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Cooper industry, H.K. Porter Company and VLN Corporation are entangled in a battle over the takeover of Nicholson File
Company.
Both H.K. Porter Company and VLN Corporation have already made their offers to the Nicholson File Company
shareholders and now the management of Cooper Industry have to decide whether to jump into the foray for the control of
Nicholson File Company or not.
The major issues faced by the management of Cooper Industry are as following:
1.Is Nicholson File Company an attractive acquisition target for Cooper Industries? Specifically, what synergies can be
created by merging these firms, and in what other aspects is Nicholson an attractive target? In what respect, if any, is
Nicholson not an attractive target? Overall, is there sufficient strategic fit to justify pursuing this acquisition?
2.What sort of integration issues is Cooper Industry likely to face if it is successful in acquiring Nicholson? What should
Cooper's management do to facilitate successful integration?
3.What should be the range of prices Cooper Industries should be willing to pay for each share of Nicholson's stock, in case
it wants to acquire the firm?
Strategic Analysis - how does Nicholson fit into Cooper's acquisition strategy
Cooper could become a major factor in the hand tools business given its expertise in manufacture of machine tools.
Moreover, one of the main problems that Cooper faces currently is a large cyclicality in its business, characteristic of the
heavy machine tool industry, but more pronounced because of its dependence on Oil and Gas industries. These industries
are heavily correlated with the state of the economy. So when there is a slowdown, Cooper would be one of the first
companies to go down - something that they would want to avoid through diversification by way of acquisitions. The hand
tools business is a lot less cyclical and cash flows are likely to be less lumpy. This fits in with Cooper's requirement of
smoothing its income flows.
The hand tools industry has a broad focus ranging from files to saws and hammers - mostly small ticket items. This ensures
that Nicholson does not depend on any particular customer/industry for its revenues, as is the case with Cooper.
Nicholson is the market leader in files and rasps and ranks 4th in handsaws and saw blades. Thus it very much fits into
Cooper's strategy of acquiring only leading companies.
The Nicholson acquisition would come on the heels of 3 previous acquisitions, all in the hand tools business, showing
definite intent on the part of Cooper to move into this line. Nicholson would provide a wider range to Cooper's current hand
tools portfolio. The idea was to build a comprehensive hand tools company that could share the common distribution
channels as the parent company, thus improving returns.
As per its outlined strategic policy Cooper should look at Nicholson as a favorable acquisition target.
Improvements in Nicholson's operations as a result of the acquisition
Cooper believes that some of Nicholson's product lines are not profitable, a case which is very common in family run
businesses. Cooper's view is that if Nicholson focuses on its profitable product lines then it can reduce its inventory costs
and manufacturing efficiency causing the COGS to reduce by 4% of sales.
The distribution network required for selling Nicholson's products are the same as those maintained by Cooper for its
acquired hand tools businesses. So in case Cooper acquires Nicholson, the Selling, General and Administrative expenses
will reduce by 3% of sales.
On the basis of these two reductions itself, the PBT of Nicholson would rise by about 7% of its sales value. In 1971, the net
sales figure was $55.3 mn. Therefore the PBT would increase by $ 3.87 mn.
PBT = $ 5.89 mn
PAT = $ 3.54 mn (tax @ 40%)
Equity = $ 31 mn
ROE = 11.4%
This is much higher than the current ROE levels. Thus Nicholson has a lot to gain from increases in ROE.
As per our projections of ROE, (assuming that the synergies take around 4 years to settle in) the ROE rises from 6.73% in
1972 to 12.25% in 1977, meaning an increase of almost 100% in 5 years.
There are more synergies to be gained from the acquisition, though these are more difficult to quantify. As mentioned in the
case, the sales pattern of Nicholson and Cooper's hand tools business are complementary. Nicholson has strengths in the
industrial sector, whereas Cooper is more into the consumer market. Thus an acquisition would lead to a possibility of
Nicholson pulling Cooper's hand tools line into the industrial sector (as a result of its strong brand equity in this sector) and
vice versa. This would help both to increase their share of the pie in either sector.