In the Case study, Cooper Industries is trying to acquire Nicholson File Company. However, there are two other companies that are interested in Nicholson as well: VLN Corporation and H.K. Porter Company. In 1971, VLN together with Nicholson management constructed a deal that, however, didn’t get the support from the majority of common stockholders.
After having done a discounted cash flow analysis, I determined that Nicholson stock is undervalued. Also, Nicholson seems to be a good strategic fit for Cooper. Therefore, Cooper could acquire Nicholson on friendly terms with a relatively large premium to attract the majority of the shares needed. The problem for Cooper is to determine how best to acquire Nicholson and the adequate price to pay.
1.) and 2.)
In my opinion, Mr. Cizik should make an attempt to gain control of the Nicholson File Company. Cooper Industries has been pursuing a policy of expansion through the acquisition of other companies and this strategy appears to be working well for them. They have acquired a number of companies and have been successful in integrating them into Cooper Industries. They have established three criteria that potential companies for acquisition must meet and Nicholson meets all three criteria. Nicholson holds 50% of the market share in files and rasps, its main products, therefore implying that Cooper could be a “major factor” in this industry. Nicholson is also a leading company in their markets and it is a stable company in terms of not being dependent on a few major customers. Nicholson has a great deal of potential for greater sales growth as it is only growing sales at 2% compared with the industry average of 7%.
Due to the strengths of its products and distribution system they should be capable of raising growth rates to the industry average. The company is further desirable to Cooper as the two companies sales forces could be combined leading to cost savings. Nicholson’s European distribution system could also be very helpful in expanding Cooper’s sales in Europe. As Cooper Industries sells more of their product to industry and Nicholson to the consumer market by combining the companies they may be able to increase sales of both product lines to the market segment they are weaker in. All in all, Mr. Cizik should try to gain control on Nicholson File company as it seems to be a good strategic fit.
Nicholson’s firm value derived by the means of DCF analysis amounts to $ 39.86 mio. After subtracting net debt, the value of Nicholson’s equity amounts to $ 28.86 mio. meaning an equity value per share of $ 49.42 (undervalued). This should also be the maximum price that Cooper should afford to pay for Nicholson.
Cooper analyzed the benefits of the merger with Nicholson. Cooper estimated that the cost of goods sold after acquiring Nicholson could be reduced from 69% of sales to 65% meaning a dollar value of this synergy of $ 11.27 Mio. Also, SG&A could be reduced from 22% of sales to 19% of sales resulting in a dollar value of this synergy of $ 8.45 Mio. These numbers are based on the combined net sales for 1972 using a 7% growth rate in sales from previous net sales (growth of industry level). The opposite distribution of business activity in business and consumer market is likely to result in revenue growth. The numerical effect of this revenue pulling, however, is highly vague at this point in time.
The exchange value Cooper could afford to pay out without causing any dilution according to my calculation is $ 37.12 per share meaning an Exchange Ratio of 1.55. Thus, we could offer 1.55 Cooper shares for every Nicholson share they need. This amounts to 133,013 of Coopers shares for 86,000 Nicholson shares. If they wanted to pay cash for the remaining stocks it would then be $37.12 * 86000 = $ 3.19 mio. for the remaining stocks needed to gain control via 50.1% of all shares. Despite the threat of EPS dilution, Cooper might be...