Group Case Analysis: Cooper Industries, Inc.
MBAD 6235 Section 11
December 3, 2014
Elisabeth Goodson, Lynette Hammond, Wanting Hou, Sam Inman,
Qian Jin, Weisi Sun, Shumin Xu, and Yuru Zhang
I. Summary of the Problem
Cooper Industries was founded in 1919 as an equipment and heavy machinery manufacturer. Over time, Cooper Industries experienced significant growth through acquisitions. Nicholson File Company had been on Cooper's shopping list for years as a company to acquire. What made Nicholson so attractive was its basic competitive strength. Cooper believe that acquiring Nicholson could reduce overcome its violent fluctuation of earnings. Nicholson had a 50% share for files and wraps with high quality line and strong name. Its hand saws and saw blades also had a very strong quality with 9% of the market. Cooper is also interested in Nicholson’s distribution system. Cooper believes that Nicholson will enjoy 6%-7% annual sales growth, cost of good sols reduced from 69% of sales to 65% and selling, general and administrative expenses form 22% of sales to 19%, which showed a great profitability. Nicholson, a family-owned a managed hand-tool business, had not been interested in Cooper's offers until May 1972 when Nicholson was in the middle of a takeover fight. H.K. Porter Company, a large firm with operations in electrical equipment, tools metals, and rubber products, also sought to acquire Nicholson. By 1967, H.K. Porter Company had purchased 44,000 of Nicholson's 584,000 shares of stock outstanding. In March 1972, Porter informed Nicholson's management of their plan to purchase a majority of Nicholson's stock, or 437,000 shares, at $42 per share. Cooper, upon hearing the news, offered to help Nicholson. Shortly after, Cooper withdrew their offer to help since the risks were too high that Porter would learn of their offer to help and would retaliate with an attack on Cooper. By late March, Nicholson's management felt the increasing pressure to find a different buyer, since they did not wish to be taken over by Porter. On April 3, Nicholson reached an agreement on a merger with VLN Corporation, a company primarily focused on automotive equipment. Under the terms of the merger, each share of Nicholson common stock would be exchanged for one share of new VLN cumulative convertible preferred stock that would pay an annual dividend of $1.60. The VLN preferred stock would be convertible into five shares of VLN common stock during the first year following the merger and four shares after the fourth year. Additionally, the preferred stock would have liquidating rights of $50 per share and would be callable at $50 per share after the fifth year. Nicholson’s management supported the merger with VLN Corporation and encouraged the shareholders to vote in favor of the merger. According to Nicholson, a preferred share was worth a minimum of $53.10 (VLN common stock closed at $10.62 prior to the offer), the $1.60 preferred dividend equaled the current rate on the Nicholson common stock, and the exchange would be tax-free. However, according to Porter, the VLN common stock recently sold for $45/8, making the first year value $23.12. Porter also argued that since VLN had not paid common dividends since 1970, those who converted to VLN common stock would suffer an income loss. Therefore, shareholders were given differing information on the value of the stock compared to the $42 cash offer from Porter. Cooper Industries continued to be interested in the opportunities that Nicholson would afford them in terms of stable earnings and sophisticated distribution systems. Cooper was given a second opportunity at Nicholson during the conflict between Porter and VLN. Porter was only able to acquire 133,000 shares of Nicholson, which did not constitute a majority, and its slate of directors was defeated by Nicholson management. Porter feared that they would be stuck with VLN preferred stock that paid low...
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