Cooper Industries, Inc.
Overview & Introduction
Cooper Industries is looking to acquire Nicholson File Company. It meets the three criteria that Cooper looks for in acquiring a company. “First, the industry should be one in which Cooper could become a major factor. The industry must be fairly stable, with a broad market for the products and a product line of ‘small ticket’ items. Finally, it had to be a leading company in their respective market segments.”
Two other companies are also interested in Nicholson: VLN Corporation and H.K. Porter Company. In 1971, VLN and Nicholson management constructed a deal that did not have the support from the majority of the outstanding common stockholders. They planned to exchange each share of Nicholson common stock for one share of VLN preferred stock, worth a minimum of $53.10.
After doing a discounted cash flow analysis, it was determined that Nicholson stock is undervalued. When the cost benefits are achieved the company is extremely undervalued. Therefore, Cooper could acquire Nicholson on friendly terms with a large premium to attract the majority of the shares needed. Cooper has never “made an ‘unfriendly’ acquisition and this one was to be no exception.” The problem is whether Cooper should acquire Nicholson and if so, what is the maximum price they should pay.
Analysis & Recommendation
With the provided assumptions, it was determined that the present value of Nicholson is $46,115,000 at the end of 1971 (see Exhibit A, B, C, and G). The price per share would be valued at $51.57, using Cooper’s capital structure and with Nicholson’s weighted average cost of capital (see Exhibit D). This is a $24.07 difference based on the closing price on December 31, 1971 of $27.50.
Cooper believes they will be able to reduce some of the overlap costs after the acquisition. First, they will eliminate some of sales and advertising...
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