Cooper Industries Inc.

Group 5
13P034
13P037
13P045
13P050

Case Background
Cooper Industries Manufacturer of heavy
machinery & equipment
Cyclical in nature
Cooper industries acquired:
A supplier of portable industrial power tools
A Manufacturer of small industrial air & process
compressors
A Maker of small pumps & compressors for oil field
applications

Nicholson File Company

Annual Sales growth 2% compared to industry
growth rate of 6% per annum
Profit Margins had slipped to only 1/3rd of other
hand tool manufacturers
Low P/E ratio of 10-14 compared to 14-17 for
other leading hand tool companies

Why Nicholson Co. was an attractive

acquisition target ?
Largest domestic manufacturer of hand tools
and a leader in its two main products
Files & Rasps (50% share of $50M market)
Hand Saws & Saw Blades (9% share of $200M
market; Second highest)

Strong Distribution System

Raid by H.K. Porter Company

Had acquired 44,000 shares of Nicholson Stock
in 1967
Offer: On March 3, 1972 Porter informed Nicholson management
of its plan to tender immediately for 437,000 of Nicholson s
584,000 outstanding shares at $42 per share in cash.

Offer would terminate on April 4th

$42 Cash represented $12 premium
Nicholson s Family & mgmt owned only 20% of
outstanding shares
Porter had ended up with 133,000 shares tendered
in request to its offer

Entry of VLN Corp!!!

Nicholson mgmt sought operating independence
Started to find an alternative merger
VLN Merger Terms

1 share of new VLN cumulative preferred stock would be

exchanged for each share of Nicholson common stock.VLN
preferred stock would pay an annual dividend of $1.60 &
would be convertible into 5 shares of VLN common stock
during the 1st year after the merger, scaling down to 4shares
after the 4th year. The preferred stock would be callable at $50
a share after the 5th year and would have liquidating rights of
$50 per share.

VLN Corp Offer: Good Or Bad ?

Nicholson pointed out :
Exchange would be tax free
$1.60 preferred dividend equaled the current rate on
Nicholson common stock
A preferred share was worth $53.10 (5 * 10.62)

Porter pointed out

VLN common stock had recently sold for $4.625
VLN had paid no common dividends since 1970,
hence income loss

Opportunity for Cooper?

Cooper estimated that Nicholsons COGS sold can
be reduced from 69% to 65%
Elimination of Sales & Adv. Expenses duplications
would lower selling, general and administrative
expenses from 22% to 19%
Cooper had acquired 29,000 shares of Nicholson
stock

EXHIBIT 7

Estimated Distribution of Nicholson File Company

Stock

SHARES SUPPORTING COOPER

H.K. Porter
Cooper Industries
TOTAL

177000
29000
206000

SHARES SUPPORTING VLN

Nicholson family and management
Owned by VLN
TOTAL

117000
14000
131000

SHARES OUTSTANDING
Shares owned by speculators
Shares unaccounted for
TOTAL

50000 - 100,000
197000 - 147,000
584000

Operations

1971

1972

1973

1974

1975

1976

Net sales

57.5

59.8

62.2

64.7

Net sales would grow at 4% per

67.3 annum

Cost of goods sold

37.4

38.9

40.4

42.1

43.7 (at 65% of Sales)

Selling, general & admin.

10.9

11.4

11.8

12.3

12.8 (at 19% of Sales)

Depreciation expense

2.2

2.3

2.4

2.5

2.6

interest exp

0.8

0.8

0.8

0.8

0.8

Operating Profit Before Tax

6.2

6.5

6.8

7.1

7.4

Taxes (a)

3.1

3.2

3.4

3.5

(Applying cooper's average historic

3.7 tax rate of 50%)

3.1

3.2

3.4

3.5

3.7

3.1

3.2

3.4

3.5

3.7

NET INCOME
Net income applicable to
common stock
Number of Shares Outstanding

584000 584000

584000 584000 584000

EPS

5.3

5.6

5.8

6.1

6.3

Dividend

1.6

1.6

1.6

1.6

1.6 (Similar Dividends as before)

54.97

58.94

63.15

67.63

72.37

14.00

74.5

77.9

81.4

85.0

88.8

Min Market Price

17.00

90.5

94.6

98.8

103.3

107.9

Max Market Price

Book Value per share

51.25

Price to Earning Ratio

Thank You