Detailed analysis of implication of merger between Cooper Industries and Nicholson File Company
The DCF valuation excel can viewed at:
https://drive.google.com/file/d/0B6nSS-YiZgneVEpVWVA2QWpyX28/view?usp=sharing
3. The Story so far…
Cooper Industries diversification
Nicholson file company rejected overtures 3 years
back, but now was in middle of a takeover fight
Porter planned to tender offer 4,37,000 shares of
Nicholson’s 5,84,000 shares @ $42 per share
Nicholson agreed to merge with VLN assured
continued operating independence
Faced with the prospect of merger with VLN, Porter
agreed to support a Cooper-Nicholson merger
4. The Big Question
“Is Nicholson File Company an attractive
acquisition target for Cooper Industries?”
If yes then,
“What price should Cooper offer?”
5. Cooper’s Checklist
Industry selection
Industry in which Cooper could become major player
Fairly stable industry with broad market for products and
product line of small ticket items
Company selection
Leading companies in their respective markets
Acquisition to earn a satisfactory long-term return
and improve the trend of Cooper’s earning per share
over the next 5 years
6. What makes Nicholson attractive?
Largest domestic manufacturer of hand tools and
leader in 2 main product areas
50% market share in files and rasps market ($50mn) with a
very strong brand name
9% share in hand saws and blades market ($200mn)
Distribution system
Had all strengths to share fully in 6-7% annual sales
forecast for the industry
7. What’s in it for Cooper?
Reducing COGS from 69% to 65%
Elimination of sales and advertising duplications,
resulting in reduction of SG&A expenses from 22% to
19%
Nicholson and Cooper operated in exact opposite
proportions in industrial and consumer market
Cooper would be able to use Nicholson’s strong
European distribution system to sell its other hand
tool lines
16. A No-Brainer Acquisition?
As per our calculations the value of Nicholson
comes to be 65.98 while the book value is 51.25
Sales tripled
Cost reduction achieved
Value created(Share price almost tripled)
Diversification (entry into new segment)
17. Keeping in mind the previous acquisitions of Cooper, the max price it can offer is
$130.74
Multiples Valuation
18. Exchange Ratio
Current Price Cooper = $24
As is
Exchange Ratio: 65.98/24 = 2.75
To be
Exchange Ratio: 98.27/24 = 4.09
If offer is done at min price quoted = 50
Exchange Ratio: 50/24 = 2.08