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George Lam

10/19/15

Sharon Joseph

Fin. 4930

Rowshan Begum

Prof. Poniachek
Harvard Case Study Cooper Industries

In this case study, we are presented with an attempted merger and acquisition between
Cooper Industries (Acquiring Company) and Nicholson File Company (Target Company).
Although there was an offer three years prior to this case study, the circumstances surrounding
this potential deal has changed enough to give Cooper Industries an opportunity to acquire
Nicholson File Company. By reviewing this case study, we hope to not only evaluate the
companys financials, but also determine whether or not this acquisition is in both Coopers and
Nicholsons best interest.
To start off, we believe that the acquisition of Nicholson would greatly benefit Cooper
Industries. There is a lot of synergistic value that can be created from this deal. According to the
case study, the synergies gained from this merger are as follows:
1.
2.
3.
4.

Reduced COGS by 4% (69% down to 65%)


Reduced Admin Expenses by 3% (22% down to 19%)
Increased Growth rate by 4-5% (up from Nicholsons 2% to 6-7%)
Increased Demographic outreach (will acquire ability to sell products in the 137
countries that Nicholson already has influence in along with 140 Local sales reps)
5. Increased Sales force & Distribution (48 direct sales reps, & 2,100 hardware
wholesalers which sell to 53,000 retail outlets)
6. Increased Expertise in File & Saw products (28 file & saw engineers)
7. Increased Market share in the Hand saws & Saw blades market (9% held by
Nicholson which if acquired, would now belong to Cooper)
Based on our calculations in the DCF analysis, we forecasted the share price of
Nicholson (post merger) to be $75.54. Of course, this should only be the maximum amount that
Cooper should pay to acquire Nicholson. We believe that the highest that Cooper should go
would be $52, which is slightly above Nicholsons book value of $51.25. This offer should be
able to retain its attractiveness as it is $10 above what VLN has offered and is also an 18.18%
markup from what the Nicholsons current trading value of $44 is. (Please see attached for
calculations)
With Coopers interest in Nicholson, they have to take into account the varying concerns
of all groups involved in order to make more informed decisions going forward especially when
each group has differing levels of bargaining power.

Cooper, having 29,000 shares of Nicholson, also has the support of Porter who is the
largest shareholder in possession of 177,000 shares. Because of this support, Cooper is relatively
in a decent position in terms of bargaining strength, but they are still faced with the issue of
having enough shares for a majority vote, which is one of their major concerns. They would
need an additional 84,584 shares, which would most likely come from the Speculators and the
shares that are unaccounted for. More likely, the share would come from speculators as those
that are unaccounted for are more likely to side with whichever company Nicholson supports.
The last concern is that their offer is not enticing enough for all involved.
In Porters case, his largest concern is that VLN might be the acquiring company and was
unhappy of the fact that he would be receiving VLN preferred stock in exchange for his
Nicholson stock. He also feared that the VLN stock would not have enough liquidity as it was
only sold on the American Stock Exchange in small portions. Porter, being the largest
shareholder, holds the greatest amount of bargaining power as he can be the deciding factor in
who wins over Nicholson.
Next, we have VLN which brings a competing offer to Nicholson and is the preferred
company that Nicholson wants to merge with. Their main concern is the same as Coopers in the
sense that they do not have the necessary shares to hold a majority vote over Cooper. The
bargaining power that VLN has is relatively low compared to all other groups as they hold the
least amount of shares at 14,000. Despite that, they do have the backing of the Nicholson family
and management. The offer that VLN proposed is relatively lower compared to what we
suggested that Cooper should pay which means that VLN should in turn; increase their offer to
make it more appealing.
Nicholson, having the second largest amount of shares of 117,000 has a great deal of
bargaining power as well. Their concern is that they will be acquired by Cooper, as Nicholson is
more comfortable with VLN as the acquiring company. With that said, Nicholson is supporting
VLN in this deal despite what Cooper Industries can bring to their company.
Lastly, we have the speculators and the shares that are unaccounted for which amounts to
247,000 shares. We believe their main concern would be having the greatest return on their
investment. Of course that would mean that Cooper would be acquiring Nicholson. In terms of
bargaining power, they are also quite high as they are going to be the deciding factor in whether
or not Cooper will acquire Nicholson. The shares they control are what Cooper needs to have
the majority vote. The amount needed from this group would be a total of 86,584 shares.
If Cooper wishes to acquire 80% of the outstanding shares, they would actually only need
438,200 shares as they already own 29,000 shares. We believe this should be funded through an
issuance of common stock to current stakeholders of Nicholson. With a price offer of $52, and a
current stock price of $24, we calculated that the exchange ratio would be 2.1666667 Cooper

shares for 1 Nicholson share. To control an 80% stake in Nicholson, Cooper would have to issue
949,433.33 new shares. (Please see attached for calculations)
To conclude this analysis, we believe that the offer of $52 should suffice in satisfying all
parties involved. Due to the amount of synergy that would be created as listed above, this offer
would be too good to pass for Nicholson. Of course, this offer would be paid by issuing new
common stock in exchange for Nicholsons shares.