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Team 3: Cooper Industries

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by

William Marshall

on 14 September 2010

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Transcript of Team 3: Cooper Industries

Opposition to conglomeration
-Do not assume managers can oversee any kind of business
-Management must thoroughly understand processes, markets, cultures, related laws What does this have to do with spark plugs? Cooper purchasing Champion for name brand - But how strong is Champion's name brand if their own diversitfication failed? Criteria for any company:
- EBIT too high - risky purchase
- Aquire companies that manufacture basic products Cheaper purchase price
Products complement Cooper's
Stengthens market position
5.2% & 4% return on sales & assets "I believe that to excercise [management control], management must thoroughly understand the company's acivities - its production processes, products, markets; the laws that relate to its various activities; and the cultures and customs of the areas in which it operates.

Robert Cizik
Chairman, President, and CEO Seek companies with:
Stable earnings
Strong assets
Market leading positions Why not? Purchasing on brand name basis - how strong is brand name when Champion's owen diversification didn't work?
Important in foreign markets (only real reason for buying)
No experience overseas
Not cheap
What else could we do with $825 million?
Market dynamics are not optimal
Purchasing champion defines conglomerization
"one time" value added

Inefficient use of funds (acquisition costs, restructuring costs, reinvesting in new products and processes)
55-60% debt to total capitalizatin ratio if both companies purchased
Cameron a better fit
Action by competitors not of concern - Don't care if someone else buys them
Out-of-date production technolgies
Jetfleets - can seel quickly, but culture reform takes time and resources
Expensive union labor (see: LATimes article), which is against Cooper policy
Shifting automotive (read: spark-plug) landscape: Asian brands and manufacturing on the rise Out-of-date "1950's" production technologies
"Bloated corporate overhead:" Jetfleets can be sold quickly, but culture reform takes time and resources
Inefficient use of funds (acquisition costs, restructuring costs, reinvesting in new products and processes)
Cameron a better fit & cheaper
Can't buy both: 55-60% debt to total capitalization ratio if both companies purchased
Market share/action by competitors not of concern - Let someone else shoulder the burden of this moribund manufacturer
Shifting automotive (read: spark-plug) landscape: Asian brands and manufacturing on the rise
Expensive union labor, which is against Cooper policy (See: LATimes article) "Deal making is romantic, sexy. That's why you have deals that make no sense." Why not? Inefficient
use of funds How we pick targets - quote Cizick on page 2 Outdated
technology Bloated
corporate
overhead Can't buy both; Cameron a better deal > Let the
competition
have it Rise of
Asian Autos Unionized
labor 2 Diversification:
Seek acquisitions that exhibit stable earnings or earnings patterns that are countercyclical to those we already have
Aquire products that serve basic and essential needs and that are derived from proven technologies, thereby contributing to the objective of operating in stable markets with predictable growth
Acquire manufacuring companies with products that are of high quality and that are leaders in their markets

Complements:
Broaden existing product lines
Offer opportunities for enhanced earnings through cost management
Enhance Cooper's strength in distribution
Strengthen a business unit's marker position
Enjoy widespread brand name recognition
Serve a broad customer base What is Cooperization? Countercyclical products
Basic and essential needs and that are derived from proven technologies
High quality products by marker leaders Diversification Broaden existing product lines
Offer opportunities for enhanced earnings through cost management
Enhance Cooper's strength in distribution
Strengthen a business unit's marker position
Enjoy widespread brand name recognition
Serve a broad customer base Complements What is Cooperization? "You can't be afraid to get rid of the things that have served their useful time"
"Strong brand"
35% of sales overseas
Also windshield wiper blades Purchasing on brand name basis: how strong is brand name when Champion's own diversification didn't work?
Important in foreign markets (only real reason for buying)
No experience overseas
Not cheap
What else could we do with $825 million?
Market dynamics are not optimal
Purchasing champion defines conglomerization
"one time" value added Why not? 1 Thank you.
Any Questions?
Autographs? Cooper is good for Champion, but is
Champion good
for Cooper? Strong
Brand? No Experience Overseas Not
cheap Coglomeration
risky Peter Drucker
Quoted in The Essays of Warren Buffet:
Lessons of Corporate America NEITHER A GOOD COMPLMENT NOR A DIVERSIFIER:
Shrinking spark plug market as auto industry shifts to smaller engines
Manufacturing with 1950s
Swolen corporate overhead, jets (poor corporate culture)
35% of sales overseas
Attempts to diversify proved unprofitable
35% of Champion stock held by founding family

Unfamiliar company, unfamiliar market, unfamiliar area
A GREAT COMPLEMENT:
Cheaper purchase price ($700 million vs. $825 million)
Petroleum & natural gas products complement Cooper's Compression and Drilling segment
Stengthen's Cooper's current market position in Compression & Drilling products
C&D Segment: 5.2% & 4% return on sales & assets respectively - up from last 4 years but could use boost to return to results of early 80s Neither a good complement nor a diversifier. Unfamiliar company, unfamiliar market, unfamiliar area + Shrinking spark plug market
Failed diversification
1950s Technology
Swolen corporate overhead - + Don't assume managers can oversee any type of business
Complementary or countercyclical
Products serve basic needs with mature production technologies Why not Champion? Offer: $21/share ($825 million total) Offer: $700 million total
Full transcript