KU Case Study – Cooper Industries / Nicholson File Organized by Discussion Topics Topic 1 – Business Characteristics of Nicholson File as an Acquisition Candidate for Cooper Industries Industry – Is it attractive? Growing, etc. Market position of product lines Distribution – Domestic & international Fit with Cooper •
•
Comparison with other acquisitions recently completed (nature of business, size, complexity, etc.) Does Cooper have the ability to manage, improve & integrate this business?
Topic 2 – Financial Characteristics……… Sales growth Profitability trends Comparison with peers Opportunities for cost savings & synergy Balance sheet (including management of working capital)
Cooper Industries / Nicholson File
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Topic 3 – Ownership Characteristics as a public company Discuss implications of the ownership profile below (after H.K. Porter tender & a s Cooper prepares to pursue the acquisition) • • •
Degree of influence of the inside ownership position Implications for Cooper in its dealings with Nicholson Who poses the real threats to Cooper's chances - H.K. Porter? - VLN? - Insiders? - Unknown future bidders?
Shareholder Group
Shares Owned (000)
% of Total
Cooper and Its Allies -Cooper -H.K. Porter Sub-total Arbs (speculators)
29 177
5.0% 30.3
206
35.3
50-100
8.6-17.1
Cumulative
43.9-52.4
Insiders and Their Allies -Family and Management -VLN Sub-total Other Public Shareholders Total
117 14
20.3 2.4
131
22.7
197-147
33.7-25.2
584
100.0%
Cooper Industries / Nicholson File
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Topic 4, 5 & 6 – Market Characteristics 4 - What is the scenario indicated by the market before H.K. Porter's tender offer?
1971 Trading Range _____-_____ Book Value Per Share _____ Market Price % Book Value _____ Dividend Per Share _____ Yield (at high & low price) _____-_____ PE Ratio (see pg. 2 of case) Nicholson _____-_____ Industry _____-_____ 5 - How Strong Is the H.K. Porter Offer?
Tender price Premium In dollars Percent PE Ratio Tender Price % Book Value
_____ _____ _____ _____ _____
6 - How Strong Is the VLN Preferred Stock Offer?
Nominal Value (call price; liquidation value) Conversion Value (year 1) VLN common at $10.62 VLN common at $4.625 Pfd. Dividend Rate Yield (assume pfd. at $50) Yield on Underlying Common
_____ _____ _____ _____ _____ _____
Cooper Industries / Nicholson File
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Topic 7 – What Could Cooper Afford to Pay? Note: Analysis narrowly focused on pro forma dilution analysis for year 1 based on a set of assumptions. Purpose is to illustrate an important technique in acquisitions completed by public companies.
Data Provided and Assumptions Used – 1972 Cooper Net Income Cooper Shares Outstanding Cooper EPS Cooper Share Price Nicholson Sales in 1972 Same as in 1971 Nicholson Unadj'd Net Income = 1971 Pro Forma Cost Savings & Synergies Increase in Pretax Income (7% of sales) After-tax (x 1- tax rate = 1 - .4 = x .6) Pro Forma Net Income Combined Pro Forma Net Inc.(add $11.0)
$11.0 mil. 4.21 mil. $2.61 $24.00 $55.3 mil. $ 1.35 mil. 7.0% $ 3.87 mil. $ 2.32 mil. $ 3.67 mil. $14.67 mil.
For simplicity, calculations ignore that 29,000 shares were already purchased by Cooper.
____Dilution Analysis at Alternative Purchase Prices_____ (dollars and shares in millions except per share data) Price Per Share: $45.00 $50.00 $55.00 $60.00 $65.00 Acquisition Value of Equity (584,000 shrs. x price per sh.) No. of Cooper Shares to be Issued No. of Cooper Shrs. Already Outst. Pro Forma Shares
What does the dilution analysis indicate? What are additional analytics that could / should be considered in this kind of pricing and valuation analysis?