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Background
Cooper Industries has been pursuing a policy of expansion through the
acquisition of other companies and this strategy appears to be working well
for them. They have acquired a number of companies and have been
successful in integrating them into Cooper Industries. They have established
three criteria that potential companies for acquisition must meet and
Nicholson meets all three criteria.
Nicholson holds 50% of the market share in files and rasps, its main products,
therefore implying that Cooper could be a major factor in this industry.
Nicholson is also a leading company in their markets and it is a stable
company in terms of not being dependent on a few major customers.
Nicholson has a great deal of potential for greater sales growth as it is only
growing sales at 2% compared with the industry average of 7%. Due to the
strengths of its products and distribution system they should be capable of
raising growth rates to the industry average. The company is further desirable
to Cooper as the two companies sales forces could be combined leading to cost
savings.
Nicholsons European distribution system could also be very helpful in
expanding Coopers sales in Europe. As Cooper Industries sells more of their
product to industry and Nicholson to the consumer market by combining the
companies they may be able to increase sales of both product lines to the
market segment they are weaker in.
In an industry that is fairly stable, with a broad market for the products
and a product line of small ticket items.
Cooper analyzed the benefits of merging with Nicholson, they estimated that
Nicholsons cost of goods sold could be reduced from 69% of sales to 65%.
The acquisition would eliminate the sales and advertising duplication, which
would lower the general and administrative expenses from 22% of sales to
19%. In addition, 75% of Nicholsons sales were to the industrial market and
only 25% to the consumer market compared to the inverse for Cooper, since
they distributed between the consumer market at 25% and industrial market
at 75%.
Valuations: As Is Basis
As Is Basis
1971
55.30
37.90
12.30
1972
56.41
38.92
12.41
1973
57.53
39.70
12.66
1974
58.68
40.49
12.91
1975
59.86
41.30
13.17
1976
61.06
42.13
13.43
Other Deductions
0.20
0.20
0.20
0.20
0.20
0.20
Dep
2.10
2.14
2.18
2.23
2.27
2.32
EBIT
Interest
EBT
PAT
2.80
0.80
2.00
1.35
2.73
2.79
2.85
2.91
2.98
1.64
1.68
1.71
1.75
1.79
NWC
24.00
24.48
24.97
25.47
25.98
26.50
Change in WC
0.217
0.48
0.49
0.50
0.51
0.52
0.78
16.32
14.51
12.66
10.77
8.84
16.00
16.32
16.65
16.98
17.32
17.67
0.32
0.33
0.33
0.34
0.35
Sales
COGS
Selling Exp
GFA
Plant & Equipment
Capex
1972
1973
1974
1975
1976
2.98
0.9009
2.6836
3.04
0.8116
2.4711
3.11
0.7312
2.2726
3.17
0.6587
2.0898
3.24
0.5935
1.9220
FCFF NPV
PV of CV
PV
Less: Debt
Value of Equity
Expected Share Price
$11.44
$21.78
$33.22
$12.00
$21.22
$36.34
Valuations: To Be Basis
To Be Basis
1971
55.30
37.90
12.30
1972
58.62
38.10
11.14
1973
62.14
40.39
11.81
1974
65.86
42.81
12.51
1975
69.81
45.38
13.26
1976
74.00
48.10
14.06
Other Deductions
0.20
0.20
0.20
0.20
0.20
0.20
Dep
2.10
2.23
2.36
2.50
2.65
2.81
EBIT
Interest
EBT
Net Income (PAT)
2.80
0.80
2.00
1.35
6.95
7.38
7.84
8.32
8.83
4.17
4.43
4.70
4.99
5.30
24.00
25.44
26.97
28.58
30.30
32.12
1.44
1.53
1.62
1.72
1.82
16.96
15.76
14.48
13.12
11.68
16.96
17.98
19.06
20.20
21.42
0.96
1.02
1.08
1.14
1.21
1972
1973
1974
1975
1976
3.99
0.9009
3.5979
4.24
0.8116
3.4449
4.51
0.7312
3.2951
4.78
0.6587
3.1512
5.08
0.5935
3.0139
Sales
COGS
Selling Exp
NWC
Chg in WC
GFA
Plant & Equipment
16.00
Capex
FCFF NPV
$16.50
PV of CV
$63.89
PV
$80.39
Less: Debt
$12.00
Value of Equity
$68.39
Expected Share Price $117.11