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 Page 2 of 4

Topic 3 – Ownership Characteristics as a public company

Discuss implications of the ownership profile below (after H.K. Porter tender & as
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 29 5.0%
-H.K. Porter 177 30.3

Sub-total 206 35.3

Arbs (speculators) 50-100 8.6-17.1

Cumulative 43.9-52.4

Insiders and Their Allies

-Family and Management 117 20.3

-VLN 14 2.4

Sub-total 131 22.7

Other Public Shareholders 197-147 33.7-25.2

Total 584 100.0%

Cooper Industries / Nicholson File Page 3 of 4

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 Page 4 of 4

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 $11.0 mil.

Cooper Shares Outstanding 4.21 mil.
Cooper EPS $2.61
Cooper Share Price $24.00
Nicholson Sales in 1972 Same as in 1971 $55.3 mil.
Nicholson Unadj'd Net Income = 1971 $ 1.35 mil.
Pro Forma Cost Savings & Synergies 7.0%
Increase in Pretax Income (7% of sales) $ 3.87 mil.
After-tax (x 1- tax rate = 1 - .4 = x .6) $ 2.32 mil.
Pro Forma Net Income $ 3.67 mil.
Combined Pro Forma Net Inc.(add $11.0) $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.) $26.3 $29.2 $32.1 $35.0 $38.0
No. of Cooper Shares to be Issued 1.10 1.22 1.34 1.46 1.58
No. of Cooper Shrs. Already Outst. ………………….4.21…………………...
Pro Forma Shares 5.31 5.43 5.55 5.67 5.79

Pro Forma EPS $2.76 $2.70 $2.64 $2.59 $2.53

Accretion (dilution) vs. $2.61 5.7% 3.4% 1.1% (0.8)% (3.1)%

Discussion points

• What does the dilution analysis indicate?

• What are additional analytics that could / should be considered in this kind of
pricing and valuation analysis?