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

1. Presented by:
Indira Badrinarayan
Prashant Keswani
Mohit Mehta
ViminThotha
Cooper Industries

2. Outline
Background
Acquisition Criteria
Reasons to acquire Nicholson
Opportunities for Cooper
Nicholson As is & To be Valuation
Multiples Valuation
Exchange Ratio

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

8. Nicholson As Is Balance Sheet

9. Balance Sheet
ASSETS 1971 1972 1973 1974 1975 1976 Assumptions/Formulae
Cash 1 1 1 1 1 1
Days of Accounts Receivable 52.80 52.80 52.80 52.80 52.80 52.80 DOAR = 365*AR/Credit Sales
Accounts receivable 8 8.16 8.32 8.49 8.66 8.83 AR = Credit Sales*DOAR/365
Days of Inventory 173.35 173.35 173.35 173.35 173.35 173.35 DOI = 365*Inventory/COGS
Inventories 18 18.48 18.85 19.23 19.62 20.01 Inventory = DOI*COGS/365
Other 1 1 1 1 1 1
TOTAL CURRENT ASSETS 28.00 28.64 29.18 29.72 30.28 30.84
LIABILITIES & NET WORTH
Days of Accounts Payable 19.26 19.26 19.26 19.26 19.26 19.26 DOAP = 365*AP/COGS
Accounts payable 2 2.05 2.09 2.14 2.18 2.22 AP = DOAP*COGS/365
Other 2 2 2 2 2 2 Constant Assumed
TOTAL CURRENT LIABILITIES 4.00 4.05 4.09 4.14 4.18 4.22
Incremental WC Calc
Working Capital 24 24.59 25.08 25.58 26.10 26.62
Incremental Working Capital - 0.59 0.49 0.50 0.51 0.52 Inc WC = TCA - TCL

10. Nicholson As Is P&L

11. P&L
PARTICULARS 1971 1972 1973 1974 1975 1976
Net sales 55.3 56.41 57.53 58.68 59.86 61.06 Sales growth = 2%
Cost of goods sold 37.9 38.92 39.70 40.49 41.30 42.13 COGS = 69% of Sales
Selling, general & admin. 12.3 12.41 12.66 12.91 13.17 13.43 SGA = 22% of Sales
Depreciation expense 2.1 2.14 2.18 2.23 2.27 2.32 See Calculations
EBIT 3 2.93 2.99 3.05 3.11 3.18
Tax 0.67 1.17 1.20 1.22 1.25 1.27 Average Tax rate 40% (given)
NOPAT 2.33 1.76 1.80 1.83 1.87 1.91 1.91 NOPAT = EBIT(1-tax)
(+) Depriciation 2.1 2.14 2.18 2.23 2.27 2.32 2.365
(-) Incremental Capex - 0.36 0.37 0.38 0.38 0.39 0.39
(-) Incremental NWC - 0.59 0.49 0.50 0.51 0.52 0.52
FCFF 2.95 3.12 3.18 3.25 3.31 3.361
Depriciation Calculation Steps (a) --> (e)
Depriciation 2.1 2.14 2.18 2.23 2.27 2.32 e) Calculate Depriciation
Net Fixed Assets 16
Gross Fixed Assets 18.1 18.46 18.83 19.21 19.59 19.98 b) Calculate GFA
Incremental Capex 0.36 0.37 0.38 0.38 0.39 c)
GFA/Net Sales (%) 32.73 32.73 32.73 32.73 32.73 32.73 a) Assuming Constant
Depriciation/GFA (%) 11.60 11.60 11.60 11.60 11.60 11.60 d) Assuming Constant
CV 42.86
PV of Firm 38.53
Value/ Share 65.98

12. After Acquisition BS

13. Balance Sheet
ASSETS 1971 1972 1973 1974 1975 1976 Assumptions/Formulae
Cash 1 1 1 1 1 1
Days of Accounts Receivable 52.80 52.80 52.80 52.80 52.80 52.80 DOAR = 365*AR/Credit Sales
Accounts receivable 8 8.48 8.99 9.53 10.10 10.71 AR = Credit Sales*DOAR/365
Days of Inventory 173.35 173.35 173.35 173.35 173.35 173.35 DOI = 365*Inventory/COGS
Inventories 18 18.10 19.18 20.33 21.55 22.85 Inventory = DOI*COGS/365
Other 1 1 1 1 1 1
TOTAL CURRENT ASSETS 28.00 28.58 30.17 31.86 33.65 35.55
LIABILITIES & NET WORTH
Days of Accounts Payable 19.26 19.26 19.26 19.26 19.26 19.26 DOAP = 365*AP/COGS
Accounts payable 2 2.01 2.13 2.26 2.39 2.54 AP = DOAP*COGS/365
Other 2 2 2 2 2 2 Constant Assumed
TOTAL CURRENT LIABILITIES 4.00 4.01 4.13 4.26 4.39 4.54
Incremental WC Calc
Working Capital 24 24.57 26.04 27.60 29.26 31.01
Incremental Working Capital - 0.57 1.47 1.56 1.66 1.76 Inc WC = TCA - TCL

14. After Acquisition P&L

15. P&L
PARTICULARS 1971 1972 1973 1974 1975 1976
Net sales 55.3 58.62 62.14 65.86 69.81 74.00 Sales growth = 6%
Cost of goods sold 37.9 38.10 40.39 42.81 45.38 48.10 COGS = 65% of Sales
Selling, general & admin. 12.3 11.14 11.81 12.51 13.26 14.06 SGA = 19% of Sales
Depreciation expense 2.1 2.23 2.36 2.50 2.65 2.81 See Calculations
EBIT 3 7.15 7.58 8.04 8.52 9.03
Tax 0.67 2.86 3.03 3.21 3.41 3.61 Average Tax rate 40% (given)
NOPAT 2.33 4.29 4.55 4.82 5.11 5.42 5.42 NOPAT = EBIT(1-tax)
(+) Depriciation 2.1 2.23 2.36 2.50 2.65 2.81 2.98
(-) Incremental Capex - 1.09 1.15 1.22 1.29 1.37 1.50
(-) Incremental NWC - 0.57 1.47 1.56 1.66 1.76 1.90
FCFF 4.87 4.28 4.54 4.81 5.10 5.00
Depriciation Calculation Steps (a) --> (e)
Depriciation 2.1 2.23 2.36 2.50 2.65 2.81 e) Calculate Depriciation
Net Fixed Assets 16
Gross Fixed Assets 18.1 19.19 20.34 21.56 22.85 24.22 b) Calculate GFA
Incremental Capex 1.09 1.15 1.22 1.29 1.37 c)
GFA/Net Sales (%) 32.73 32.73 32.73 32.73 32.73 32.73 a) Assuming Constant
Depriciation/GFA (%) 11.60 11.60 11.60 11.60 11.60 11.60 d) Assuming Constant
CV 63.71
PV of Firm 57.39
Value/ Share 98.27

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

19. THANK YOU