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Case Study on Diversification Merger & Acquisition

GROUP I Gopalkrishnan 214 Saket Jain 217 Shraddha Kakade- 219 Bhavin Parekh - 232 Natasha Patel - 235 Saubhagya Seksaria - 243 R Venkatraman - 256

About Cooper Industries

Cooper Industries- founded in 1833 by brothers Charles and Elias Cooper The company started as a foundry and was initially called the C&E Cooper Company.

Coopers initial product offerings included plows, hog, troughs, kettles and stoves
In Mid 1950s, Cooper Industries became the national leader in pipeline compression engines, products that enabled the development of the growing oil and gas industry Since it wanted to reduce its exposure to more cyclical industries such as automotive and petroleum, Cooper underwent a period of portfolio rationalization starting in1959. This was mainly accomplished with it relying heavily on Mergers & Acquisition

Understanding Merger & acquisitions


Although they are often uttered in the same breath the terms merger and acquisition mean slightly different things.

Acquisition
When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

Merger
Merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. Both companies' stocks are surrendered and new company stock is issued in its place.

Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.

Rule of Acquisition in this case:


Under Rhode Island Law Company must own majority shares (51.1%) to merge the target company

Cooper Acquisition Strategy


Coopers requirements to acquire a company have three major components. The target company must be: In an industry in which Cooper could become a major player. In an industry that is fairly stable, with a broad market for the products having large customer base. A leader in its market segment.

Cooper History of acquisitions:


1959-1966 Supplier- portable Industrial power tool Manufacturer- small industrial and air compressor Manufacturer of small pumps and compressors for oil field applications Manufacturer of tyre changing tools for automotive industry Advantages Broadening of market for Cooper Disadvantages Company was still sensitive to the economic conditions

Worlds largest manufacturer of measuring tape & rules

1967-(Lufkin Rule company)


Advantages
Acquired a quality product line An established distribution system of 35000 retail hardware store in US, Canada & Mexico. Gained service of William Rector & Hal Stevens of Lufkin who were knowledgeable in the hand tool business

Manufacturers of the best wrenches, pliers, screwdrivers


1969- (Crescent Niagara Corporation)
Advantages Acquired a quality product line comprising of High-quality wrenches, pliers, screwdrivers

Disadvantages It was a loss making company which needed to be turned around by restructuring and stopping production in inefficient plants and products

A leading supplier of soldering tools

1970 -(Weller Electric Corporation)


Advantages
Production capacity in England, West Germany & Mexico. Exposure to new markets

Advantages of Merger & Acquisition

Economy of scale Economy of scope Increased revenue or market share Market Dominance Cross-selling Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage Geographical or other diversification into new Markets Resource transfer: resources information asymmetry or by combining scarce resources Vertical integration: Vertical integration occurs when an upstream and downstream firm
merges. Reason e.g. Double marginalization. It occurs when both the upstream and downstream firms have monopoly power

Empire-building

Synergy:
Synergy can be defined as the value that is created by combining companies, which yields a result greater than the value of these companies as separate entities.

Improve profit margin by working together instead of as competitors. Control Price Control Cost Growth Greater Sales Expansion Improved Distribution System

Capital Arrangement of M & A


Finance the acquisition by Issuing shares Offer Preferred Stocks Debt Bonds Warrants All Cash Deal Cross Holding Deal Initial Public Offering

Leading manufacturer of File & Rasps

Reason For Targeting Nicholson File Company -1971


Having 50% market share of 50 million$ market for file & rasps Enjoying 18 million$ market share in Saw Blades Having a distribution network of 53000 retail outlet through 2100 hardware wholesalers. Presence in 137 countries World-Wide.

Facts about the Nicholson File Company:

The Nicholson family and other members of the management group own about 20% of the Nicholson stock; the remainder is publicly held. Vulnerability to be acquired Annual Sales Growth of 2% below industry growth rate of 6% poor bottom lines compare to other hand tool manufacturer Poor Market Sentiments on stock reflected in its poor P/E Ratio. Valuation of Stock more on the basis of dividend yield rather than hope for capital appreciation Net Worth of the company is presumed on the basis of Book Value (1971) which is 51.25$ Per Share

OPERATING PERFOMANCE
NICHOLSON
(Million of $ Except Per Share Data) 1967 Operations Net Sales Cost of Goods Sold Depreciation Selling & Adm Exp Interest Expenses Other Deductions Income Before Tax Income Taxes Income Before Preferred Div 48.5 32.6 2 10.7 0.4 0.3 2.5 0.6 1.9 49.1 33.1 2.3 11.1 0.7 0.1 1.8 0.84 0.96 53.7 35.5 2.4 11.5 0.8 0.2 3.3 1.31 1.99 54.8 37.2 2.3 11.9 0.8 0.2 2.4 0.88 1.52 55.3 37.9 2.1 12.3 0.8 0.2 2 0.67 1.33 1968 1969 1970 1971

Common Stock of Nicholson


Earning Per Shares Before Extraordinary Items Dividends Per Shares Book Value Per Shares Maket Price Price / Earning Ration 3.19 1.6 45.66 33-46 10-14 1.65 1.6 48.03 35-48 21-30 2.88 1.6 49.31 29-41 10-14 2.64 1.6 50.2 25-33 9-13 2.32 1.6 51.25 23-32 10-14

Percentage of Sales
Cost of Goods Sold % Selling & Adm Exp Income Before Tax And Extraordinary Items 67 22 5.2 67 23 3.7 66 21 6.1 68 22 4.4 69 22 3.6

Synergy Between Cooper & Nicholson :

Cost Of Good Sold reduction from 69% to 65% of sales Leading to additional Income of 2.20 Million $ Selling, General & Administrative Expenses reduction from 22% To 19% Leading to additional Income of 1.68 Million $ The above two savings would results in increase in income before tax by almost 291% On 1971 Level Increase in market reach in industrial market segment by 300% for Cooper Product Range Increase in market reach in consumer market segment by 300% for Nicholson Product Range The above two points creates potentiality for substantial increase in sales for both the companies. Presuming modest growth rate @ 20% due to Synergy could result in increase In revenue of 55.66 Million $ over 1971 levels leading to additional Income of around 5.5 Million $ as a group

($ In Millions) Nicholson

Net Sales
Saving Due To Reduction In COGS by 4% Saving Due To Reduction In Selling General & Adm. Exp by 3% Total Saving due to synergy (a)
Cooper

55.3
2.20 1.68 3.87
Nicholson
55.3 11.06 7.19 2.10 1.77

Sales 1971 level

208 41.6 32.03 5.8 3,77

Presuming additional sale @ 20%


Cost of Goods Sold Selling General & Adm. Exp Additional Income due to increase in revenue (b)

5.54

Additional Income Due To Acquisition Synergy (a) + (b)

9.41

Cooper competition for Acquisition VLN and its offer


Diversified company with majorly into publishing and replacing automotive equipments. Offer one share of new VLN cumulative convertible preferred stock in exchange of each shares of Nicholson. Would pay an annual dividend of $1.6 Preferred stock would be convertible into 5 common stock of VLN in first year and 4 common stock after fourth year. The above offer has the approval of the management of Nicholson.

H.K. Porter Company


Foe turned friend Large conglomerate with wide ranging interest in electrical equipments, tools, nonferrous metal and rubber products.

Existing holding - 44000 shares of Nicholson


Acquired 133000 in open market offer @of 42$ per share Total holding in Nicholson File Company is 177000 shares comprising of 30.31% of the total share capital Out of the race to acquire remaining shares to gain control due to negative publicity and no support of Nicholson Management.

H.K. Porter Company has two options:


To let VLN takeover Nicholson or support Cooper. Not ready to support VLN due to following reasons. Lack-Luster performance of VLN Does not see significant growth potentiality with VLN Low yield of 1.6$ per preferred share offered by VLN Vis a Vis market yield on straight preferred stock of 7% Does not agree with VLN common stock valuation of 10.63$per share and feels it is worth only 4.625% per share.

Due to the above does not want its holding of 177000 share in Nicholson to be depreciated by converting into VLN preferred stocks or common stock.

Keeping the above in mind it has no option but to turn to Cooper Industries.

Cooper Target To Acquire Nicholson


Shares Distribution Of Nicholson
Magic Figure For Acquisition (584000*51.1%) Shares In Hand - Cooper Balance Shares To Be Acquired 292584 29000 263584

Potential Support Priority


HK Porter Shares Unaccounted For (Average) Shares Held By Speculator (Average) Nicholson Family & Management Own By VLN TOTAL 177000 172000 75000 117000 14000 584000

Practical Price Target For Nicholson Acquisition by Copper


Minimum Price For Acquisition by various routes Routes Per Share 44 $ 50 $ 51.25 $ Financial Arrangements Cash Common Stock / Convertible Securities Open Offer - Cash / Common Stock / Convertible Securities

Market purchase at Current Price


H K Porter Book Value

Funding Arrangements For Acquisition


Fund Available Available Cash More Than Required Dilution Of Equity 9

Issue Of Equity
Infuse Of Debt / Bond Current Debt / Equity Ration is favor to Raise Debt Total needed and available 13 4

Products Of Cooper Industries As On Today

AMI /Audible/Visual Signaling- MEDC /Cable Management /Capacitors (Power)/ Comm./Data /Control Stations /Demand Response /Dielectric Fluids /Electrical Automation Systems /Enclosures-Bline /Enclosures-Crouse-Hinds /Electrical Junction Boxes/ Emergency Communications /Energy Automation /Field bus /Fire Life Safety/ Fittings / Cable Glands /Fuses (or Fusing Protection) Busman /Fuses - Power Systems /Grating Products /Hand Tools /Industrial Ethernet /Industrial Security /Industrial Wireless /Instrument Junction Boxes /Instrumentation Protection /LightingControls /Lighting-Area Site /Lighting-Commercial Office /Lighting-Complex Environment /LightingHazardous Lighting /Lighting-Warehouse /Line, Installation and protection equip /Manual Call Stations /Meter Mountings /MRP (Molded Rubber Products) /PA/GA - MEDC /Panel Boards /Pipe Hangers & Mechanical Supports /Plugs and Receptacles /Power Tools /Pre-fab Systems /Process Alarm Equipment /Power System Analysis Software /Regulators /Spring Steel Fasteners /Strut Systems / Bolted Framing /Surge Protection /Surge Protection - Power Systems /Switches /Switchgear /Transformer Pad mount /Transformer Pole Mount /Transformer Substation /Wiring Devices

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