Q.1: If you were Mr. Cizik of Cooper Industries, would you try to gain control of Nicholson
File Co in May 1972?
Looking at the credentials of Nicholson, I would definitely have tried to gain control of the Nicholson. As Nicholson bore competitive strength in hand tools industry, also Nicholson had ‘A’ grade repute in the market, strong brand name with 50% share for files and wraps. It had extremely large and highly effective distribution across the world. Nicolson’s financial statements indicate that it had the potential of not only achieving up to 6% annual growth, also it could also cut down the COGS from 69% to 65%, and could lower the selling and administrative expense to 16% from 22%. These could effectively contribute to the company’s profitability. By gaining the control of Nicholson, Cooper would be able to use Nicholson’s distribution system to cross sell Cooper’s hand tool lines in the industrial and consumer markets.
Q.2: What is the maximum price that Cooper can afford to pay for Nicholson and still keep the
acquisition attractive from the standpoint of Cooper?
Reviewing Exhibit 5, 6 & 8, it can be concluded that Cooper should offer to pay up to $50 / Share to Nicholson.
Mr. Cizik should take the plunge and acquire Nicholson File at $50 a share, estimating Nicholson File on a standalone basis at about book value of $30 million. For 1 Nicholson share cooper would have to issue 2.08 Cooper shares. This will sum up to issuing 1.2 Cooper shares to Nicholson Shareholders for cent percent stock of Nicholson. This will make the agreement a tax free event, which was one of the compulsions for HK porter for supporting the merger with Cooper. The acquisition would still be attractive as per valuation, the value of Nicholson comes to be 65.32$ whereas the book value shows a lower figure of 51.25.This proves that the share price is being undervalued and acquisition will be profitable and hence cooper should acquire Nicholson. Also, the addition of Nicholson Files’ product lines will provide stability to the Cooper revenues and enhance the Cooper brand. According to Exhibit 7, Cooper Industries will still continue to maintain its trend of upward earnings per share.
Q.3: What are the concerns and what are the bargaining positions of each group of Nicholson
stockholders? What must Copper offer each group in order to acquire its shares?
The price band that Cooper is offering is between 45 & 50$ per share. Cooper will have to raise a capital of $38 million for which they will have to take in to account the options of debt or equity financing. This can also be done by partial financing from either instrument.
While putting together their bargaining offer to acquire the Nicholson, Cooper must consider three major groups’ shareholders of Nicholson. These groups are Management of Nicholson, H.K. Porter, and the group of Unaccounted for Shares and Spectator Shares.
Management of Nicholson: As the management might not be willing to lose control of the company they will be offered a swap at a ratio of 2:1
For H.K. Porter: Cooper should offer a price somewhere between 50 & 53$ acquire 177000 shares from H.K. Porter.
Remaining shares shall be bought from the market by paying a higher price in comparison to the current market price as those shareholders’ only concern is higher profits or short term gains.
Q.4: What should Mr. Cizik recommend that the Cooper management do?
After all the views, review, suggestions, comments and calculations it can be deduced that acquiring Nicholson would be a profitable business agreement. Mr. Cizik should recommend the Cooper management to work out a schedule to finance this deal. Mr. Cizik could recommend the ways to the capital which sums up to 12.5 million $.
Firstly from the cash balance that is $9 million out of which $3 million could be used for capital financing.
Secondly a Swap worth $5.2 million could be offered to the management i.e. for every single share of Nicholson, Cooper could offer its 2 share, determining the ration to 2:1.