Case Study on Diversification Merger & Acquisition

1. Case Study on Diversification Merger & Acquisition GROUP I Gopalkrishnan – 214 Saket Jain – 217 Shraddha Kakade- 219 Bhavin Parekh - 232 Natasha Patel - 235 Saubhagya Seksaria - 243 R Venkatraman - 256

2. About Cooper Industries • Cooper Industries- founded in 1833by brothers Charles and Elias Cooper • The company started as a foundry and was initially called the C&E Cooper Company. • Cooper’s initial product offerings included plows, hog, troughs, kettles and stoves • In Mid 1950’s, Cooper Industries became the national leader in pipeline compression engines, products that enabled the development of the growing oil and gas industry • Since it wanted to reduceits exposure to more cyclical industries such as automotive and petroleum, Cooper underwent a period of portfolio rationalization starting in1959. • This was mainly accomplished with it relying heavily on Mergers & Acquisition

3. Understanding Merger & acquisitionsAlthough they are often uttered in the same breath the terms merger and acquisition mean slightly different things. Acquisition• When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition.• From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. Merger• Merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. • Both companies' stocks are surrendered and new company stock is issued in its place.Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.

4. Rule of Acquisition in this case:Under Rhode Island Law Company must own majority shares (51.1%)to merge the target companyCooper Acquisition StrategyCooper’s requirements to acquire a company have three major components.The target company must be: • In an industry in which Cooper could become a major player.• In an industry that is fairly stable, with a broad marketfor the products having large customer base.• A leader in its market segment.

5. Cooper History of acquisitions:1959-1966• Supplier- portable Industrial power tool• Manufacturer- small industrial and air compressor• Manufacturer of small pumps and compressors for oil field applications• Manufacturer of tyre changing tools for automotive industryAdvantages• Broadening of market for CooperDisadvantages• Company was still sensitive to the economic conditions

6. World’s largest manufacturer of measuring tape & rules1967-(Lufkin Rule company)Advantages• Acquired a quality product line • An established distribution system of 35000 retail hardware store in US, Canada & Mexico.• Gained service of William Rector & Hal Stevens of Lufkin who were knowledgeable in the hand tool business

7. Manufacturers of the best wrenches, pliers, screwdrivers1969- (Crescent Niagara Corporation)Advantages• Acquired a quality product line comprising of High-quality wrenches, pliers, screwdriversDisadvantages• It was a loss making company which needed to be turned around by restructuring and stopping production in inefficient plants and products A leading supplier of soldering tools1970 -(Weller Electric Corporation)Advantages• Production capacity in England, West Germany & Mexico.• Exposure to new markets

8. Advantages of Merger & Acquisition• Economy of scale • Economy of scope• Increased revenue or market share• Market Dominance• Cross-selling • Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage• Geographical or other diversification into new Markets• Resource transfer: resources information asymmetry or by combining scarce resources• Vertical integration: Vertical integration occurs when an upstream and downstream firm merges. Reason e.g. Double marginalization. It occurs when both the upstream and downstream firms have monopoly power• Empire-building

9. Synergy:Synergy can be defined as the value that is created by combining companies, which yields a result greater than the value of these companies as separate entities. Improve profit margin by working together instead of as competitors. Control Price Control Cost Growth Greater Sales Expansion Improved Distribution SystemCapital Arrangement of M & AFinance the acquisition by  Issuing shares  Offer Preferred Stocks Debt  Bonds Warrants All Cash Deal Cross Holding Deal Initial Public Offering

10. Leading manufacturer of File & RaspsReason For Targeting Nicholson File Company -1971• Having 50% market share of 50 million$ market for file & rasps• Enjoying 18 million$ market share in Saw Blades• Having a distribution network of 53000 retail outlet through 2100 hardware wholesalers.• Presence in 137 countries World-Wide.

11. Facts about the Nicholson File Company:• The Nicholson family and other members of the management group own about 20% of the Nicholson stock; the remainder is publicly held. • Vulnerability to be acquired• Annual Sales Growth of 2% below industry growth rate of 6% poor bottom lines compare to other hand tool manufacturer• Poor Market Sentiments on stock reflected in its poor P/E Ratio.• Valuation of Stock more on the basis of dividend yield rather than hope for capital appreciation• Net Worth of the company is presumed on the basis of Book Value (1971) which is 51.25$ Per Share

14. Synergy Between Cooper & Nicholson :•Cost Of Good Sold reduction from 69% to 65% of sales – Leading to additional Income of 2.20 Million $• Selling, General & Administrative Expenses reduction from 22% To 19% - Leading to additional Income of 1.68 Million $The above two savings would results in increase in income before tax by almost 291% On 1971 Level• Increase in market reach in industrial market segment by 300% for Cooper Product Range• Increase in market reach in consumer market segment by 300% for Nicholson Product Range The above two points creates potentiality for substantial increase in sales for both the companies. • Presuming modest growth rate @ 20% due to Synergy could result in increase In revenue of 55.66 Million $ over 1971 levels leading to additional Income of around 5.5 Million $ as a group

16. Cooper competition for Acquisition VLN and its offer• Diversified company with majorly into publishing and replacing automotive equipments.• Offer one share of new VLN cumulative convertible preferred stock in exchange of each shares of Nicholson.• Would pay an annual dividend of $1.6• Preferred stock would be convertible into 5 common stock of VLN in first year and 4 common stock after fourth year.• The above offer has the approval of the management of Nicholson.

17. H.K. Porter CompanyFoe turned friend• Large conglomerate with wide ranging interest in electrical equipments, tools, nonferrous metal and rubber products.• Existing holding - 44000 shares of Nicholson• Acquired 133000 in open market offer @of 42$ per share• Total holding in Nicholson File Company is 177000 shares comprising of 30.31% of the total share capital• Out of the race to acquire remaining shares to gain control due to negative publicity and no support of Nicholson Management.

18. H.K. Porter Company has two options:To let VLN takeover Nicholson or support Cooper.Not ready to support VLN due to following reasons. Lack-Luster performance of VLN Does not see significant growth potentiality with VLN Low yield of 1.6$ per preferred share offered by VLN Vis a Vis market yield on straight preferred stock of 7% Does not agree with VLN common stock valuation of 10.63$per share and feels it is worth only 4.625% per share.  Due to the above does not want its holding of 177000 share in Nicholson to be depreciated by converting into VLN preferred stocks or common stock. Keeping the above in mind it has no option but to turn to Cooper Industries.

19. Cooper Target To Acquire Nicholson

20. Practical Price Target For Nicholson Acquisition by Copper Funding Arrangements For Acquisition

21. Products Of Cooper Industries As On TodayAMI /Audible/Visual Signaling- MEDC /Cable Management /Capacitors (Power)/ Comm./Data /Control Stations /Demand Response /Dielectric Fluids /Electrical Automation Systems /Enclosures-Bline /Enclosures-Crouse-Hinds /Electrical Junction Boxes/ Emergency Communications /Energy Automation /Field bus /Fire Life Safety/ Fittings / Cable Glands /Fuses (or Fusing Protection) - Busman /Fuses - Power Systems /Grating Products /Hand Tools/Industrial Ethernet /Industrial Security /Industrial Wireless /Instrument Junction Boxes /Instrumentation Protection /Lighting- Controls /Lighting-Area Site /Lighting-Commercial Office /Lighting-Complex Environment /Lighting-Hazardous Lighting /Lighting-Warehouse /Line, Installation and protection equip /Manual Call Stations /Meter Mountings /MRP (Molded Rubber Products) /PA/GA - MEDC /Panel Boards /Pipe Hangers & Mechanical Supports /Plugs and Receptacles /Power Tools /Pre-fab Systems /Process Alarm Equipment /Power System Analysis Software /Regulators /Spring Steel Fasteners /Strut Systems / Bolted Framing /Surge Protection /Surge Protection - Power Systems /Switches /Switchgear /Transformer Pad mount /Transformer Pole Mount /Transformer Substation /Wiring Devices

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