Cooper Industries was created in 1919 as a manufacturer of heavy machinery and equipment. They were the leading producer of engines and compressors used to pump natural gas through pipes and oil out of wells. Cooper Industries' sales reflected greatly on the sales of natural gas and oil, leading to volatility of their earnings related to the cyclical nature of heavy machinery sales. In order to even out their sales, in 1959, Cooper began acquiring other manufactures to increase their market spread. By 1966, they had acquired four companies, none of which shielded Cooper from cyclical cycles.
In 1966, Cooper conducted a full review of their acquisition strategy because of unsuccessful past acquisitions. They came up with three criteria that each new acquisition must have; 1) The company must be in an industry where Cooper could become a major factor 2) The industry should be reasonably stable, with a broad market for products and a product line of "small-ticket" items. 3) Cooper would only acquire leading companies in their respected markets. Cooper used their newly implemented strategy to acquire Lufkin Rule Company in 1967. Then in 1969, Cooper acquired Crescent Niagara Cooperation.
Cooper continued its quest to eliminate the cyclicality of their sales by Acquiring Weller Electric Cooperation in 1970. With the acquisition of these companies, Cooper gained significant market share in the hand tool market, as well as strong distribution and management teams. Issue at Hand Cooper Industries was also looking to acquire Nicholson File Company, due to recent vulnerability, but being an overall strong company. The vulnerabilities were a reflection of conservative accounting and financial policies, and low percentage of outstanding stock held by the Nicholson family.
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Their sales growth is 2%, well below the industry average of 6%. Their profit margins were also down to one third of other the hand tool manufacturers. Its common stock was trading at $ 44, well below its book value average of $51. 25. The main reason to acquire Nicholson was that they had a competitive advantage in their industry. They were the leader of the file and rasp industry by holding 50% market share of the $50 million industry, and also holding a 9% market share of the hand saw and saw blades $200 million industry.
Nicholson also had a huge distribution system; 48 direct salesman who sold to 2,100 hardware wholesalers, who in turn distributed to 53,000 hardware retailers in 137 countries worldwide. Cooper was not the only company looking to acquire Nicholson File Company; H. K. Porter Company was also interested. Porter was a conglomerate with a wide-ranging interest in electrical, tools, nonferrous metals, and rubber products. They have already acquired 44,000 shares of common stock of Nicholson in 1967. On March 3, Nicholson received a tender offer of $42 a share for 437,000 shares from Porter, to take over the company.
Nicholson was not happy with the idea of being acquired by Porter, due to the loss of control of their company. The merger would only increase the sales figures of Porter by only one-sixth of what they already make. If the offer went through, 20% of the outstanding shares owned by the Nicholson family would not be enough to retain control of the company. Cooper made an offer to Nicholson so that Porter would not get the company; Cooper's stock was depressed at the time, leaving them vulnerable for Porter to acquire them, forcing them to withdraw the offer.
Enough shares had been tendered that a merger was imminent for Nicholson; the question was by whom. By late March Nicholson needed to make a move and find someone to merge with soon in order to keep Nicholson management in control, instead of Porter taking over. They finally found a company to merge with that would not get rid of management, VLN Company, a broadly diversified company with major interests in original and replacement automotive equipment and in publishing. By accepting VLN's agreement, Nicholson would still hold operating independence of their company.
They liked VLN's offer for a couple reasons; it was a tax free transaction, the stock holders would still receive the same $1. 60 preferred stock dividend, and a preferred share was worth a minimum of $53. 10, according to VLN. Because of these reasons, Nicholson management supported the offer. However, Porter stated that the shares were only worth $23. 12. The price differed according to what recent stock price of VLN was used the low or the high. Disputes between VLN and Porter gave Cooper another opportunity to acquire Nicholson.
Porter did not want the merger between VLN and Nicholson to occur. A few reasons for that being; Cooper shares were worth more than VLN shares, VLN was traded on the American Stock Exchange, meaning it was less liquid, and the preferred dividend was below the market yield. During the time that Porter was trying to takeover Nicholson, they had acquired 133,000 shares of common stock in addition to the 44,000 shares they acquired a few years earlier. This was well short of the 292,000 shares needed for Porter to overtake Nicholson Company.
If Cooper were to acquire Nicholson this would be more lucrative for Porter, so Porter had a tentative agreement with Cooper to support the Cooper-Nicholson merger. That would lead to 177,000 shares from Porter in Cooper's favor, including 29,000 shares they had acquired over the open market in the past months, bringing their share total to 206,000. That left the need for only 86,000 more shares to merge with Nicholson and have 50. 1% control. There were 150,000-200,000 shares unaccounted for at that time, but would be purchased if Nicholson recommended the merger with Cooper.
Every other merger that Cooper underwent was friendly in nature, so they wanted to make sure that the merger with Nicholson followed suit. They needed to make an offer to Nicholson that they would be interested in. Additional terms included long-term returns and improved earnings per share over the next five years. These were put in place to leave additional acquisitions, in the future, a viable option for Cooper and Nicholson. Ratio Analysis Nicholson File Company is suffering a low increase of sale. The rate of sale growth is only 2%, which is much lower than the 6% of industry average.
But according to its financial data and some ratios, it shows that Nicholson File Company is worth to buy. Current Ratio: this ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities with its short-term assets. The current ratio of the industry average is only 2. 3 (page A-1, A-2). The ratio of Nicholson is about 7, almost triple of industry average. It shows that Nicholson File Company is healthy in financial position and also shows that Nicholson is leading in position of in industry.
As this reason, it meets cooper's third acquisition strategy. Quick Ratio: the quick ratio of Nicholson File Company is 0. 62 (page A-2), while the industry average is 0. 5. Even Nicholson File Company's inventories cover almost 40% (page A-4). Its quick ratio is still up to the industry by 0. 12. It also indicates this company's short-term is outstanding in liquidity. Inventory turnover: Nicholson File Company is experiencing low sale growth, so its inventory turnover ratio is not brilliant as its current ratio or quick ratio.
Its inventory turnover is 2.1 (page A-3), which is same to the industry average. If it is taken over by cooper, the net sale of each year is expected to increase by 6%, instead of 2%. Receivable Turnover: the Receivable turnover of Nicholson File Company is 6. 9 (page A-4), while the industry average is about 4. 6. It shows that Nicholson File Company can make a collection of credits sale and accounts receivable more efficient than other companies in the same industry. On the other hand, it also indicates Nicholson File Company has a very good ability in debt management.
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