Case Study -Cooper Industries

Cooper Industries

Case Study

Jonathan De Leon

Ann Lewis

Mary J. Roy

Crystal Vincent

University of Phoenix Online

Advanced Problems in Finance

FIN 545

William Crockett

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.

Shareholder Standings

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

Shareholder Concerns

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.

H.K. Porter

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