Jonathan De Leon
Mary J. Roy
University of Phoenix Online
Advanced Problems in Finance
September 5, 2005
Cooper Industries Inc.
Based on the given information in the case study regarding the acquisition of Nicholson File Company by Cooper Industries, there is no question that Cooper should try to gain control of Nicholson. This decision is based on an analysis of the bargaining positions of each group of Nicholson stockholders which have disparate goals and needs that need to be met. In addition, an appropriate payment method and specific dollar value based on a competitor's offer and Cooper financial data was decided. The remainder of this paper will provide the analysis and rationale for this determination. Should Cooper Industries Acquire Nicholson File Company?
Cooper Industries has been expanding through diversification since 1996. Cooper's requirements to acquire a company has three major components. The target company must be: 1.In an industry in which Cooper could become a major player 2.In an industry that is fairly stable, with a broad market for the products and a product line of small ticket' items; and 3.A leader in its market segment.
When looking at the criteria that Cizik's company (Cooper Industries), set forth relative to acquisitions, the acquisition of Nicholson meets all three objectives plus has significant potential short and long-term potential. Cooper management feels that by eliminating redundancy and streamlining Nicholson's operations this potential can be realized. Currently, Nicholson's financial history boasts a 2% increase in profit annually but this percentage is way below the industry average of 6%. Cooper management proposed that if Nicholson stops selling to every market, increased efficiencies would result and cut cost of goods sold from 69% of sales to 65%. It was also suggested that the acquisition could lower selling, general, and administrative expenses from 22% of sales to 19%.
Nicholson's position in the file and rasp market where it holds a 50% market share of a $50 million dollar market meets all three of Cooper's objectives. Furthermore, Nicholson's brand name within the hand saw and saw blade industry is strong and Nicholson holds a 9% market share in the $200 million dollar their only major competitor was Sears and Diston who held a larger market share. Shareholder Standings
At the time of the proposed merger between Nicholson File and VLN, there were a total of approximately 584,000 Nicholson shares outstanding. H.K. Porter had not purchased enough shares to hold majority control, and this situation provided Cooper with yet another opportunity to acquire Nicholson.
Nicholson and Porter stockholders had their own concerns, as well as bargaining positions, and if Cooper was to acquire Nicholson they had to address all of their concerns and convince them that the merger was a mutually beneficial proposition. The table below, Exhibit 7 in the case study, shows the estimated disposition of shares in early 1972: Estimated Distribution of Nicholson File Company Stock_______________
Shares supporting Cooper
Cooper Industries 29,000206,000
Shares supporting VLN
Nicholson family and management117,000
Owned by VLN 14,000 131,000
Shares owned by speculators 50,000 100,000
Shares unaccounted for197,000 147,000
Total Nicholson shares outstanding584,000
There are three major groups of shareholders that Cooper must consider when putting together their offer to acquire Nicholson. These groups are Nicholson, H.K. Porter, and the group of Unaccounted for Shares and Spectator Shares. Nicholson File Company
Loss of control - Nicholson management's greatest fear was loss of operating control. The company had been in the Nicholson family for years, and if Cooper expected to...