market segment according to the case. Cooper believed that Nicholson’s COGS could be reduced from 69% of sales to 65%. They also estimated that by eliminating the sales and advertising duplications would lower their administrative, selling, and general expenses from 22% of sales to 19%. With the original COGS and expense percentages implemented, the value of operations for Cooper was $282.31 With the new reduced percentages of COGS and expenses implemented, their value of operation increased to $681.68. If we were Mr. Cizik, we would try to gin control of Nicholson File Company due to the significant increase in their value of operation. After analyzing Nicholson’s value, we found that Nicholson’s stock price per share should worth $93.19, even if they continue the bad management. They pay $50 to Porter is much less than Nicholson’s value. Therefore, we think Cooper should gain control of Nicholson. 2. What is the Maximum price that Cooper can afford to pay for Nicholson and still keep the acquisition attractive from the standpoint of Cooper? The maximum price that Cooper can afford to pay for Nicholson and still keep the acquisition attractive is $229.03 based on our Sensitivity Analysis. Nicholson held a 50% share of the $50 million market for files and rasps and also had a 9% share of the $200 million market
Jonathan De Leon
Mary J. Roy
University of Phoenix Online
Advanced Problems in Finance
September 5, 2005
Cooper Industries Inc.
Based on the given information in the case study regarding the acquisition of Nicholson File Company by Cooper Industries, there is no question that Cooper should try to gain control of Nicholson. This decision is based on an analysis of the bargaining positions of each group of Nicholson stockholders which have disparate goals and needs that need to be met. In addition, an appropriate payment method and specific dollar value based on a competitor's offer and Cooper financial data was decided. The remainder of this paper 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. Cooper's requirements to acquire a company has three major components. The target 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 'small ticket' items; and
3. A leader in its market segment.
When looking at the criteria that Cizik's company (Cooper Industries), set forth relative to acquisitions, the acquisition of Nicholson meets all three objectives plus has significant potential short and long-term potential. Cooper management feels that by eliminating redundancy and streamlining Nicholson's operations this potential can be realized.
Currently, Nicholson's financial history boasts a 2% increase in profit annually 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%.
Nicholson's position in the file and rasp market where it holds a 50% market share of a $50 million dollar market meets all three of Cooper's objectives. Furthermore, Nicholson's brand name within the hand saw and saw blade industry is strong and Nicholson holds a 9% market share in the $200 million dollar - their only major competitor was Sears and Diston who held a larger market share.
At the time of the proposed merger between Nicholson File and VLN, there were a total 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 yet 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 mutually beneficial proposition.
The table below, Exhibit 7 in the case study, shows the estimated disposition of shares in early 1972:
Estimated Distribution of Nicholson File Company Stock_______________
Shares supporting Cooper
H.K. Porter 177,000
Cooper Industries 29,000 206,000
Shares supporting VLN
Nicholson family and management 117,000
Owned by VLN 14,000 131,000
Shares owned by speculators 50,000 - 100,000
Shares unaccounted for 197,000 - 147,000
Total Nicholson shares outstanding 584,000
There are three major groups of shareholders that Cooper must consider when putting together their offer to acquire Nicholson. These groups are Nicholson, H.K. Porter, and the group of Unaccounted for Shares and Spectator Shares.
Nicholson File Company
Loss of control - Nicholson management's greatest fear was loss of operating control. The company had been in the Nicholson family for years, and if Cooper expected to gain support for the offer 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 guarantee them that they would work with the current management to maintain the identity and image of Nicholson. Additionally, Wall Street investors would view the maintenance of Nicholson management as a stabilizing factor in the merger.
Loss of product lines - Whichever company acquired Nicholson, there was no doubt that aggressive cost cutting measures would be pursued; 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 least--include Nicholson management in the decision making alternatives.
Stock 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. Additionally, 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 - Porter will most likely sell their shares immediately