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Cooper Case Solutions

Cooper Case Solutions

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Published by Darshan Salgia

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Published by: Darshan Salgia on Oct 17, 2011
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07/16/2013

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7/24/2011

Case Study: Cooper Industries
Mergers and Acquistions

. therefore implying that Cooper could be a major factor in this industry. Due to the strengths of its products and distribution system they should be capable of raising growth rates to the industry average. Nicholson’s European distribution system could also be very helpful in expanding Cooper’s sales in Europe. They have acquired a number of companies and have been successful in integrating them into Cooper Industries.Background 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 established three criteria that potential companies for acquisition must meet and Nicholson meets all three criteria. 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. The company is further desirable to Cooper as the two companies sales forces could be combined leading to cost savings. 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%. 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. its main products. Nicholson holds 50% of the market share in files and rasps.

In addition. . they estimated that Nicholson’s cost of goods sold could be reduced from 69% of sales to 65%. The target company must be: • In an industry in which Cooper could become a major player. with a broad market for the products and a product line of small ticket items. since they distributed between the consumer market at 25% and industrial market at 75%. The acquisition would eliminate the sales and advertising duplication. • • In an industry that is fairly stable. A leader in its market segment. which would lower the general and administrative expenses from 22% of sales to 19%. Cooper analyzed the benefits of merging with Nicholson.Criteria for acquisition Cooper Industries has been expanding through diversification since 1966. “75% of Nicholson’s sales were to the industrial market and only 25% to the consumer market” compared to the inverse for Cooper. Cooper’s requirements to acquire a company have three major components.

98 0.49 14.67 0.4711 1974 3. 43.04 0. taken as percentage of sales i.10 2.30 13. 3.90 12.14 2.20 2.66 16.68 24.32 1.4% Current Year NWC .80 0.20 2.78 $33.7312 2.20 2.51 16.18 2.68 40.91 1976 61.85 1975 59.17 0.84 17.9009 2.48 0.17 0.30 37.92 12.33 1.e.8% Should be ignored 1.49 12.13 13.32 0.34 .71 25.30 0.35 24.52 8.35 Tax Rate taken as 40% CA-CL.50 12.217 0.6587 2.41 38.47 0.e.98 Figures in Millions of Dollars except per-share data Assumptions Made Sales Growth takes as 2% It is 69% of the sales Taken as 22% of the sales Taken as same of the previous years Taken as Percentage of sales i.Previous Year NWC Taken as a percentage of the sales 1972 FCF (Free Cash Flow) Discounting @ 11% DFCF ∑PV 2.2726 1975 3.41 0.44 $21.32 2.66 0.80 2.Valuations: As Is Basis As Is Basis Sales COGS Selling Exp Other Deductions Dep EBIT Interest EBT PAT NWC Change in WC GFA Plant & Equipment Capex 1971 55.73 1973 57.0898 1976 3.00 0.97 0.53 39.77 17.5935 1.24 0.20 2.8116 2.98 0.27 2.91 0.51 10.00 1972 56.6836 1973 3.32 16.70 12.11 0.32 0.9220 FCFF NPV PV of CV ∑PV Less: Debt Value of Equity Expected Share Price $11.79 26.50 0.86 41.23 2.78 16.22 $12.20 2.20 2.64 24.43 0.75 25.00 $21.79 1974 58.22 $36.34 1.33 1.06 42.65 0.98 0.00 1.48 16.

39 Less: Debt $12.97 1.24 0.20 2.06 0.0139 FCFF NPV $16.96 4.81 45.82 11.4% Current Year NWC .14 0.6587 3.20 1.5935 3.81 8.35 24.65 8.7312 3.95 1973 62.50 7.23 6.62 38.9009 3.2951 1975 4.72 13.21 Tax Rate taken as 40% CA-CL.39 11.90 12. 43.80 2.99 30.20 2.78 .30 37.48 19. taken as percentage of sales i.51 0.06 1. 3.17 25.5979 1973 4.84 1975 69.8% Should be ignored 4.96 0.76 17.62 14.42 1.11 Price Synergy: $80.83 Figures in Millions of Dollars except per-share data Assumptions Made Sales Growth takes as 6% Taken as 65% of the sales Taken as 19% of the sales Taken as same of the previous years Taken as Percentage of sales i.00 48.08 4.8116 3.39 Expected Share Price $117.38 13.20 2.81 0.20 2.99 0.86 42.20 2.Valuations: To Be Basis To Be Basis Sales COGS Selling Exp Other Deductions Dep EBIT Interest EBT Net Income (PAT) NWC Chg in WC GFA Plant & Equipment Capex 16.70 28.10 2.10 11.00 1971 55.50 PV of CV $63.00 Value of Equity $68.30 0.14 40.43 26.44 1.58 1.51 0.Previous Year NWC Taken as a percentage of the sales 1972 FCF (Free Cash Flow) Discounting @ 11% DFCF ∑PV 3.44 16.26 0.e.38 1974 65.32 1976 74.10 14.80 0.02 4.30 32.e.78 0.68 21.1512 1976 5.81 12.12 20.14 5.53 15.89 ∑PV $80.96 16.00 1972 58.20 2.98 1.12 1.30 1.00 1.4449 1974 4.36 7.08 0.

 This use of debt rather than equity for the acquisition of Nicholson would lead to higher return on equity. the cost of financing as interest expense in the cash flow that subtracted from net income before taxes (TAX SHEILD) are accounted for first calculation of the income tax . with the profitability and assumptions we make in the first place.  The key is the cost of capital which is 11% so Cooper should maintain the cost of debt for the merger should not increase the CoC. the U.S. . reducing ROE and company control. So it leaves cooper with additional margin for borrowing. As this ratio increases.  As the company grows. If the company were more shares instead of the debt issue. it would change the existing capital structure resulting in equity dilution .  Another reason is to fund a debt.  Also existing Coopers debts are going to achieve maturity beginning from 1972. The profits will ACCUMULATE over time. the debt / equity ratio likely to change. so the leverage of the company increased by one point.  Debt is more than equity leads to a higher debt equity ratio. and are held in the company in the form of retained earnings .Strategy from cooper's perspective We recommend a loan for the financing preferred capital Structure for a number of reasons.  Since the Cooper and Nicholson are two companies heavy load of stock and inventory that must be funded in cash or liabilities so using existing cash for a acquisition will not be advisable. tax law that allows companies costs.This is exactly what many companies look for in a merger or acquisition.

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