Case Study on Case Study on Diversification Merger & Diversification Merger &

AcquisitionAcquisitionGROUP IGROUP I

Gopalkrishnan – 214Gopalkrishnan – 214Saket Jain – 217Saket Jain – 217Shraddha Kakade- 219Shraddha Kakade- 219Bhavin Parekh - 232Bhavin Parekh - 232Natasha Patel - 235Natasha Patel - 235Saubhagya Seksaria - Saubhagya Seksaria - 243243R Venkatraman - 256R Venkatraman - 256

About Cooper Industries About Cooper Industries •• Cooper Industries- Cooper Industries- founded in 1833founded in 1833 by brothers Charles and Elias by brothers Charles and Elias Cooper Cooper

•• The company The company started as a foundry started as a foundry and was initially called the C&E and was initially called the C&E Cooper Cooper Company.Company.

•• Cooper’s initial Cooper’s initial productproduct offerings included offerings included plows, hog, troughs, plows, hog, troughs, kettles and kettles and stovesstoves

•• In Mid 1950’s, Cooper Industries became the national In Mid 1950’s, Cooper Industries became the national leaderleader in in pipeline pipeline compression compression enginesengines, products that enabled the , products that enabled the development of the development of the growing oil and gas industrygrowing oil and gas industry

•• Since it wanted to Since it wanted to reducereduce its exposure to more cyclical industries its exposure to more cyclical industries such as such as automotive and petroleum, Cooper underwent a period of automotive and petroleum, Cooper underwent a period of portfolio portfolio rationalization starting in1959. rationalization starting in1959.

•• This was mainly accomplished with it This was mainly accomplished with it relying heavily on Mergers & relying heavily on Mergers & AcquisitionAcquisition

Understanding Merger & acquisitionsUnderstanding Merger & acquisitions

Although they are often uttered in the same breath the Although they are often uttered in the same breath the terms merger terms merger and acquisition mean slightly different things. and acquisition mean slightly different things.

AcquisitionAcquisition

•• When one company takes over another and clearly When one company takes over another and clearly establishes itself as the establishes itself as the new owner, the purchase is called an new owner, the purchase is called an acquisition.acquisition. •• From a legal point of view, the target company ceases to From a legal point of view, the target company ceases to exist, the buyer exist, the buyer "swallows" the business and the buyer's stock "swallows" the business and the buyer's stock continues to be traded. continues to be traded.

MergerMerger•• Merger happens when two firms agree to go forward as a Merger happens when two firms agree to go forward as a single new single new company rather than remain separately owned and company rather than remain separately owned and operated. operated.

•• Both companies' stocks are surrendered and new company Both companies' stocks are surrendered and new company

stock is issued stock is issued in its place.in its place.

Whether a purchase is considered a merger or an acquisition really depends on whether 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. In other words, the real the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders. company's board of directors, employees and shareholders.

Rule of Acquisition in this case:Rule of Acquisition in this case:

Under Rhode Island Law Company must own Under Rhode Island Law Company must own majority majority shares (51.1%)shares (51.1%) to merge the target companyto merge the target company

Cooper Acquisition StrategyCooper Acquisition Strategy

Cooper’s requirements to acquire a company have Cooper’s requirements to acquire a company have three three major components.major components. The target company must be: The target company must be:

•• In an industry in which Cooper could become a In an industry in which Cooper could become a major major playerplayer..

•• In an industry that is fairly stable, with a In an industry that is fairly stable, with a broad broad marketmarket for for the products having large customer base.the products having large customer base.•• A A leaderleader in its market segment. in its market segment.

Cooper History of acquisitions:Cooper History of acquisitions:

1959-19661959-1966

•• Supplier- portable Industrial power toolSupplier- portable Industrial power tool•• Manufacturer- small industrial and air compressorManufacturer- small industrial and air compressor•• Manufacturer of small pumps and compressors for Manufacturer of small pumps and compressors for oil field oil field applicationsapplications•• Manufacturer of tyre changing tools for automotive Manufacturer of tyre changing tools for automotive industryindustry

AdvantagesAdvantages•• Broadening of market for CooperBroadening of market for Cooper

DisadvantagesDisadvantages•• Company was still sensitive to the economic Company was still sensitive to the economic conditionsconditions

World’s largest manufacturer of measuring tape & rulesWorld’s largest manufacturer of measuring tape & rules

1967-(Lufkin Rule company)1967-(Lufkin Rule company)

AdvantagesAdvantages

•• Acquired a quality product line Acquired a quality product line

•• An established distribution system of 35000 retail An established distribution system of 35000 retail hardware hardware store in US, Canada & Mexico.store in US, Canada & Mexico.

•• Gained service of William Rector & Hal Stevens of Gained service of William Rector & Hal Stevens of Lufkin who Lufkin who were knowledgeable in the hand tool businesswere knowledgeable in the hand tool business

MManufacturers of the best wrenches, pliers, screwdriversanufacturers of the best wrenches, pliers, screwdrivers1969- (Crescent Niagara Corporation)1969- (Crescent Niagara Corporation)

AdvantagesAdvantages•• Acquired a quality product line comprising of High-quality Acquired a quality product line comprising of High-quality wrenches, pliers, screwdriverswrenches, pliers, screwdrivers

DisadvantagesDisadvantages•• It was a loss making company which needed to be turned It was a loss making company which needed to be turned around by around by restructuring and stopping production in inefficient restructuring and stopping production in inefficient plants and products plants and products

A leading supplier of soldering toolsA leading supplier of soldering tools1970 -(Weller Electric Corporation)1970 -(Weller Electric Corporation)

AAdvantagesdvantages•• Production capacity in England, West Germany & Mexico.Production capacity in England, West Germany & Mexico.•• Exposure to new marketsExposure to new markets

Advantages of Merger & AcquisitionAdvantages of Merger & Acquisition

•• Economy of scale Economy of scale

•• Economy of scopeEconomy of scope

•• Increased revenue or market shareIncreased revenue or market share

•• Market DominanceMarket Dominance

•• Cross-selling Cross-selling

•• Taxation: Taxation: A profitable company can buy a loss maker to use the target's loss as their A profitable company can buy a loss maker to use the target's loss as their advantageadvantage

•• Geographical or other diversification into new MarketsGeographical or other diversification into new Markets

•• Resource transfer: Resource transfer: resources information asymmetry or by combining scarce resources information asymmetry or by combining scarce resourcesresources

•• Vertical integration: Vertical integration: Vertical integration occurs when an upstream and Vertical integration occurs when an upstream and downstream firm downstream firm merges. Reason e.g. Double marginalization. It occurs when both the merges. Reason e.g. Double marginalization. It occurs when both the upstream and downstream upstream and downstream firms have monopoly powerfirms have monopoly power

•• Empire-buildingEmpire-building

Synergy:Synergy: Synergy can be defined as the value that is created by combining Synergy can be defined as the value that is created by combining companies, which yields a result greater than the value of these companies, which yields a result greater than the value of these companies as separate entities.companies as separate entities.

Improve profit margin by working together instead of as Improve profit margin by working together instead of as competitors.competitors. Control PriceControl Price Control CostControl Cost GrowthGrowth Greater Sales Greater Sales ExpansionExpansion Improved Distribution SystemImproved Distribution System

CCapital Arrangement of M & Aapital Arrangement of M & AFinance the acquisition by Finance the acquisition by Issuing shares Issuing shares Offer Preferred StocksOffer Preferred Stocks Debt Debt Bonds Bonds WarrantsWarrants All Cash DealAll Cash Deal Cross Holding DealCross Holding Deal Initial Public OfferingInitial Public Offering

Leading manufacturer of File & RaspsLeading manufacturer of File & Rasps

Reason For Targeting Nicholson File Company -1971Reason For Targeting Nicholson File Company -1971

•• Having 50% market share of 50 million$ market for Having 50% market share of 50 million$ market for file & raspsfile & rasps

•• Enjoying 18 million$ market share in Saw BladesEnjoying 18 million$ market share in Saw Blades

•• Having a distribution network of 53000 retail outlet Having a distribution network of 53000 retail outlet through through 2100 hardware wholesalers.2100 hardware wholesalers.

•• Presence in 137 countries World-Wide. Presence in 137 countries World-Wide.

Facts about the Nicholson File Company:Facts about the Nicholson File Company:

•• The The Nicholson family Nicholson family and other members of the and other members of the management management group own about group own about 20% of the Nicholson 20% of the Nicholson stockstock; the remainder is ; the remainder is publicly held. publicly held.

•• VulnerabilityVulnerability to be acquired to be acquired

•• Annual Sales Annual Sales Growth of 2% below industry growth rGrowth of 2% below industry growth rate ate of 6%of 6%

poor bottom lines compare to other hand tool poor bottom lines compare to other hand tool manufacturermanufacturer

•• Poor Market Sentiments on stock rPoor Market Sentiments on stock reflected in its poor P/E eflected in its poor P/E Ratio.Ratio.

•• Valuation of Stock Valuation of Stock more on the more on the basis of dividend yield basis of dividend yield rather rather than hope for capital appreciationthan hope for capital appreciation

•• Net Worth Net Worth of the company is presumed on the basis of of the company is presumed on the basis of Book Book Value (1971) which is 51.25$ Per ShareValue (1971) which is 51.25$ Per Share

OPERATING PERFOMANCENICHOLSON

 (Million of $ Except

Per Share Data)

 196

7196

8196

9197

0197

1

Operations          

Net Sales 48.5 49.1 53.7 54.8 55.3

Cost of Goods Sold 32.6 33.1 35.5 37.2 37.9

Depreciation 2 2.3 2.4 2.3 2.1

Selling & Adm Exp 10.7 11.1 11.5 11.9 12.3

Interest Expenses 0.4 0.7 0.8 0.8 0.8

Other Deductions 0.3 0.1 0.2 0.2 0.2

Income Before Tax 2.5 1.8 3.3 2.4 2

Income Taxes 0.6 0.84 1.31 0.88 0.67

Income Before Preferred Div 1.9 0.96 1.99 1.52 1.33

 

Common Stock of Nicholson          

Earning Per Shares Before Extraordinary Items 3.19 1.65 2.88 2.64 2.32

Dividends Per Shares 1.6 1.6 1.6 1.6 1.6

Book Value Per Shares45.6

648.0

349.3

1 50.251.2

5

Maket Price 33-46

35-48

29-41

25-33

23-32

Price / Earning Ration10-14

21-30

10-14 9-13

10-14

 

Percentage of Sales  

Cost of Goods Sold % 67 67 66 68 69

Selling & Adm Exp 22 23 21 22 22

Income Before Tax And Extraordinary Items 5.2 3.7 6.1 4.4 3.6

Synergy Between Cooper & Nicholson :Synergy Between Cooper & Nicholson : •• Cost Of Good Sold reductionCost Of Good Sold reduction from 69% to 65% of sales – Leading to from 69% to 65% of sales – Leading to

additional additional Income of Income of 2.20 Million $2.20 Million $

•• Selling, General & Administrative Expenses reduction Selling, General & Administrative Expenses reduction from 22% To from 22% To 19% -19% - Leading to additional Income of Leading to additional Income of 1.68 Million $1.68 Million $

The above two savings would results in The above two savings would results in increase in income before increase in income before tax tax by by almost 291% On 1971 Levelalmost 291% On 1971 Level

•• Increase in Increase in market reach in market reach in industrial market segment industrial market segment by 300% for by 300% for Cooper Product RangeCooper Product Range

•• Increase in Increase in market reach in market reach in consumer market segment consumer market segment by 300% for by 300% for Nicholson Product Range Nicholson Product Range

The above two points creates The above two points creates potentiality for substantial increase in potentiality for substantial increase in sales sales for for both the companies. both the companies.

•• Presuming modest growth rate @ 20% due to Synergy cPresuming modest growth rate @ 20% due to Synergy could result ould result in in increase In revenue of 55.66 Million $ increase In revenue of 55.66 Million $ over 1971 levels leading to over 1971 levels leading to additional additional Income of around 5.5 Million $ as a groupIncome of around 5.5 Million $ as a group

($ In Millions)

  Nicholson

Net Sales 55.3

Saving Due To Reduction In COGS by 4% 2.20

Saving Due To Reduction In Selling General & Adm. Exp by 3% 1.68

Total Saving due to synergy (a) 3.87

 

  Cooper Nicholson

Sales 1971 level 208 55.3

Presuming additional sale @ 20% 41.6 11.06

Cost of Goods Sold 32.03 7.19

 Selling General & Adm. Exp 5.8 2.10

Additional Income due to increase in revenue 3,77 1.77

 (b)5.54

 

Additional Income Due To Acquisition – Synergy (a) + (b) 9.41

Cooper competition for Acquisition Cooper competition for Acquisition

VLN and its offerVLN and its offer

•• Diversified company with majorly into publishing and Diversified company with majorly into publishing and replacing replacing automotive equipments.automotive equipments. •• Offer Offer one share of new VLN cumulative convertible one share of new VLN cumulative convertible preferred preferred stock in exchange of each shares of Nicholson.stock in exchange of each shares of Nicholson.

•• Would pay an Would pay an annual dividend of $1.6annual dividend of $1.6 •• Preferred stock would Preferred stock would be convertible into 5 common be convertible into 5 common stock of stock of VLN in first year and 4 common stock after VLN in first year and 4 common stock after fourth year.fourth year.

•• The The aboveabove offer has the approval of the management offer has the approval of the management of of Nicholson.Nicholson.

H.K. Porter CompanyH.K. Porter Company

Foe turned friendFoe turned friend

•• Large conglomerate with wide ranging interest in Large conglomerate with wide ranging interest in electrical electrical equipments, tools, nonferrous metal and equipments, tools, nonferrous metal and rubber products.rubber products.

•• Existing holding - Existing holding - 44000 shares of Nicholson44000 shares of Nicholson

•• Acquired Acquired 133000 in open market offer @of 42$ per 133000 in open market offer @of 42$ per shareshare

•• Total holding Total holding in Nicholson File Company is 177000 in Nicholson File Company is 177000 shares shares comprising of comprising of 30.31%30.31% of the total share of the total share capitalcapital

•• Out of the race Out of the race to acquire remaining shares to gain to acquire remaining shares to gain control due control due to negative publicity and to negative publicity and no support of no support of Nicholson Management.Nicholson Management.

H.K. Porter H.K. Porter Company has two options:Company has two options:

To let VLN takeover Nicholson or support Cooper.To let VLN takeover Nicholson or support Cooper.Not ready to support VLN due to following reasons.Not ready to support VLN due to following reasons.

Lack-Luster performance of VLNLack-Luster performance of VLN

Does not see significant growth potentiality with Does not see significant growth potentiality with VLNVLN

Low yield of 1.6$ per preferred share offered by VLN Low yield of 1.6$ per preferred share offered by VLN Vis a Vis Vis a Vis market yield on straight preferred stock of 7%market yield on straight preferred stock of 7%

Does not agree with VLN common stock valuation of Does not agree with VLN common stock valuation of 10.63$per 10.63$per share and feels it is worth only 4.625% per share and feels it is worth only 4.625% per share. share.

Due to the above does not want its holding of Due to the above does not want its holding of 177000 share in 177000 share in Nicholson to be depreciated by Nicholson to be depreciated by converting into VLN preferred converting into VLN preferred stocks or common stock.stocks or common stock.

Keeping the above in mind it has no option but to turn to Cooper Keeping the above in mind it has no option but to turn to Cooper IndustriesIndustries..

Cooper Target To Acquire Nicholson Cooper Target To Acquire Nicholson

Shares Distribution Of Nicholson

Magic Figure For Acquisition (584000*51.1%) 292584

   

Shares In Hand - Cooper 29000

Balance Shares To Be Acquired 263584

   

Potential Support Priority  

HK Porter 177000

Shares Unaccounted For (Average) 172000

Shares Held By Speculator (Average) 75000

Nicholson Family & Management 117000

Own By VLN 14000

   

TOTAL 584000

Practical Price Target Practical Price Target For Nicholson Acquisition by CopperFor Nicholson Acquisition by Copper

Minimum Price For Acquisition by various routes

 RoutesPer Share Financial Arrangements

Market purchase at Current Price 44 $ Cash

H K Porter 50 $ Common Stock / Convertible Securities

Book Value 51.25 $Open Offer - Cash / Common Stock / Convertible Securities

Funding Arrangements For Acquisition Fund Available

Available Cash More Than Required 9

Dilution Of Equity

4

Issue Of Equity

Infuse Of Debt / Bond

Current Debt / Equity Ration is favor to Raise Debt  

Total needed and available 13

Products Of Cooper Industries As On TodayProducts Of Cooper Industries As On Today

AMI /Audible/Visual Signaling- MEDC /Cable Management /Capacitors (Power)/ Comm./Data AMI /Audible/Visual Signaling- MEDC /Cable Management /Capacitors (Power)/ Comm./Data /Control Stations /Demand Response /Dielectric Fluids /Electrical Automation Systems /Control Stations /Demand Response /Dielectric Fluids /Electrical Automation Systems /Enclosures-Bline /Enclosures-Crouse-Hinds /Electrical Junction Boxes/ Emergency /Enclosures-Bline /Enclosures-Crouse-Hinds /Electrical Junction Boxes/ Emergency Communications /Energy Automation /Field bus /Fire Life Safety/ Fittings / Cable Glands Communications /Energy Automation /Field bus /Fire Life Safety/ Fittings / Cable Glands

/Fuses (or Fusing Protection) - Busman /Fuses - Power Systems /Grating Products //Fuses (or Fusing Protection) - Busman /Fuses - Power Systems /Grating Products /Hand Hand ToolsTools /Industrial Ethernet /Industrial Security /Industrial Wireless /Instrument Junction /Industrial Ethernet /Industrial Security /Industrial Wireless /Instrument Junction Boxes /Instrumentation Protection /Lighting- Controls /Lighting-Area Site /Lighting-Boxes /Instrumentation Protection /Lighting- Controls /Lighting-Area Site /Lighting-Commercial Office /Lighting-Complex Environment /Lighting-Hazardous Lighting /Lighting-Commercial Office /Lighting-Complex Environment /Lighting-Hazardous Lighting /Lighting-Warehouse /Line, Installation and protection equip /Manual Call Stations /Meter Warehouse /Line, Installation and protection equip /Manual Call Stations /Meter Mountings /MRP (Molded Rubber Products) /PA/GA - MEDC /Panel Boards /Pipe Hangers & Mountings /MRP (Molded Rubber Products) /PA/GA - MEDC /Panel Boards /Pipe Hangers & Mechanical Supports /Plugs and Receptacles /Power Tools /Pre-fab Systems /Process Alarm Mechanical Supports /Plugs and Receptacles /Power Tools /Pre-fab Systems /Process Alarm Equipment /Power System Analysis Software /Regulators /Spring Steel Fasteners /Strut Equipment /Power System Analysis Software /Regulators /Spring Steel Fasteners /Strut Systems / Bolted Framing /Surge Protection /Surge Protection - Power Systems /Switches Systems / Bolted Framing /Surge Protection /Surge Protection - Power Systems /Switches /Switchgear /Transformer Pad mount /Transformer Pole Mount /Transformer Substation /Switchgear /Transformer Pad mount /Transformer Pole Mount /Transformer Substation /Wiring Devices /Wiring Devices

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