Cooper Case Study

By Deeksha Kamath (34) Esha Khurana (39) Garima Nahar (40)

Introduction
Cooper industry, H.K. Porter Company and VLN Corporation are entangled in a battle over the takeover of Nicholson File Company. Both H.K. Porter Company and VLN Corporation have already made their offers to the Nicholson File Company shareholders and now the management of Cooper Industry have to decide whether to jump into the foray for the control of Nicholson File Company or not.

The major issues faced by the management of Cooper Industry are as follows:
Is Nicholson File Company an attractive acquisition target for Cooper Industries? Specifically, what synergies can be created by merging these firms, and in what other aspects is Nicholson an attractive target? In what respect, if any, is Nicholson not an attractive target? Overall, is there sufficient strategic fit to justify pursuing this acquisition?

What should be the range of prices Cooper Industries should be willing to pay for each share of Nicholson's stock, in case it wants to acquire the firm?

Strategic Analysis - how does Nicholson fit into Cooper's acquisition strategy?
As Cooper is into cyclical businesses of oil and gas which is heavily correlated with the state of the economy. The hand tools business is a lot less cyclical and cash flows are likely to be less lumpy. This fits in with Cooper's requirement of smoothing its income flows. The hand tools industry has a broad focus ranging from files to saws and hammers - mostly small ticket items. This ensures that Nicholson does not depend on any particular customer/industry for its revenues, as is the case with Cooper. Nicholson is the market leader in files and rasps and ranks 4th in handsaws and saw blades. Thus it very much fits into Cooper's strategy of acquiring only leading companies.

Calculation
Excel Sheet

Inference
As per our calculations the value of Nicholson comes to be 65.32$ while the book value is 51.25.This shows that as the share price is being undervalued the acquisition will be profitable and hence cooper should acquire Nicholson.

The price band we are willing to offer is 4550$ per share. Cooper needs to raise a capital of $38 million. They can either go for debt or equity or we can take part debt and part equity. The company needs to hold 51.1% of the stake to gain control.

The following offers will be made to the stakeholders

Management of Nicholson as the management would not like to lose control of the company they will be given a 2:1 swap. To Porter: we will acquire 177000 shares from porter at a price anywhere from 50 53$.

Rest of the share will be bought from the market, as they want short term gains, we would pay just a price higher than the current market rate. (46-48$)

To raise the above capital, we will need 12.5 million $. Modes of financing are as follows:

Cash balance: $9 million out of which $3 million will be used for capital financing.

Swap is worth $5.2 million will be made to the management i.e. 2 shares of cooper for every share of Nicholson.

Rest will be bought from the market at a premium of $2-4 i.e. $46-48.

Thank you