COOPER INDUSTRIES CORPORATE STRATEGY (A)

Merger & Acquisition

ANIRUDH SINGH EM01
SUHAIL NASIR 26NMP55
SANTOSH K DIWAKAR 26NMP47
Group # 04
Big Problem : Cyclical natural gas business.
How to mitigate it?
Companys history
More than 150 years old company.
Before acquisition era,
Small but reputable maker of engines and compressors to
propel natural gas through pipeline.
Problem was faced due to cyclical natural gas business.
Risk mitigation. How?
Increase their size and scope by diversification. How?
Acquisition.
But first
To free top managers and corporate board directors from
the restraints of daily operations.
But acquisition may result failure accompanied with
huge losses.
Acquisition : What kind of companies to be acquired?
Cooper decided to acquire companies :
having Stable earning OR
having Earning countercyclical to the oil and gas transmission
industry.
having Products that serves basic need.
having Matured manufacturing technologies.
having Own strongest asset.
having belief in High quality.


Guidelines which can avoid wild diversification..
Acquisition ERA
Categorization can be done as under:
Tools Group
Energy

Both mitigate the risk of Cyclical natural gas business.
Tool Group Acquisition
Lufkins acquisition in 1967
Why Lufkin
Basic needs
manufacturer of
measuring tools for
lumber industry.
Market leader in its area.
Produced premium
quality products.
Few market fluctuations
in their sales.
Help Cooper level its cyclical revenues.
Crescent Niagara acquisition
in 1968
Why Crescent Niagara
Basic needs
manufacturer of Crescent
wrenches.
Recognized name in the
industry..
Produced premium
quality products.
DIVERSIFICATION
Tool Group Acquisition Contd
Weller manufacturing Corp.
acquisition in 1970
Why Weller manufacturing
Corp.
Basic needs manufacturer
of Soldering tools.
World leader in its area.
Wide market accessibility
North and South America
and in Europe.
Provide added marketing
power.
Why these companies?
VARIETY
MARKET ACCESSIBILITY
Divestment of 33 businesses between 1970 and 1988
New tool group formation requires changes
Revamping manufacturing operations.
Process and equipment up gradation.
Plant relocation to South zone.
Eliminate the low profit earning tools.
Centralized sales and marketing.
Retained only the best people after every acquisition.
Increase variety, quality and market accessibility.

Tool Group Acquisition Contd
Keep the best, divest the rest
Tool Group Acquisition Contd
Some more acquisition in
tool group
Nicholson File 1972
File and Saw maker.
Xcelite Nut Runners
1973
Fastners.
Wiss scissors 1976
Scissors.
Plumb hammers 1980
Hammers.

Dellas Airmotives 1970
Repaired and leased jet
engines.
Distributed aircraft parts
and supplies.

4 more acquisition to
supplant this business.

AVOID COMPETITION WITH MARKET LEADERS.
Reinforcing there earlier acquisition by new one
and always kept their policies and mantras before
acquisition.
Energy Division
Cooper retrenched & concentrated to their core business
Compression equipment for oil and gas.
Acquire Superior.
Makers of engines and natural gas compressors.
Filled the product line gap (between smallest and largest)

Energy Division
Acquire Gardner-Denver
1979
Manufacturer of petroleum
exploration, mining and
general construction.
Filled the gap of energy
division.
Kept product lines capable
of healthy development.
Eliminate others with little
potential.


Increase of scope : Exploration, production,
transmission, distribution, and storage
Acquire Crouse-Hinds 1981
World wide producer of
electrical equipment such
as receptacles, fittings etc.
Beldin acquisition after
Crouse-Hinds
Maker of electronic wire
and cables, and electrical
cords.


Increased variety :
Transmission,
control and
distribution of
electrical energy
from plant to end
user.
Electrical and Electronic Business
Acquire Crouse-Hinds 1981
World wide producer of electrical
equipment such as receptacles, fittings
etc.
Beldin acquisition after Crouse-Hinds
Maker of electronic wire and cables, and
electrical cords.
McGraw-Edison acquisition-1985.
Manufacturer of product for the control
and transmission of electrical energy.
RTE acquisition-1988
Makers of transformers and supplier of
related equipments.


Coopers acquisition traits
Always followed the basic policies .
Reason for Acquisition
Increase Variety
Economies of Scope
Economies of Scale
Market expansion
Focus on stable cash flow
Avoid competition with market leaders.
Corporate role & objective
Long term EPS growth rate of 5% above inflation rate.
ROE objective of 12% on top of inflation.
Long term D/E ratio target is of 40%.
Preferred cash or convertible preferred stock for
expansion.

CASH FLOW IS KING
Corporate role & objective
With each acquisition:
Tailored its structure to suit the new configuration of businesses.
De-centralized operating philosophy.
Active involvement in operating the acquired companies.
Divest, if required but made it profitable to earn more.
Operational responsibility operations.
Top level responsibility Long term policies, acquisition and
divestment.
Each division is a profit center.
Autonomous power to profit centers Fast decision making.
Established manufacturing service group for manufacturing
improvement. Etc.


Champions deal
Maker of spark plug for small engines.
Also windshield wiper blades.
Well known brand name.
Worldwide manufacturing facilities.
CSP is in trouble because
Declining market
Failed diversification
1950 Technology
Swollen corporate overhead
Profit dropped down to $24 million.


BASIC NEED
WORLD LEADER
MATURE
MANUFACTURING
PROCESS
WORLDWIDE
MANUFACTURING
FACILITY
OFFER: $21/share ($825 million)
FINANCIAL CALCULATION Champion Spark Plug
Dec-88 Dec-87 Dec-86 Dec-85 Dec-84 Dec-83 Dec-82 Dec-81 Dec-80
SALES 738000 719900 883800 829400 816500 764400 783700 818600 799800
EXPENSES 189600 187200 213800 194200 183800 178400 171900 185400 190600
NET INCOME 23600 19100 -17200 15200 27300 27000 26800 30300 36900
EPS 0.67 0.5 -0.45 0.4 0.71 0.7 0.7 0.79 0.96
DIVIDEND 0.2 0.05 0.2 0.4 0.4 0.4 0.8 0.8 0.8
TOTAL ASSET 575600 653000 647700 640800 579300 571700 590900 626000 636200
TOTAL CL 170300 202900 236100 211600 165800 161000 176700 183800 162900
LT DEBT 13900 17500 23500 29700 26000 22300 23300 31400 41400
TOTAL LIABILITY 184200 220400 259600 241300 191800 183300 200000 215200 204300
TOTAL EQUITY 349900 387400 351800 368700 359400 359500 361100 384300 405900
FINANCIAL CALCULATION Champion Spark Plug
ROE 0.0674
RR(1-PAYOFF RATIO) 0.7015
GROWTH RATE 0.0473
TOTAL NO OF SHARES 39285.71 (ASSUMPTION CONSTANT)
YEAR Dec-88 Dec-89 Dec-90
NET INCOME 23600 24716.61 25886.05
NPV 593743.94
CALCULATED SHARE VALUE $15.11
Champions deal
growth rate below 5%.
ROE is 6.74% .
Long term D/E ratio target is of 40%.
In case of both the acquisition, than D/E ratio will move
to 55% to 60%
ROS & ROA of Electrical & Electronic and Commercial &
Industrial was well above 14%.



Misaligned with CORPORATE OBJECTIVE
CAMERON IRON WORKS
Can acquire Cameron at the cost of $700 mill.
Manufacturer of Petroleum & Natural gas related
equipment.
Core competent in advance forging technology


Recommendation Cameron. Why?
Cameron deal was at low price as compared to CSP.
Bad condition because of overall industry was suffering but on the other hand
CSP was suffering because of high overhead cost and declining phase of the
industry.
Cameron has advanced forged technology, on the other hand CSP has
manufacturing technology of 1950.
Cameron product line will complement Coopers on the other hand CSPs main
product was at declining phase.
Coopers compression & drillings segment ROA & ROS was below 6% and was
performing pathetic as compared to other segments.
Cooper has only distribution in automotive parts and adding CSP may incur
financial burden on this segment.
There was a market slump in energy sector worldwide and this was the right
time to acquire related companies.


CSPs D/E > 50% ; Old technology ; Declining product phase.
Special thanks to Dr. Palakh Jain for her guidance