Cooper Case Study Summary

COOPER CASE STUDY SUMMARY

Nicholson

Early in 1972 Nicholson dad to fend off a take over attempt by H.K. Porter Company Inc., which controlled 30.5% of the company's stock. Porter made a cash tender offer to stockholders. However, Porter did not get enough stock to take over Nicholson. In trying to fight the takeover Nicholson made several merger overtures to other companies like VLN Corp. A few years back, it had rejected an offer from Cooper Industries.

Cooper Industries & Nicholson

Cooper was interested in Nicholson because of its competitive strength in the hand tools industry. Nicholson had a 50% share for files and wraps with a very strong brand name and high quality line. It also had a 9% share of the 200 million handsaws and saw blades market with excellent brand & quality. It had a very effective and large distribution system across US, Canada and overseas. Cooper industries believed that Nicholson can achieve 6% annual sales growth and also bring down the cost of goods sold from 69% to 65% and selling and administrative expenses from 22% to 19%, thereby increasing its profitability. Cooper would be able to use Nicholson’s distribution system to cross sell Cooper’s hand tool lines in the industrial and consumer markets.

Cooper anticipated that the Nicholson acquisition would lessen its earnings volatility and currently Nicholson is in the merger market to fend off the raid by H K Porter Company.

Valuation of Nicholson File (without merger)

Please see Exhibit 1 and Exhibit 3 for details and assumptions

Assuming that Nicholson will continue to have sales growth equal to 2 % with cost of goods sold at 69% of the net sales, its market price will stay in the ($19 to $27 range in 1972) and ($22 to $31 in 1976) because of the operating in-efficiencies and lower profit margins (3% to 4 %) as also the un-certain ownership situation. Its share price is therefore lower then its book-value.

Its EPS will range from $2 to $2.25 over the next five years. Nicholson is getting a tax-rate of about 40%, lower than the 50% industry tax-rate because of investment tax credit and net income from partially owned foreign companies, especially in Europe.

Its stand-alone valuation as of 1972 will be $30.1 million and in 1976 will be $31.4 million on a book-value basis.

Valuation of Nicholson File as part of Cooper Industries

Please see Exhibit 2 for details and assumptions

Cooper Industries estimates that if Nicholson mergers with it, it will be able to move the EPS up to the $14 to $17 range, by bringing down the cost of goods sold to 65% from 69% of the net sales and selling expenses to 19% from 22%. This will increase the profit margin of Nicholson from 3% range to 10%.

Also, the Nicholson sales growth will increase form 2% to 6% because of synergies between the two companies and Nicholson will have access to both the industrial and consumer segment.

Its valuation will increase to $32 million in 1972 going up to $42 million in 1976.

Its share price under Cooper assumptions, on a stand-lone basis will go up to ($73 to $89 in 1972) and ($96 to $117 in 1976). Its EPS under Cooper assumptions will be in the range of $5.27 to $6.88 from 1972 to 1976.

The synergies for a Nicholson and Cooper merger will increase the earnings for shareholders of both the companies, as they can cross-sell their products across a wider market at a higher margin, with reduced expenses.

Valuation of Cooper Industries (without merger)

Please see Exhibit 4, Exhibit 6 and Exhibit 7 for details and assumptions

Cooper is valued at $84 million in 1972, with sales growth of 6% and a tax-rate of 50%. Its profit margin is around 10% and the EPS will be from $2.61 to $3.56 in 1972 to 1976.

Its PE ratio is very volatile $9 to $18 in 1972 and because of the cyclical nature of some of its earnings component, its share price ($23 to $47 in 1972) and EPS fluctuates a lot. In 1971, the EPS came down to $1.11 because of a cyclical down-turn, from $2.73 in 1970. Exhibit 7 shows the EPS trend for Cooper industries from 1967 to 1971.

Valuation of Cooper Industries after merger with Cooper Industries

Please see Exhibit 5, Exhibit 6 and Exhibit 7 for details and assumptions

Cooper is looking to assemble a strong presence in the non-powered hand tool industry to reduce this fluctuation in its earnings. Cooper sees Nicholson as a good fit to its product line