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Cooper Industries, Inc

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Kelsi Patterson

on 19 September 2013

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Transcript of Cooper Industries, Inc

Cooper Industries, Inc

Cooper Industries, Inc
Aaron, Kelsi, Luther, Stephanie, Tom, Will
Competition to Takeover and Opportunity for Cooper
Valuation
High Volatility Lead to Change in Acquisition Strategy
Nicholson File Company
Deal Structure
Recommendation
Presentation Outline
1. Background of Cooper Industries
2. Cooper Industries strategy
3. Target acquisition - Nicholson File Company
4. Other offers and what is now the opportunity for Cooper
5. Valuation
6. Recommendation
Background - Cooper Industries
Management Concerns
High dependence of sales to the oil and gas industries
High earnings volatility because of cyclical nature of machinery sales
Acquisition Strategy
Three criteria for new acquisitions:
Industry where Cooper could become a major leader
Stable industry with no reliance on large customers or a few large sales a year
Acquire only leading companies in their respective market segments
Recent acquisitions
The new strategy lead to Cooper acquiring three firms from 1967-1970
Lufkin Rule Company - worlds largest manufacturer of rulers and tapes
Crescent Niagara - well known, high quality wrenches, pliers and screwdrivers
Weller Electric Corporation - leading supplier of soldering tools
Nicholson File Company
Established 1864
Leading manufacturer of hand tools
Family dominated management
Past attempts to merge with Nicholson failed
Acquisition of Nicholson
Is it consistent with acquisition strategy?
Motive
Will acquiring Nicholson reduce instability in EPS?
Will it help stock price reflect true value?

Coopers motivation for acquisition
Five motives for acquisition
Undervaluation
Diversification
Synergies
Control
Management self-interest
Past acquisition strategy/motives
Diversification
Decrease instability in EPS
Cyclical nature of sales
Fluctuating oil price
4 acquisitions between 1959-1966

Cooper Industries, Inc
First to show an interest in Nicholson File Company
In 1969 approached Nicholson File Company
Attempts to form a relationship rejected
H K Porter Company
Already own 44,000 shares of total 584,000
3rd March 1972, announce a tender for an additional 437,000
Offer to pay $42 per share in cash
Takeover threatened Nicholson's operating independence
Product lines likely to be eliminated in cost cutting
Cooper should proceed with its takeover bid for Nicholson.
Recommended exchange ratio of 2.083 Cooper shares for every 1 share in Nicholson
Satisfies both of Porter’s conditions, thereby securing their support.
Cooper’s commitment to making a friendly takeover will benefit Nicholson.

What really happened?
Cooper offered to exchange 1 share of new Cooper convertible, preferred stock for each share in Nicholson.
Cooper and Porter’s combined 47% holding in Nicholson left Nicholson with little choice.
Cooper completed the takeover of Nicholson in October 1972
Based on Jim Harvey's speech structures
Is Nicholson an attractive acquisition?
Operations in Heavy machinery and equipment
Reduce instability in EPS and increase stock price
Diversify against fluctuating oil price

Motives behind past 3 acquisitions
Diversification (of product size/ turnover)
Synergies
Control

Is VLN really the white knight?
VLN Corporation strike agreement
Cooper Industries Inc.
Approach Nicholson File Company a second time
Willing to make a better offer, if they commit now
Counter offer later withdrawn
Appear to be white knight in the takeover conflict
Offering preferred stock, initially convertible into 5 common stock
Preferred stock paying $1.60 annual dividend
Tax free exchange on securities
Nicholson guaranteed continued operating independence
Value of preferred shares received dependent on common stock
Common stock has not paid dividends since 1970
No sign of significant future growth
Dividend yield below the risk free rate and current market yield
Unwilling to exchange Nicholson shares for VLN stock
Move support to Cooper, as appears more attractive
Cooper are expected to rebound out of downturn
Cooper stock more liquid, and easier to trade
New opportunity for Cooper Industries
Cooper Status Quo

Nicholson Status Quo

Nicholson Under Cooper Control

Cooper Post Merger

EPS Chart

Sensitivity Analysis

Of course not! They are our competition!
Have got into bed with management and promised retention of their jobs
Poor company with no obvious synergies
Chance of a successful raid by Cooper looks good

VLN Considered?

Large number of Speculators will accept Cooper offer due to immediate 14% premium on current stock price (we estimate 50% conservatively)
Friendly take over achieved by providing second “white knight” offer
Nicholson management still employed
Market growth achievable under Cooper Management=value for both firms
EPS maintained
Long term growth prospects are healthy
$50 p/share fair price for one Nicholson Share- Everybody wins


Continued…

Cooper happy to do share exchange of 2.083 Cooper shares for 1 Nicholson Share
Satisfies $50 H.K Porter asking price
Cooper proven track record, strong company, continuation of product lines
Under appreciated at time, Porter expects Coopers Shares to appreciate = greater $ return for them
Cooper better value company than VLN



Coopers Offer

Nicholson valuation
Exchange Ratio

The Numbers

Currently sitting on sideline
Large percentage will follow Nicholson Managements Recommendation
We estimate a third of unaccounted for will take Cooper offer if Nicholson Management endorse (conservative)


Unaccounted for Shares

Tax free transaction
Minimum price of $50 p/share
Strong company taking over

H.K Porter Wishlist

Want Friendly Takeover
Maintain EPS
Satisfactory long term growth
Ownership but joint control
Pay a fair value to all parties AND not overpay
Make acquisitions that continue Cooper Strategy of Improving market share and delivering operating and financial synergies
Cash or Stock Issue?

Cooper Industries Wishlist

Nicholson Family/Management
Cooper Industries
H.K Porter
Speculators
Unaccounted for Shareholders
VLN Corporation


Who are the stake holders in the Deal?

Projected Ownership Post Cooper Offer

Ownership Pre-Cooper Offer

Exchange Ratio = 50/24
=
2.08 Cooper Shares for every 1 Nicholson Share

Cooper Trading at $24
Nicholson Offer $50
Anything Greater has Negative impact on EPS

Exchange Ratio

Holding shares in hope of capital gain from competing firms
Current price $44 p/share
$42 p/share tendered by H.K Porter
VLN offer $53.10 based on current price of VLN stock of $10.62
FOR SPECULATORS TO SELL > $44 P/share

Speculator Wishlist

Non hostile
Promise of jobs post merger
Best option for its shareholders
Ensure continuation of product lines


Nicholson Management/Family Wishlist

Cooper has one last shot at an attractive company which multiple firms are vying for

Structuring the Deal

Growth rate of 11.02% for combined firm BV
Nicholson BV of $47 million
Cash Equivalent share offer max of $27 million
Continued upward EPS Trend
To be Tax free need 100% share for share swap


Nicholson Valuation Determined:

Ownership Pre-Cooper Offer

Cooper happy to do share exchange of 2.083 Cooper shares for 1 Nicholson Share
Satisfies $50 H.K Porter asking price
Cooper proven track record, strong company, continuation of product lines
Under appreciated at time, Porter expects Coopers Shares to appreciate = greater $ return for them
Cooper better value company than VLN



Coopers Offer

Growth rate of 11.02% for combined firm BV
Nicholson BV of $47 million
Cash Equivalent share offer max of $27 million
Continued upward EPS Trend
To be Tax free need 100% share for share swap


Nicholson Valuation Determined:

Currently sitting on sideline
Large percentage will follow Nicholson managements recommendation
We estimate a third of unaccounted for will take Cooper offer if Nicholson Management endorse (conservative)


Unaccounted for Shares

Holding shares in hope of capital gain from competing firms
Current price $44 p/share
$42 p/share tendered by H.K Porter
VLN offer $53.10 based on current price of VLN stock of $10.62
FOR SPECULATORS TO SELL > $44 P/share

Speculator Wishlist

Tax free transaction
Minimum price of $50 p/share
Strong company taking over

H.K Porter Wishlist

Want Friendly Takeover
Maintain EPS
Satisfactory long term growth
Ownership but joint control
Pay a fair value to all parties AND not overpay
Make acquisitions that continue Cooper Strategy of improving market share and delivering operating and financial synergies
Cash or Stock Issue?

Cooper Industries Wishlist

Nicholson Family/Management
Cooper Industries
H.K Porter
Speculators
Unaccounted for Shareholders
VLN Corporation


Who are the stake holders in the Deal?

Cooper has one last shot at an attractive company which multiple firms are vying for

Structuring the Deal

Of course not! They are our competition!
Have got into bed with management and promised retention of their jobs
Poor company with no obvious synergies
Chance of a successful raid by Cooper looks good

VLN Considered?

Projected Ownership Post Cooper Offer

Large number of Speculators will accept Cooper offer due to immediate 14% premium on current stock price (we estimate 50% conservatively)
Friendly take over achieved by providing second “white knight” offer
Nicholson management still employed
Market growth achievable under Cooper management = value for both firms
EPS maintained
Long term growth prospects are healthy
$50 p/share fair price for one Nicholson share - everybody wins


Continued…

Non hostile
Promise of jobs post merger
Best option for its shareholders
Ensure continuation of product lines


Nicholson Management/Family Wishlist

Exchange Ratio = 50/24= 2.08 Cooper Shares for every 1 Nicholson Share

Cooper Trading at $24
Nicholson Offer $50
Anything Greater has Negative impact on EPS

Exchange Ratio

EPS vs. DCF
The motivation for our valuation technique
Acquisitions
1. A supplier of portable industrial power tools
2. A manufacturer of small industrial air and process compressors
3. A maker of small pumps and compressors for oil field use
4. A producer of tyre changing tools
Started off in 1919 as a manufacturer of heavy machinery and equipment
By mid 1950's Cooper was a leading producer of engines and compressors
Porter Change Their Focus
Full transcript