Cooper Industries Case Study

Group 4:
Abhishek Soni (14MF27)
Maithili Chopra (14MF06)
Manaal Shaikh (14MF24)
Vinit Sanghvi (14MF22)

Present Scenario

For every share of Nicholson, VLN is offering one 1 preferred share (which can be
converted to 5 common shares)

Porter valued Nicholson at USD 24.5 million.

Cooper needs to acquire at least 263,584 shares to get management control

Cooper assumptions:

Can take annual sales growth of Nicholson from 2% to 6% industry growth rate by
mid 1970s

Profit margins can be doubled

PE can be expanded to 14-17(industry standard) with stronger fundamentals.

Preliminary valuation assumptions

Nicholson
Revenue
growth

2%

COGS

69%

SG&A

22%

Tax

40%

Cooper
Revenue
growth

6%

COGS

77%

SG&A

13%

Tax

5%

Financial Implications of the merger

Projected Income statement of Merged entity
OPERATIONS
($MILLIONS)
Net sales
Cooper
Nicholson
Cost of goods sold
Depreciation
Selling & admin
expenses
Interest expense
PBT
Income taxes
PAT

1972
264
208
56.4
188.9
6.4

1973
273
214
58.7
194.3
6.4

1974
288
227
61.0
204.6
6.5

1975
303
241
62.2
215.3
6.5

1976
319
255
63.5
226.6
6.6

39.2
3.5
26.5
10.6
16

40.2
4.6
27.3
10.9
16

42.2
4.8
30.0
12.0
18

44.3
5.1
31.8
12.7
19

46.5
5.3
33.6
13.5
20

EPS Analysis
Year

1972

1973 1974 1975

1976

EPSNicholson

1.8

1.8

1.9

1.9

2.0

EPS-Cooper

1.5

1.4

1.7

1.9

2.1

EPS- Merged

2.7

2.8

3.1

3.3

3.5

Synergies lead to improved profitability and increased EPS

Better management allowing higher growth rate

Reduction in COGS

Consolidation and reduction in selling expenses

Boundaries for Exchange Ratio

Present share prices:
Cooper: $24
Nicholson: $44
On basis of projected EPS for 1972,
Minimum boundary: .53
Maximum: 2.09
2 shares of Cooper per share of Nicholson looks ideal.
The negotiation range is wide but Cooper Industries wont be
benefitted by the synergies beyond an exchange ratio of 2.1

Shareholders dilemma in a nutshell

Shareholder group

Number of
shares held
177,000

Areas of concern

Action alternatives

1. Wants tax-free exchange

2. Doesn't want VLN stock

Nicholson family &

management

117,000

1. Want operating freedom

1. Raise bid
2. Sell to Cooper at a price
exceeding $50/share if offer is
made
1. Stay with VLN

2. Want tax-free exchange

Speculators

1. Want short-run gains

50,000100,000

Non speculative
uncommitted shares

147,000197,000

Cooper Industries

VLN

29,000

14,000

H.K. Porter

2. Reach accommodation with

Cooper
1. Tender to VLN

2. Tender to Cooper if offer

made

3. Sell in open market

1. May have some allegiance 1. Tender to VLN
to Nicholson management
2. Low tax basis
2. Tender to Cooper if offer
made
3. Unsure of VLN offer
3. Sell in open market
1. Wants control of Nicholson 1. Make tender offer
2. Doesn't want VLN stock
2. Tender to VLN
1. Wants control of Nicholson 1. Raise bid if Cooper makes an
offer

The Offer Summary

The Acquisition will make Cooper a stronger player

New EPS of $2.7 in 1972

All stock offering

o

Will save cash in the Balance Sheet

Will not attract taxes

2 Shares of Cooper per share of Nicholson

Value of merged entity as 10% discount rate at 248 million USD against 180
million USD on as is basis