Case Study on Diversification Merger & Acquisition

GROUP I Gopalkrishnan – 214 Saket Jain – 217 Shraddha Kakade- 219 Bhavin Parekh - 232 Natasha Patel - 235 Saubhagya Seksaria - 243 R Venkatraman - 256

About Cooper Industries

Cooper Industries- founded in 1833 by brothers Charles and Elias Cooper The company started as a foundry and was initially called the C&E Cooper Company.


Cooper’s initial product offerings included plows, hog, troughs, kettles and stoves
In Mid 1950’s, Cooper Industries became the national leader in pipeline compression engines, products that enabled the development of the growing oil and gas industry Since it wanted to reduce its exposure to more cyclical industries such as automotive and petroleum, Cooper underwent a period of portfolio rationalization starting in1959. This was mainly accomplished with it relying heavily on Mergers & Acquisition

the purchase is called an acquisition.Understanding Merger & acquisitions Although they are often uttered in the same breath the terms merger and acquisition mean slightly different things. . the buyer "swallows" the business and the buyer's stock continues to be traded. Both companies' stocks are surrendered and new company stock is issued in its place. employees and shareholders. the real difference lies in how the purchase is communicated to and received by the target company's board of directors. Acquisition • • When one company takes over another and clearly establishes itself as the new owner. the target company ceases to exist. In other words. Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. From a legal point of view. Merger • • Merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated.

with a broad market for the products having large customer base. . In an industry that is fairly stable.1%) to merge the target company Cooper Acquisition Strategy Cooper’s requirements to acquire a company have three major components. The target company must be: • • • In an industry in which Cooper could become a major player.Rule of Acquisition in this case: Under Rhode Island Law Company must own majority shares (51. A leader in its market segment.

Cooper History of acquisitions: 1959-1966 • • • • • • Supplier.small industrial and air compressor Manufacturer of small pumps and compressors for oil field applications Manufacturer of tyre changing tools for automotive industry Advantages Broadening of market for Cooper Disadvantages Company was still sensitive to the economic conditions .portable Industrial power tool Manufacturer.

Gained service of William Rector & Hal Stevens of Lufkin who were knowledgeable in the hand tool business . Canada & Mexico.World’s largest manufacturer of measuring tape & rules 1967-(Lufkin Rule company) Advantages • • • Acquired a quality product line An established distribution system of 35000 retail hardware store in US.

pliers. Exposure to new markets . West Germany & Mexico.Manufacturers of the best wrenches.(Crescent Niagara Corporation) • Advantages Acquired a quality product line comprising of High-quality wrenches. screwdrivers 1969. pliers. screwdrivers • Disadvantages It was a loss making company which needed to be turned around by restructuring and stopping production in inefficient plants and products A leading supplier of soldering tools 1970 -(Weller Electric Corporation) Advantages • • Production capacity in England.

Reason e. Double marginalization.g.Advantages of Merger & Acquisition • • • • • • • • • Economy of scale Economy of scope Increased revenue or market share Market Dominance Cross-selling Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage Geographical or other diversification into new Markets Resource transfer: resources information asymmetry or by combining scarce resources Vertical integration: Vertical integration occurs when an upstream and downstream firm merges. It occurs when both the upstream and downstream firms have monopoly power • Empire-building .

which yields a result greater than the value of these companies as separate entities. Improve profit margin by working together instead of as competitors.Synergy: Synergy can be defined as the value that is created by combining companies. Control Price Control Cost Growth Greater Sales Expansion Improved Distribution System Capital Arrangement of M & A Finance the acquisition by Issuing shares Offer Preferred Stocks Debt Bonds Warrants All Cash Deal Cross Holding Deal Initial Public Offering .

Presence in 137 countries World-Wide. .Leading manufacturer of File & Rasps Reason For Targeting Nicholson File Company -1971 • • • • Having 50% market share of 50 million$ market for file & rasps Enjoying 18 million$ market share in Saw Blades Having a distribution network of 53000 retail outlet through 2100 hardware wholesalers.

the remainder is publicly held. Vulnerability to be acquired Annual Sales Growth of 2% below industry growth rate of 6% poor bottom lines compare to other hand tool manufacturer Poor Market Sentiments on stock reflected in its poor P/E Ratio.Facts about the Nicholson File Company: • The Nicholson family and other members of the management group own about 20% of the Nicholson stock.25$ Per Share • • • • • . Valuation of Stock more on the basis of dividend yield rather than hope for capital appreciation Net Worth of the company is presumed on the basis of Book Value (1971) which is 51.

9 2.OPERATING PERFOMANCE NICHOLSON (Million of $ Except Per Share Data) 1967 Operations Net Sales Cost of Goods Sold Depreciation Selling & Adm Exp Interest Expenses Other Deductions Income Before Tax Income Taxes Income Before Preferred Div 48.8 37.99 54.67 1.52 55.88 1.1 12.5 0.8 0.2 2 0.96 53.2 2.9 0.2 3.8 0.5 32.5 0.3 11.4 0.2 2.4 11.1 33.1 0.4 0.8 0.8 0.3 1.84 0.31 1.3 0.33 1968 1969 1970 1971 .5 2.1 2.9 49.3 11.6 2 10.3 37.7 0.6 1.7 35.1 1.3 2.7 0.

88 1.2 25-33 9-13 2.03 35-48 21-30 2.6 50.1 68 22 4.2 67 23 3.25 23-32 10-14 Percentage of Sales Cost of Goods Sold % Selling & Adm Exp Income Before Tax And Extraordinary Items 67 22 5.19 1.6 51.7 66 21 6.Common Stock of Nicholson Earning Per Shares Before Extraordinary Items Dividends Per Shares Book Value Per Shares Maket Price Price / Earning Ration 3.6 49.31 29-41 10-14 2.65 1.6 .6 45.6 48.64 1.66 33-46 10-14 1.4 69 22 3.32 1.

General & Administrative Expenses reduction from 22% To 19% Leading to additional Income of 1.68 Million $ The above two savings would results in increase in income before tax by almost 291% On 1971 Level • • Increase in market reach in industrial market segment by 300% for Cooper Product Range Increase in market reach in consumer market segment by 300% for Nicholson Product Range The above two points creates potentiality for substantial increase in sales for both the companies. • Presuming modest growth rate @ 20% due to Synergy could result in increase In revenue of 55.5 Million $ as a group .20 Million $ Selling.Synergy Between Cooper & Nicholson : • • Cost Of Good Sold reduction from 69% to 65% of sales – Leading to additional Income of 2.66 Million $ over 1971 levels leading to additional Income of around 5.

77 Sales 1971 level 208 41.03 5.77 Presuming additional sale @ 20% Cost of Goods Sold Selling General & Adm. Exp by 3% Total Saving due to synergy (a) Cooper 55.3 2.20 1. Exp Additional Income due to increase in revenue (b) 5.87 Nicholson 55.54 Additional Income Due To Acquisition – Synergy (a) + (b) 9.6 32.19 2.68 3.3 11.8 3.41 .06 7.($ In Millions) Nicholson Net Sales Saving Due To Reduction In COGS by 4% Saving Due To Reduction In Selling General & Adm.10 1.

6 Preferred stock would be convertible into 5 common stock of VLN in first year and 4 common stock after fourth year. Would pay an annual dividend of $1.Cooper competition for Acquisition VLN and its offer • • • • • Diversified company with majorly into publishing and replacing automotive equipments. Offer one share of new VLN cumulative convertible preferred stock in exchange of each shares of Nicholson. . The above offer has the approval of the management of Nicholson.

• • • • Existing holding .31% of the total share capital Out of the race to acquire remaining shares to gain control due to negative publicity and no support of Nicholson Management.44000 shares of Nicholson Acquired 133000 in open market offer @of 42$ per share Total holding in Nicholson File Company is 177000 shares comprising of 30. Porter Company Foe turned friend • Large conglomerate with wide ranging interest in electrical equipments. nonferrous metal and rubber products. tools.H.K. .

63$per share and feels it is worth only 4. Due to the above does not want its holding of 177000 share in Nicholson to be depreciated by converting into VLN preferred stocks or common stock. . Keeping the above in mind it has no option but to turn to Cooper Industries.625% per share. Porter Company has two options: To let VLN takeover Nicholson or support Cooper.K. Not ready to support VLN due to following reasons. Lack-Luster performance of VLN Does not see significant growth potentiality with VLN Low yield of 1.6$ per preferred share offered by VLN Vis a Vis market yield on straight preferred stock of 7% Does not agree with VLN common stock valuation of 10.H.

Cooper Target To Acquire Nicholson Shares Distribution Of Nicholson Magic Figure For Acquisition (584000*51.Cooper Balance Shares To Be Acquired 292584 29000 263584 Potential Support Priority HK Porter Shares Unaccounted For (Average) Shares Held By Speculator (Average) Nicholson Family & Management Own By VLN TOTAL 177000 172000 75000 117000 14000 584000 .1%) Shares In Hand .

Cash / Common Stock / Convertible Securities Market purchase at Current Price H K Porter Book Value Funding Arrangements For Acquisition Fund Available Available Cash More Than Required Dilution Of Equity 9 Issue Of Equity Infuse Of Debt / Bond Current Debt / Equity Ration is favor to Raise Debt Total needed and available 13 4 .Practical Price Target For Nicholson Acquisition by Copper Minimum Price For Acquisition by various routes Routes Per Share 44 $ 50 $ 51.25 $ Financial Arrangements Cash Common Stock / Convertible Securities Open Offer .

Power Systems /Grating Products /Hand Tools /Industrial Ethernet /Industrial Security /Industrial Wireless /Instrument Junction Boxes /Instrumentation Protection /LightingControls /Lighting-Area Site /Lighting-Commercial Office /Lighting-Complex Environment /LightingHazardous Lighting /Lighting-Warehouse /Line./Data /Control Stations /Demand Response /Dielectric Fluids /Electrical Automation Systems /Enclosures-Bline /Enclosures-Crouse-Hinds /Electrical Junction Boxes/ Emergency Communications /Energy Automation /Field bus /Fire Life Safety/ Fittings / Cable Glands /Fuses (or Fusing Protection) Busman /Fuses . Installation and protection equip /Manual Call Stations /Meter Mountings /MRP (Molded Rubber Products) /PA/GA .MEDC /Cable Management /Capacitors (Power)/ Comm.Power Systems /Switches /Switchgear /Transformer Pad mount /Transformer Pole Mount /Transformer Substation /Wiring Devices .Products Of Cooper Industries As On Today AMI /Audible/Visual Signaling.MEDC /Panel Boards /Pipe Hangers & Mechanical Supports /Plugs and Receptacles /Power Tools /Pre-fab Systems /Process Alarm Equipment /Power System Analysis Software /Regulators /Spring Steel Fasteners /Strut Systems / Bolted Framing /Surge Protection /Surge Protection .

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