If you were Mr. Cizik of Cooper Industries, would you try to gain control of Nicholson File Co. Robert Cizik is the executive vice president of…

1. If you were Mr. Cizik of Cooper Industries, would you try to gain control of Nicholson File Co.

Mr. Robert Cizik is the executive vice president of Cooper Industries, Inc. and is currently reviewing acquisition candidates for his company. Nicholson File Company serves as one of the candidates and was approached by Cooper Industries three years earlier. However the offer was rejected and Nicholson is now in the middle of a takeover fight with Porter. This presents as an opportunity for Cooper Industries to gain control. Nicholson is an attractive candidate due to its basic competitive strengths. It is recognized as one of the largest domestic manufacturers of hand tools and performs as a leader in two main product areas with an exceptional process of a distribution system. Mr. Cizik is attracted to the potential profit gain from the acquisition of Nicholson disregarding the threat Porter poses for the firm. Based on Cooper’s estimations, the cost of goods sold may possibly be reduced from 69 percent to 65 percent. Additionally the elimination of sales and advertising duplications would lower the general, administrative expenses from 22 percent to 19 percent. While Nicholson has 75% in the industrial market and 25% in consumer, Cooper has the exact opposite proportions. The acquisition would permit Cooper to gain a larger market share within the industrial and the consumer market. After analyzing the opportunities Nicholson File Co. presents for Cooper Industries, we recommend Mr. Cizik to continue with his effort in trying to gain control of the company.

2. What is the maximum Price that Cooper can afford to pay for Nicholson and till keeps the acquisition attractive from the standpoint of cooper? (Treasury bills yielded 5.6% in May 1972)

The maximum price that Cooper can afford to pay for Nicholson should be $60.13 per share for the reasons that we mentioned in the previous question.

3. What are the concerns and what is the bargaining position of each group of Nicholson stockholder? What must Cooper offer each group in order to acquire its shares?

The main concerns of this case are the way the shareholder stock will be handle (valued) and what the profitable advantages in acquiring Nicholson’s majority shares. According to our calculations Cooper Copper has an optimum bargaining position because they can offer up to $60.13 (at a 4% growth estimated rate) for it’s the stock in order to acquire the majority its shares. Porter’s offer of $42.00 per share failed to get the majority of shares need to acquire control. VLN’s offered to honor the price of $53.10 for preferred shares. This is the share value that speculators and stockholders would hope to obtain although the actual offer could end up to be much less. According to our calculations and analysis the best possible offer Copper can offer up to $60.13 (at a 4% growth estimated rate) per share for Nicholson stock.

4. On the assumption that the Cooper management wants to acquire at least 80% of the outstanding Nicholson stock and to make the same offer to all stockholders, what offer must Cooper management make – in terms of dollar value and the form of payment (cash, stock, debt)?

If the Cooper management wants to acquire at least 80% of the outstanding Nicholson stock, Cooper will have to acquire all other stocks including those owned by Porter Inc., except those belonging to the Nicholson family and management, since we are supposing that Nicholson Family and the management won’t sell their shares, since they want to keep the business, Following Cooper’s policy to not make un-friendly acquisitions, it shouldn’t be wise to buy their stocks, because if they did sell for a reason a change in management could cause the leaving of some key staff and managers. However, cooper is able to buy or exchange Porter’s stocks for common Cooper shares in a tax free exchange which has to be worth at least $50 per Nicholson share (Porter’s proposal). Since Cooper stocks are going to increase in value according to Exhibit 8, and they will further increase due to synergy after the acquisition of Nicholson, it is preferable to offer cash instead of stocks. Since Porter is afraid from not recovering their 42US$ per action if VLN acquires Nicholson, and the maximum price they can get so far 44US$, which is the current value of Nicholson shares, Cooper is in position to renegotiate Porter’s proposal, offering 50US$ Cash to buy Nicholson stocks owned by Porter. Nicholson current stocks are 44US$ per stock, however they are over appreciated due to the acquisition process, therefore, this could be informed to stockholders and also 50 US$ per share could be offered to shareholders, however it would be necessary to get the support of the Management first, once the offer is accepted. In order to buy the stocks of speculators which own 50,000 to 100,000 shares, the same price could be offered (50US$ per share), which would represent a good opportunity for them considering that the current price is 44US$ per share, and that is very close to the price announced by VLN (53.10). In order to buy VLN shares, once they see that Cooper has acquired more than 51% of stocks, they will have no other choice than selling their stock; the same price could be offered.

Therefore, the total stocks to be purchased at 50US$ per stock would be 438,000 shares, which would be totalized at 21.9 million US$. Since the total cash owned by Cooper is 9million dollars, and it wouldn’t be wise to decapitalize, Cooper could use 7million US$ from its cash and the remaining by getting debt.

5. What should Mr. Cizik recommend Cooper management to do?

Mr. Cizik should recommend that Cooper management attempt to purchase Nicholson by offering preferred Cooper shares that can be converted into $60.13 worth of Cooper common stock. We believe that they should try to negotiate with management to get the Nicholson management to support Cooper Industries takeover. It is unlikely that Cooper will be able to acquire the company without the support of management, and as they have always in the past made friendly mergers they would like to continue doing that.


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