Cooper Industries Inc. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

PRICING OF NICHOLSON FILE COMPANY

Messrs, Rector and Cizik approached Nicholson Management with the proposal of a better offer if management would commit to it without any delay but that did not happen and the offer was withdrawn. However, after the failure of Porter’s all cash offer of $42 per share and Porter’s interest in Nicholson-Cooper merger there was an opportunity for Cooper to try and gain control once again.

Nicholson’s management had agreed for a merger with VLN through preferred convertible shares worth $53.1 each. This price was based on VLC share price of $10.62 the day before the offer. However VLN stock had recently been as low as $4.6 per share that meant that there was the potential that actual value of the convertible was below $53.1 each. A significant number of shareholders had tendered their shares at $42 per share and Cooper could gain simple majority if a significant number of these shares could be acquired in addition to shares already held and offered by Porter. Exhibit D and E provide relevant valuations and offer prices. Cooper had previously acquired companies at earnings multiple of around 15 to 16 and an offer in this region valued Nicholson’s share at around $34 to $38 per share. Using PE ratios of Nicholson’s competitors, potential price is in the region of $32 to $40 per share but this price did not incorporate any acquisition premium. DCF analysis at Exhibit B and E show that acquisition is highly attractive and Cooper can afford to pay a significant price premium and still achieve healthy return. Assuming full ownership, if company pay $32 million and generate forecast revenues in Exhibit B, net present value of the acquisition is in excess of $55 million (Exhibit F).

CONCERNS AND POSITION OF NICHOLSON FILE COMPANY SHAREHOLDERS

Nicholson’s management and chairman value continued operating independence very highly and would like to see a set-up where there is significant autonomy for the current management. In this regard, Cooper’s policy of friendly takeovers and good relations with management should help to alleviate any concerns. Another important aspect is the taxation side of the transaction as a cash-only transaction is likely to result in significant tax burden reducing the return achieved by shareholders significantly. Thus, an offer that reduces or eliminates tax burden is important for shareholders. Finally price offered should be attractive enough that represent good return on investment. If an equity-based offer is made, shareholders would be concerned about real value of the equity instrument on offer. Future dividends and expectation of likely stock movement in near future would be important aspects for shareholders.

OFFER IN TERMS OF VALUE AND FORM OF PAYMENT

H.K Porter Company, a large conglomerate and held nearly 25% of Nicholson stock. Porter initiated takeover bid by announcing tender by April 4 for remaining 437,000 shares at $42 per share in cash representing $12 premium per share over most recent share price. Porter’s tender did not succeed; attracting only 133,000 shares that were not enough for majority control. Nicholson’s management had agreed to a merger with VLN Corporation through one shares of convertible preferred stock for each Nicholson share. The convertible share would provide $1.6 annual dividend convertible in five shares of Nicholson during first year and 4 shares after four years. Stock was callable at $50 a share after year 5. Porter was not interested in this and preferred Cooper’s equity-based instrument over VLC’s offer.

Cooper needed to offer either common stock or convertible preferred stock with current market yields of around 7%. Evans, President of Porter agreed to support Cooper-Nicholson merger if transaction was tax free and worth at least $50 a share. Cooper holds 29,000 of Nicholson shares (roughly 5%). Fifty to hundred thousand shares were held by speculative investors in the hope of escalation in share price. Another 150 to 200 were held by investors likely to support Nicholson management recommendation. To gain at least 80% shares, Cooper would need to make an offer that would be acceptable to Porter, Nicholson management and other shareholders. Cooper would need to structure a non cash-offer to eliminate tax burden of the investors and would need to offer in excess of $50 a share................................

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