2. Problem Statement
• Is Nicholson File Company a good acquisition
target for Cooper industries?
• If Yes, at what price?
3. Big stack bully Cooper Industries
• Cooper industries was organized and founded
in 1919 as a manufacturer of heavy
machinery and equipment.
• By 1950’s cooper industries was a leading
producer of engines and massive producers.
• Between 1959 – 1966 Acquisitions.
- A supplier of portable industrial power tools
- A manufacturer of small industrial air and
process compressor
- A maker of small pumps and compressor of oil
field applications.
- A producer of tire changing tools for the
automotive market.
4. SWOT Analysis
Strengths
1. Strong acquisitions which widened its market
and diversified its portfolio.
2. Cooper Industries is well positioned for
sustained growth in the years ahead
Weaknesses
1. Heavy dependence on sales to oil and gas
industries.
2. Violent fluctuation of earnings caused by cyclic
nature of heavy machinery and equipment sales.
Opportunities
1. Compressors: long term expansion in the oil
and gas business due to increasing global
population and economic expansion in developing
countries.
2. Engines: increased demand of gas engines
due to spread of low cost shale gas.
3. Emerging markets in developing countries.
Threats
1. Rise of manufacturers in emerging countries.
2. Uncertainty in the Economy.
5. To grow I need to buy but what to
buy?
(Acquisition strategy)
• The Industry should be fairly stable with
broad market for the products a product line
of largely small ticket items
• To acquire the leading companies in their
respective segment for better growth
perspective.
6. Underdog Nicholson File Company
• A company with relatively poor sales and
poor performance in the recent years.
• Nicholson had conservative accounting,
Financial policies and low percentage of
outstanding stocks held by Nicholson family.
• Nicholson Sales growth was 2% in
comparison to industry growth of 6%.
• Stocks traded well below book value. Lack of
interest from investors was reflected from
companies Price – Equity ratio.
7. Cooper – Nicholson projections
• Cooper industries projects Nicholson’s growth
rate of sales from 2% to 6%.
• Decrease in COGS from 69% to 65%
gradually
• Decrease in selling and administration
expenses from 22% - 19%
• Stronger position in the market
8. Multiples of earlier acquisitions
Particular
Lufkin
rule
Crescent
Niagara
Weller
Electric
Accounting no (
Nicholson) 1971 Median Nicholson
Price / Sales 0.9 0.8 1.5 55.3 0.9 51.8
Price /
Income 14.7 -312.5 16.2 1.35 14.7 19.9
Price / Book
Value 1.4 2.6 3.3 51.25 2.6 130.7
As per multiples Cooper industries acquisition the
merger with Nicholson as per price of share will be
in range $19.9/- to $130.7/-
9. Financials as is basis
Valuation (AS IS BASIS)
Particulars 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976
Operations 2% 2% 2% 2% 2%
Net sales 48.50 49.10 53.70 54.80 55.30 56.41 57.53 58.68 59.86 61.06
Cost of goods sold 32.60 33.10 35.90 37.20 37.90 38.92 39.70 40.49 41.30 42.13
Selling, general, and administrative expenses 10.70 11.10 11.50 11.90 12.30 12.41 12.66 12.91 13.17 13.43
Depreciation expense 2.00 2.30 2.40 2.30 2.10 2.14 2.18 2.23 2.27 2.32
Other deductions 0.30 0.10 0.20 0.20 0.20 0.00 0.00 0.00 0.00
Income before taxes (EBT) 2.53 1.85 2.97 2.42 2.02 2.93 2.99 3.05 3.11 3.18
Taxes 0.60 0.84 1.31 0.88 0.67 1.17 1.20 1.22 1.25 1.27
Net income 1.93 1.01 1.66 1.54 1.35 1.76 1.80 1.83 1.87 1.91
Add: Depreciation 2.14 2.18 2.23 2.27 2.32
Cash Flow from Operations 3.90 3.98 4.06 4.14 4.22
Less: Change in NWC 0.48 0.49 0.50 0.51 0.52
Less: CapEx 0.36 0.37 0.38 0.38 0.39
Operating Free Cash Flow 3.06 3.12 3.18 3.25 3.31
Continuity value (WACC 10%) 42.24
Total FCFF 45.55
Terminal Value
3.06 3.12 3.18 3.25 45.55
Discounted FCF 2.69 2.57 2.45 2.34 28.28
EV 38.33
Less: Long-term debt 11.00
FCFE 27.33
no. of shares 0.584
Interest expense 0.4 0.7 0.8 0.8 0.8
Percentage of Sales
Cost of goods sold 67% 67% 67% 68% 69% 69% 69% 69% 69% 69%
Selling, general, and administrative expenses 22% 23% 21% 22% 22% 22% 22% 22% 22% 22%
Income before taxes 5% 4% 6% 4% 4% 3% 3% 3% 3% 3%
value per share 46.80
EPS 3.02 3.08 3.14 3.20 3.26
Continuity value 45.55
10. Financials to be basis
Valuation of Nicholson ( TO BE BASIS)
Particulars 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976
Operations 6% 6% 6% 6% 6%
Net sales 48.50 49.10 53.70 54.80 55.30 58.62 62.14 65.86 69.81 74.00
Cost of goods sold 32.60 33.10 35.90 37.20 37.90 40.45 42.25 44.13 46.08 48.10
Selling, general, and administrative expenses 10.70 11.10 11.50 11.90 12.30 12.90 13.67 13.83 13.96 14.06
Depreciation expense 2.00 2.30 2.40 2.30 2.10 2.14 2.18 2.23 2.27 2.32
Other deductions 0.30 0.10 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20
Income before taxes (EBT) 2.53 1.85 2.97 2.42 2.02 2.93 3.83 5.48 7.30 9.32
Taxes 0.60 0.84 1.31 0.88 0.67 1.17 1.53 2.19 2.92 3.73
Net income 1.93 1.01 1.66 1.54 1.35 1.76 2.30 3.29 4.38 5.59
Add: Depreciation 2.14 2.18 2.23 2.27 2.32
Cash Flow from Operations 3.90 4.48 5.51 6.65 7.91
Less: Change in NWC 1.44 1.53 1.62 1.72 1.82
Less: CapEx 0.36 0.37 0.38 0.38 0.39
Free Cash Flow 2.10 2.59 3.52 4.55 5.70
Terminal Value 122.44
2.10 2.59 3.52 4.55 128.14
Discounted FCF 1.97 2.27 2.89 3.51 92.44
Enterprise Value 103.07
Less: Long-term debt 11.00
FCFE (equity) 92.07
no of shares 0.584
Interest expense 0.4 0.7 0.8 0.8 0.8
Percentage of Sales
Cost of goods sold 67% 67% 67% 68% 69% 69% 68% 67% 66% 65%
Selling, general, and administrative expenses 22% 23% 21% 22% 22% 22% 22% 21% 20% 19%
Income before taxes 5% 4% 6% 4% 4% 5% 6% 8% 10% 13%
EPS 3.01 3.93 5.63 7.50 9.58
Value per Share $ 157.66
Continuity Value $ 122.44
11. H.K. Porter co. a competitor to look
after.
• A Conglomerate with wide ranging interest in
electrical equipment, tools, non ferrous
metals and rubber products
• H.K Porter had acquired 44000 shares of
Nicholson in 1967 and was planning to
acquire 437000 @ 42$ a share
• Shares were valued at a premium of 12$ a
share
• H.K. Porter trying to go for hostile take over
by buying 437,000 of 584,000 outstanding
shares
12. VLN a competitor to look after.
• A broadly diversified company with major
interest in publishing, original and
replacement automotive equipment.
• It assured Nicolson of continued operating
Independence.
• A VLN preferred stock would pay a annual
dividend of $1.60/-
• Preference shares would be convertible to 5
shares of VLN common stock during 1 year of
merger scaling down to 4 shares after 4th
year
• Right of calling of preference shares @ $50/-
a share after 5 years ( Face Value )
13. Has Cooper made a right move?
• Nicholson is a company with very good
fundamentals
• Diversification of business and sustainable
growth with quality management
• Increase in earnings per share in upcoming
years
• Chances of making future acquisitions on the
basis of stock
• Cross selling of products and friendly
environment.
14. - Thank you
• Nicholson will support the merger as the
offered is around $50/- a share more than
$42/- offered by H.K Porter.
• Cooper industries will also be satisfied as the
value per share of Nicholson comes around
$46.80/-
Conclusion