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Designing an Accretive

deal
Case: Cooper Industries,
Inc.
NMP-CRBV
Sources of value in the deal
• Familiarity with business
• Size benefits leading to scale
economies – SG&A expenses,
• Complementary: Industrial vs.
consumer markets, distribution set-up
• Stable business of Nicholson to
compensate for cyclicality of Cooper
business – lower volatility expected to
translate to better valuations
So what is the max Cooper can pay
for Nicholson?
• Depends on the extent to which synergies can be
realized – As an analyst how much faith can you
place on these forecasts?
– Revenue growth rate assumed
– Cost reductions assumed
– Forecaster’s bias, if any – Who prepared the forecasts for
Nicholson?
• What are Cooper’s priorities in this takeover battle?
– Beat Porter’s $42 bid while still creating value for its own
shareholders
– Ensure no EPS dilution immediately or in later years
– Ensure valuation of Cooper shares does not erode
(acquisitions in future using share swap possible)
– Assume controlling stake in Nicholson
When does an acquisition create value?
Deal cost = Deal cost =
How much Value of $5m $5m
Acquirer’s
of this value synergies
gain =
should be = $25m
$10m
given away
Value of

m
Premiu
Acqn.
as control

Goodwill
control =
premium to
$25m “Walkaway”
target
company offer price = Negotiated
Current market Target $145m
SHs? offer price =
valuation = standalone $135m
$85m
Current book equity
value valuation =
= $65m $100m
Forecasting Nicholson’s standalone
business
  1972 1973 1974 1975 1976

Operations
Net sales $58.62 $62.14 $65.86 $69.81 $74.00
Cost of goods sold $40.45 $42.25 $44.13 $46.08 $48.10
Selling, general, and
administrative expenses $12.90 $13.05 $13.17 $13.26 $14.06
Depreciation expense 2.1 2.1 2.1 2.1 2.1
Other deductions 0.2 0.2 0.2 0.2 0.2
EBIT $2.98 $4.53 $6.26 $8.17 $9.54
Taxes $1.19 $1.81 $2.50 $3.27 $3.82
NOPAT $1.79 $2.72 $3.76 $4.90 $5.72
Valuing Nicholson’s equity
  1971 1972 1973 1974 1975 1976
NOPAT $1.79 $2.72 $3.76 $4.90 $5.72
Add: Depreciation 2.1 2.1 2.1 2.1 2.1
Less: Capex 2.1 2.1 2.1 2.1 2.1
Less: Change in NWC 1.44 1.53 1.62 1.72 1.82
FCFF $0.35 $1.19 $2.14 $3.19 $3.91
Terminal value (When?) 83.00
PV factor 0.91 0.82 0.75 0.68 0.62
PV of cash flows $0.31 $0.98 $1.60 $2.17 $40.36
PV (Value of firm) $53.49
Less: LT debt 12
Value of equity ($ million) $41.49
What swap ratio does this 
Value per share of Nicholson 71.05 translate to?
Possible swap ratios and their impact

  1972 1973 1974 1975 1976

Cooper PAT before acquisition ($ million) $11.0 $11.9 $12.8 $13.8 $15.0

Nicholson PAT after acquisition ($ million) $1.3 $2.2 $3.3 $4.4 $5.2

Total PAT after acquisition ($ million) $12.3 $14.1 $16.1 $18.2 $20.2

Cooper EPS before acquisition $2.61 $2.83 $3.04 $3.27 $3.56
Max number of Cooper shares to maintain EPS
(million) 4.71 5.00 5.29 5.57 5.69

Existing Cooper outstanding shares (million) 4.21 4.21 4.21 4.21 4.21
Max Cooper shares that can be given to Nicholson
SHs (million) 0.50 0.79 1.08 1.36 1.48

No. of Nicholson shares outstanding (million) 0.584 0.584 0.584 0.584 0.584

No. of Cooper shares each Nicholson share will get 0.86 1.35 1.85 2.33 2.53

Translating into per share price for Nicholson ($) 20.74 32.33 44.33 56.01 60.68
Further…
• Are there ways Cooper can better this ratio for
Nicholson without facing EPS dilution?
• Is EPS accretion/ dilution a good yardstick to
determine acquisition price?
• Going by our valuation of the target (incl. synergies)
and EPS analysis, what would you offer as Cooper
management?
• As Nicholson, what points might you negotiate on?
Can book value per share be one of them?
• How should Cooper strategize around the offer and
various shareholder groups of Nicholson to gain
controlling interest?