cooper industry case study

cooper industry case study

• 1.
  Cooper Industries Manan Parekh– 107 Priyanka Jain - 113 Omkar Gurav - 93
• 2.
  Problem Statement • IsNicholson File Company a good acquisition target for Cooper industries? • If Yes, at what price?
• 3.
  Big stack bullyCooper Industries • Cooper industries was organized and founded in 1919 as a manufacturer of heavy machinery and equipment. • By 1950’s cooper industries was a leading producer of engines and massive producers. • Between 1959 – 1966 Acquisitions. - A supplier of portable industrial power tools - A manufacturer of small industrial air and process compressor - A maker of small pumps and compressor of oil field applications. - A producer of tire changing tools for the automotive market.
• 4.
  SWOT Analysis Strengths 1. Strongacquisitions which widened its market and diversified its portfolio. 2. Cooper Industries is well positioned for sustained growth in the years ahead Weaknesses 1. Heavy dependence on sales to oil and gas industries. 2. Violent fluctuation of earnings caused by cyclic nature of heavy machinery and equipment sales. Opportunities 1. Compressors: long term expansion in the oil and gas business due to increasing global population and economic expansion in developing countries. 2. Engines: increased demand of gas engines due to spread of low cost shale gas. 3. Emerging markets in developing countries. Threats 1. Rise of manufacturers in emerging countries. 2. Uncertainty in the Economy.
• 5.
  To grow Ineed to buy but what to buy? (Acquisition strategy) • The Industry should be fairly stable with broad market for the products a product line of largely small ticket items • To acquire the leading companies in their respective segment for better growth perspective.
• 6.
  Underdog Nicholson FileCompany • A company with relatively poor sales and poor performance in the recent years. • Nicholson had conservative accounting, Financial policies and low percentage of outstanding stocks held by Nicholson family. • Nicholson Sales growth was 2% in comparison to industry growth of 6%. • Stocks traded well below book value. Lack of interest from investors was reflected from companies Price – Equity ratio.
• 7.
  Cooper – Nicholsonprojections • Cooper industries projects Nicholson’s growth rate of sales from 2% to 6%. • Decrease in COGS from 69% to 65% gradually • Decrease in selling and administration expenses from 22% - 19% • Stronger position in the market
• 8.
  Multiples of earlieracquisitions Particular Lufkin rule Crescent Niagara Weller Electric Accounting no ( Nicholson) 1971 Median Nicholson Price / Sales 0.9 0.8 1.5 55.3 0.9 51.8 Price / Income 14.7 -312.5 16.2 1.35 14.7 19.9 Price / Book Value 1.4 2.6 3.3 51.25 2.6 130.7 As per multiples Cooper industries acquisition the merger with Nicholson as per price of share will be in range $19.9/- to $130.7/-
• 9.
  Financials as isbasis Valuation (AS IS BASIS) Particulars 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 Operations 2% 2% 2% 2% 2% Net sales 48.50 49.10 53.70 54.80 55.30 56.41 57.53 58.68 59.86 61.06 Cost of goods sold 32.60 33.10 35.90 37.20 37.90 38.92 39.70 40.49 41.30 42.13 Selling, general, and administrative expenses 10.70 11.10 11.50 11.90 12.30 12.41 12.66 12.91 13.17 13.43 Depreciation expense 2.00 2.30 2.40 2.30 2.10 2.14 2.18 2.23 2.27 2.32 Other deductions 0.30 0.10 0.20 0.20 0.20 0.00 0.00 0.00 0.00 Income before taxes (EBT) 2.53 1.85 2.97 2.42 2.02 2.93 2.99 3.05 3.11 3.18 Taxes 0.60 0.84 1.31 0.88 0.67 1.17 1.20 1.22 1.25 1.27 Net income 1.93 1.01 1.66 1.54 1.35 1.76 1.80 1.83 1.87 1.91 Add: Depreciation 2.14 2.18 2.23 2.27 2.32 Cash Flow from Operations 3.90 3.98 4.06 4.14 4.22 Less: Change in NWC 0.48 0.49 0.50 0.51 0.52 Less: CapEx 0.36 0.37 0.38 0.38 0.39 Operating Free Cash Flow 3.06 3.12 3.18 3.25 3.31 Continuity value (WACC 10%) 42.24 Total FCFF 45.55 Terminal Value 3.06 3.12 3.18 3.25 45.55 Discounted FCF 2.69 2.57 2.45 2.34 28.28 EV 38.33 Less: Long-term debt 11.00 FCFE 27.33 no. of shares 0.584 Interest expense 0.4 0.7 0.8 0.8 0.8 Percentage of Sales Cost of goods sold 67% 67% 67% 68% 69% 69% 69% 69% 69% 69% Selling, general, and administrative expenses 22% 23% 21% 22% 22% 22% 22% 22% 22% 22% Income before taxes 5% 4% 6% 4% 4% 3% 3% 3% 3% 3% value per share 46.80 EPS 3.02 3.08 3.14 3.20 3.26 Continuity value 45.55
• 10.
  Financials to bebasis Valuation of Nicholson ( TO BE BASIS) Particulars 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 Operations 6% 6% 6% 6% 6% Net sales 48.50 49.10 53.70 54.80 55.30 58.62 62.14 65.86 69.81 74.00 Cost of goods sold 32.60 33.10 35.90 37.20 37.90 40.45 42.25 44.13 46.08 48.10 Selling, general, and administrative expenses 10.70 11.10 11.50 11.90 12.30 12.90 13.67 13.83 13.96 14.06 Depreciation expense 2.00 2.30 2.40 2.30 2.10 2.14 2.18 2.23 2.27 2.32 Other deductions 0.30 0.10 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 Income before taxes (EBT) 2.53 1.85 2.97 2.42 2.02 2.93 3.83 5.48 7.30 9.32 Taxes 0.60 0.84 1.31 0.88 0.67 1.17 1.53 2.19 2.92 3.73 Net income 1.93 1.01 1.66 1.54 1.35 1.76 2.30 3.29 4.38 5.59 Add: Depreciation 2.14 2.18 2.23 2.27 2.32 Cash Flow from Operations 3.90 4.48 5.51 6.65 7.91 Less: Change in NWC 1.44 1.53 1.62 1.72 1.82 Less: CapEx 0.36 0.37 0.38 0.38 0.39 Free Cash Flow 2.10 2.59 3.52 4.55 5.70 Terminal Value 122.44 2.10 2.59 3.52 4.55 128.14 Discounted FCF 1.97 2.27 2.89 3.51 92.44 Enterprise Value 103.07 Less: Long-term debt 11.00 FCFE (equity) 92.07 no of shares 0.584 Interest expense 0.4 0.7 0.8 0.8 0.8 Percentage of Sales Cost of goods sold 67% 67% 67% 68% 69% 69% 68% 67% 66% 65% Selling, general, and administrative expenses 22% 23% 21% 22% 22% 22% 22% 21% 20% 19% Income before taxes 5% 4% 6% 4% 4% 5% 6% 8% 10% 13% EPS 3.01 3.93 5.63 7.50 9.58 Value per Share $ 157.66 Continuity Value $ 122.44
• 11.
  H.K. Porter co.a competitor to look after. • A Conglomerate with wide ranging interest in electrical equipment, tools, non ferrous metals and rubber products • H.K Porter had acquired 44000 shares of Nicholson in 1967 and was planning to acquire 437000 @ 42$ a share • Shares were valued at a premium of 12$ a share • H.K. Porter trying to go for hostile take over by buying 437,000 of 584,000 outstanding shares
• 12.
  VLN a competitorto look after. • A broadly diversified company with major interest in publishing, original and replacement automotive equipment. • It assured Nicolson of continued operating Independence. • A VLN preferred stock would pay a annual dividend of $1.60/- • Preference shares would be convertible to 5 shares of VLN common stock during 1 year of merger scaling down to 4 shares after 4th year • Right of calling of preference shares @ $50/- a share after 5 years ( Face Value )
• 13.
  Has Cooper madea right move? • Nicholson is a company with very good fundamentals • Diversification of business and sustainable growth with quality management • Increase in earnings per share in upcoming years • Chances of making future acquisitions on the basis of stock • Cross selling of products and friendly environment.
• 14.
  - Thank you •Nicholson will support the merger as the offered is around $50/- a share more than $42/- offered by H.K Porter. • Cooper industries will also be satisfied as the value per share of Nicholson comes around $46.80/- Conclusion