Cooper Industries, Inc.
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The management of Cooper Industries, Inc., is considering whether to acquire the Nicholson File Company, a leading manufacturer of hand tools. The Nicholson family and other members of the management group own about 20% of the Nicholson stock; the remainder is publicly held. From the standpoint of Cooper, an affirmative decision may involve Cooper in a bidding contest with two other companies, which have already purchased part of the outstanding Nicholson stock and made tender offers in an effort to acquire control of Nicholson. If Cooper decides to proceed, it must determine what price it will have to pay in order to acquire control of Nicholson and whether it can reasonably afford to pay this price for Nicholson. These decisions must be made in the light of the interests, motivations, and bargaining positions of several widely divergent groups of Nicholson stockholders. After these questions are resolved, the Cooper management must determine its precise acquisition tactics.
Suggested Questions
If you were Mr. Cizik of Cooper Industries, would you try to gain control of Nicholson File Company in May 1972?
What is the maximum price that Cooper can afford to pay for Nicholson
and still keep the acquisition attractive form the standpoint of Cooper? [Treasury Bills yielded 5.6% in May 1972.]
What are the concerns and bargaining positions of each group of Nicholson stockholders? What must Cooper offer each group in order to acquire its shares?
On the assumption that the Cooper management wants to acquire 100% of the outstanding Nicholson stock and to make the same offer to all stockholders, what offer must Cooper management make-in terms of dollar value and the form of payment (cash, stock, debt)?
What should Mr. Cizik recommend that the Cooper management do?
Table TN-A Operating Cash Flows of Nicholson If Acquired by Cooper (millions of $)
Actual _____Projected______
1971 1972 1973 1976
Net sales (6% per year growth
$55.3 $58.6 $62.1 $74.0
Cost of goods sold (69%, 67%, 65%)
37.9 39.3 40.4 48.1
Selling, general, administrative expenses
(22%, 21%, 20%, 19%)
12.3 12.3 12.4 14.1
Depreciation
2.1 2.1 2.1 2.1
Other deductions
.2 .2 .2 .2
Profit before taxesa
$ 2.8
$ 4.7 $ 7.0 $ 9.5
Taxes (at 40%) 1.1 1.9 2.8 3.8
Profit after taxes
$ 1.7 $ 2.8
$ 4.2
$ 5.7
Add back: Depreciation
2.1
2.1
2.1
2.1
Cash flow from operationsa
$ 3.8 $ 4.9
$ 6.3
$ 7.8
aNo interest charges are reflected in these figures, since these cash flows will be discounted in Exhibit TN-1 at an appropriate cost of capital or arrive at a value for the total cash flows projected from the Nicholson operations. The actual 1971 data for Nicholson are adjusted to remove interest expense in 1971.
Table TN-B Rough Estimate of Weighted Cost of Capital for Nicholson
.04
.31
.012
Common stock
.13
.69
1.00
.102
aIn this rough calculation, market weights are used for the capital structure, with the market value of Nicholson stock at $44.
Table TN-C Exchange Ratios Causing No Dilution of Cooper’s EPS
1972 1973 1974 1975 1976
Maximum number of Cooper shares that could
be issued for Nicholson shares without
diluting Cooper’s earnings per share (millions)
1.34
1.45 1.5 1.46
Number of Nicholson shares outstanding (millions) .584
.584 .584 .584 .584
Number of Cooper shares that could be offered for
one Nicholson share without diluting Cooper’s
earnings per share for the year in question
1.64
2.29 2.48
2.58 2.50
Exhibit TN-1 Calculation of Value of Nicholson to Cooper Based on Discounted Cash Flow Analysis
(millions of dollars except per share data)
1972 1973 1974 1975 1976 1977 1978 1979 1980 1981
Projected cash flow from operationsa
Terminal value at end of 10 yearsb
Deduct: