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A cooper industries inc a valuation case 274 116

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Based on the given information in the case study regarding the acquisition of Nicholson File Company by Cooper Industries, there is no question that Cooper should try to gain control of Nicholson. This decision is based on an analysis of the bargaining positions of each group of Nicholson stockholders which have disparate goals and needs that need to be met. In addition, an appropriate payment method and specific dollar value based on a competitor's offer and Cooper financial data was decided.

The a cooper industries inc a valuation case 274 116 of this paper will provide the analysis and rationale for this determination. Cooper Industries has been expanding through diversification since 1996. Cooper's requirements to acquire a company has three major components. The target company must be: In an industry in which Cooper could become a major player 2. In an industry that is fairly stable, with a broad market for the products and a product line of 'small ticket' items; and 3.

A leader in its market segment. When looking at the criteria that Cizik's company Cooper Industriesset forth relative to acquisitions, the acquisition of Nicholson meets all three objectives plus has significant potential short and long-term potential. Cooper management feels that by eliminating redundancy and streamlining Nicholson's operations this potential can be realized.

Shareholder Standings At the time of the proposed merger between Nicholson File and VLN, there were a total of approximately 584, 000 Nicholson shares outstanding.

Cooper Industries, Inc.

Porter had not purchased enough shares to hold majority control, and this situation provided Cooper with yet another opportunity to acquire Nicholson. Nicholson and Porter stockholders had their own concerns, as well as bargaining positions, and if Cooper was to acquire Nicholson they had to address all of their concerns and convince them that the merger was a mutually beneficial proposition. The table below, Exhibit 7 in the case study, shows the estimated disposition of shares in early 1972: Porter 177, 000 Cooper Industries 29, 000 206, 000 Shares supporting VLN Nicholson family and management 117, 000 Owned by VLN 14, 000 131, 000 Shares owned by speculators 50, 000 - 100, 000 Shares unaccounted for 197, 000 - 147, 000 Total Nicholson shares outstanding 584, 000 Shareholder Concerns There are three major groups of shareholders that Cooper must consider when putting together their offer to acquire Nicholson.

These groups are Nicholson, H. Porter, and the group of Unaccounted for Shares and Spectator Shares. Nicholson File Company Loss of control - Nicholson management's greatest fear was loss of operating control.

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Additionally, Wall Street investors would view the maintenance of Nicholson management as a stabilizing factor in the merger. Loss of product lines - Whichever company acquired Nicholson, there was no doubt that aggressive cost cutting measures would be pursued; this would undoubtedly mean marginal product lines would cease to exist. Although Cooper could not emphatically guarantee that nothing would change, they could guarantee that they would work with Nicholson to determine if improvements could be made to product lines at risk and thereby maintain their existence, or at the least -- include Nicholson management in the decision making alternatives.

VLN stock performance had been dreary, and did not show any signs of growth in the short-term. This would make it difficult for them to sell the shares of VLN on the American Stock Exchange which does not trade in large blocks.

Quick Sale - Porter will most likely sell their shares immediately after the deal is closed. They will do this because they no longer will have an interest in acquiring Nicholson, and history has shown many times over that share prices will fall rather quickly as mergers do not create synergies through added value or earnings growth.

Unaccounted For Shares and Spectator Shares Valuation and Sustainability - This voting bloc has the same concerns as Porter relative to share pricing, but is more concerned with sustainability unlike Porter who is concerned with making a quick dollar.

They own a lot more shares, estimated between 150, 000-200, 000 shares, and are not certain that VLN Corporation projected figures are truthful. Shareholder Negotiations Both Nicholson and Porter had strong postures regarding the merger, and Cooper needed both companies to bless the merger to get it approved by a majority of the stockholders.

Cooper only owned 29, 000 shares and needed a total of 292, 000 shares to gain a majority. Nicholson and Unaccounted Shares The Nicholson family and management owned 117, 000 shares. However, the speculation was that 150, 000-200, 000 of the unaccounted for shares would vote with the Nicholson family. This amount of shares would give Nicholson immense bargaining power. Cooper knew that their offer would have to be as good, if not better than VLN's offer, as Nicholson management wholeheartedly supported the merger with VLN.

Porter Porter owned 177, 000 shares.

  • Retrieved September 2, 2005, from;
  • Cooper knew that their offer would have to be as good, if not better than VLN's offer, as Nicholson management wholeheartedly supported the merger with VLN;
  • Nicholson File Company Loss of control - Nicholson management's greatest fear was loss of operating control;
  • Cooper's Offer to Acquire Nicholson As has been detailed above, each group of shareholders has their own concerns and bargaining power.

This was a major voting bloc and gaining their support was essential. Therefore, their support would be mutually beneficial and easier to garner.

  • The Nicholson family had also rejected Cooper's acquisition overtures three years earlier so Cooper management is aware of how precise the offer has to be to get Nicholson ownership to sign off on the deal;
  • Porter in order to get approval for the merger;
  • Cooper only owned 29, 000 shares and needed a total of 292, 000 shares to gain a majority;
  • Overall, this offer would not only exceed VLN's offer currently approved by Nicholson management, but would also likely gain the approval of the shares held by speculators and unknown investors;
  • In an industry that is fairly stable, with a broad market for the products and a product line of 'small ticket' items; and 3;
  • In addition, this offer meets the payment method required by H.

Cooper's Offer to Acquire Nicholson As has been detailed above, each group of shareholders has their own concerns and bargaining power. Cooper has to induce both Nicholson and Porter that their offer is more than fair, and as a result, all three companies and shareholders will profit.

In order to match the bid by VLN, Cooper's offer would have to be greater than two-for-one for each Nicholson share. The offer would need to be in the range of 2. It is of extreme importance to Nicholson that they maintain control. In mergers, culture clashes are often the "kiss-of-death. Cooper has a history of successful mergers and acquisitions, which should be of some comfort to Nicholson as they will be acquired by some company or group of investors.

Porter realizes that a merger between Cooper and Nicholson will give them the opportunity to convert shares of Nicholson into Cooper stock - a much more enticing proposition than that of VLN.

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They will also want the exchange to be tax-free to avoid capital gains taxes. As has been mentioned above, this group will most likely side with the Nicholson family so if the Nicholson family is satisfied, then this group will be also. Payment Considerations There are several considerations that Cooper management must take into account prior to deciding the specifics of the offer they will give Nicholson File Company in terms of dollar value and the form of payment.

The form of payment may include an offer of cash, stock, debt or some combination of the payment options. As previously described, one of the challenges Cooper is facing in this acquisition is to ensure a satisfactory offer that appeals to a sufficiently broad range of shareholders with different interests. The Nicholson family had also rejected Cooper's acquisition overtures three years earlier so Cooper management is aware of how precise the offer has to be to get Nicholson ownership to sign off on the deal.

The acquisition offers by both H. Based on these two offers, it appears that the appropriate form of payment should be Cooper cumulative convertible stock.

The primary basis for this recommendation is that Nicholson management had already accepted an offer from VLN Corporation using convertible stock but rejected a cash offer from H. This is consistent with Chang and Suk 1998 research which found that "cash offers are more likely than stock offers to have termination initiated by the target firm.

However, one negative aspect of using stock is that "acquisitions of public targets result in insignificant bidder returns to the acquirer when stock is offered.

In addition, the offer was desirable since the exchange of stock would be tax-free as opposed to a cash offer. According to Dhaliwal et al 2005to qualify as a "tax-free acquisition. Porter in order to get approval for the merger. The final consideration that assists with setting up the range for an appropriate offer that a cooper industries inc a valuation case 274 116 be accepted by a simple majority of shareholders is the total value of Nicholson stock.

Therefore, in order to make the offer attractive, Cooper will have to make an offer that exceeds the market value of all of the stock but will have to ensure that the offer is not too high that it affects Cooper's long-term plans to continue to pursue acquisitions. A basic rule for Cooper acquisitions is that they bring significant long-term returns on the acquisitions as well as steady growth in earnings per share.

Overall, this offer would not only exceed VLN's offer currently approved by Nicholson management, but would also likely gain the approval of the shares held by speculators and unknown investors. In addition, this offer meets the payment method required by H. Failed takeovers, methods of payment, and bidder returns, Financial Review. Harvard Business School case 274-116. Factors to consider when planning consolidation. Retrieved September 2, 2005, from: Nicholson File Company records.

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