Cooper Industry Case Study

Cooper Industries, Inc

Background

Cooper Industries was a successful manufacturer whose specialty was heavy machinery and equipment. In order to moderate the earnings volatility and reduce the dependence on sales, Cooper tried to expand its market segments in portable industrial power tools, air and process compressors, small pumps and so on. During 1959 to 1966, four companies had been acquired Cooper based on three major criteria. Potential industry had to meet Cooper’s requirements that helped the company to be a leadership, maintained a stable market share, and became a leading company in the respective market segments. It aimed to expanded and penetrated into hand tools business; therefore, Robert Cizik who was the executive vice president of Cooper Industries was interested in the Nicholson File Company.

Financial structure.

SWOT analysis of Nicholson File Company

Previous merger offers analysis

Why Nicholson File Company?

Nicholson was suffering a low growth rate and PE ratio at the moment, which make the company’s market value lower than its book value. The main reason for that is the low expectation and interest from investors and hence low liquidity of the stock. With the belief of limited future growth rate, the Nicholson stock is traded based on dividend-yield valuation at price lower than its book value. Though Nicholson company was having a hard time, it was still attractive to acquirer because of its remaining strength: Nicholson company is one of the largest domestic manufactures and the leader in its two main product areas with influential brand name and reputation. Specifically to Cooper, Nicholson File had a wide and efficient distribution system

Valuation of Nicholson File Company without merger

According to the Exhibit, The discounted-cash-flow method approach attempts to determine the enterprise value and the value of the Nicholson, by assuming the present value of cash flows over 5 years. In the forecast period, with an assumption that the sale growth rate is 2% and cost of sold is 69%, the Nicholson’s, enterprise value is $27.16 million, and market price is $25.9 per share in 1976. By computing WACC as its discount rate which can reflect the weighted average of investors’ opportunity cost on a comparable investment, the Nicholson’s cost of capital did not draw profits off. Its long-term debt only weighed 27.9% of its total value.

...