Cooper Industries, Inc

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1.If you were Mr. Cizik of Cooper Industries, would you try to gain control of Nicholson File Company in May 1972?

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? [Treasury Bills yielded 5.6% in May 1972.]

3.What are the concerns and what is the bargaining position of each group of Nicholson stockholders? What must Cooper offer group in order to acquire its shares?

4.On the assumption that the Cooper management wants to acquire at least 80% of the outstanding Nicholson stock and make the same offer to all stockholders, what offer must Cooper management make in terms of dollar value and of the form of payment (cash, stock, debt)?

5.What should Mr. Cizik recommend that the cooper management do?

1. Mr. Cizik should make an attempt to gain control of the Nicholson File Company. Cooper Industries has been pursuing a policy of expansion through the acquisition of other companies and this strategy appears to be working well for them. They have acquired a number of companies and have been successful in integrating them into Cooper Industries. They have established three criteria that potential companies for acquisition must meet and Nicholson meets all three criteria. Nicholson holds 50% of the market share in files and rasps, its main products, therefore implying that Cooper could be a “major factor” in this industry. Nicholson is also a leading company in their markets and it is a stable company in terms of not being dependent on a few major customers.

Nicholson has a great deal of potential for greater sales growth as it is only growing sales at 2% compared with the industry average of 7%. Due to the strengths of its products and distribution system they should be capable of raising growth rates to the industry average. The company is further desirable to Cooper as the two companies sales forces could be combined leading to cost savings. Nicholson’s European distribution system could also be very helpful in expanding Cooper’s sales in Europe. As Cooper Industries sells more of their product to industry and Nicholson to the consumer market by combining the companies they may be able to increase sales of both product lines to the market segment they are weaker in.

2. FMV of Nicholson = $172,630,000 Per share value = $295.60 I was not able to come up with a valid firm value, as there was no information regarding how much working capital will be increased by Nicholson over the next ten years, nor was there any information available regarding how much capital expenditures would be increased. Capital expenditures were assumed to equal depreciation and it was assumed working capital was not growing.

3. H.K. Porter bought their shares with the intention of taking over Nicholson themselves, however as they were unable to acquire enough shares to buy the company they are now looking to sell their shares. They would obviously like to do this profitably if possible and their primary concerns are therefore the price and liquidity. They are looking to get the most money out the stocks that they can and so price is of primary importance in bargaining with them. However, they also want to be able to quickly liquidate their stocks and so would prefer to receive cash. Though they have expressed that convertible preferred stock would be acceptable as they know Cooper stock is stable and is easily tradable being on the New York Exchange.

The speculators and unaccounted for shareholders will also be concerned primarily with price. Though they would appreciate more liquid payments, they would most likely not be as concerned with this as Porter as many of them will not be specifically looking to get rid of their stock right away. These shareholders may be swayed to buy or not to buy based on what the Nicholson family and management suggested they do. Therefore, one of the best ways to reach these shareholders may be through the management.

Due to this influence, the Nicholson family and management have a greater bargaining position then their shares alone command. They are also interested in more than simply the price. Though the management is not opposed to a takeover, possibly because they no longer have a choice, they wish to see Nicholson remain autonomous within any company it is acquired by. The management and family are further most likely not willing to sell the majority of their shares for cash as they wish to remain involved in the company and have a stake in it. Cooper would therefore need to offer to exchange stock with them giving them a stake in the combined companies.

As VLN is competing to take over Nicholson it is unlikely that would be willing to sell their shares to Cooper for any reasonable price.

4. To own 80% of the outstanding shares of Nicholson Cooper will have to acquire the management and family’s share and half of the speculators shares and unaccounted for shares as well as Porter’s. Cooper already knows that it can acquire Porter’s stocks for common or convertible Cooper shares worth at least $50. Therefore, Cooper will have to offer at least this amount to the other shareholders. Cooper must make an agreement with the management of Nicholson to get them to agree to the deal, as it would be difficult to take over the firm without them and impossible to acquire 80% of it. Cooper will need to promise that the Nicholson firm will have autonomy within Cooper Industries following the takeover.

They will also have to work with the management to resolve any other worries they have concerning being integrated into Cooper, such as what job positions will be available to Nicholson management. If Cooper is able to come to an agreement with the management regarding these concerns, then their offer of $50 worth of Cooper shares per Nicholson share should be acceptable. VLN is offering Nicholson $50 worth of VLN stock which is much more volatile then Cooper stock and less easily traded, so the Cooper deal would be superior. As this price and form of payment, stock options, seems acceptable to both Porter and Nicholson management, we can conclude that this amount would also be accepted by a significant number of the other shareholders, especially if they are encouraged to accept the deal by management.

5. Mr. Cizik should recommend that Cooper management attempt to acquire Nicholson by offering preferred Cooper shares that can be converted into $50 worth of Cooper common stock. They should attempt to negotiate with management to get the Nicholson management to support a Cooper Industries takeover. It is unlikely that Cooper will be able to acquire the company without the support of management, and as they have always in the past made friendly mergers they would like to continue to do that.

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