Cooper Case

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Executive Summary

In the Case study, Cooper Industries is trying to acquire Nicholson File Company. However, there are two other companies that are interested in Nicholson as well: VLN Corporation and H.K. Porter Company. In 1971, VLN together with Nicholson management constructed a deal that, however, didn’t get the support from the majority of common stockholders.

After having done a discounted cash flow analysis, I determined that Nicholson stock is undervalued. Also, Nicholson seems to be a good strategic fit for Cooper. Therefore, Cooper could acquire Nicholson on friendly terms with a relatively large premium to attract the majority of the shares needed. The problem for Cooper is to determine how best to acquire Nicholson and
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In general, it is crucial to consider the effect of acquisitions on EPS as a significant, or enduring dilution of EPS will harm the corporation’s performance significantly.

I do recommend a loan as capital preferred financing structure. This use of debt rather than equity financing for the acquisition of Nicholson causes a higher return on equity, as well as an increase in the efficiency of existing capital structure. Also, there are tax advantages to be realized through debt financing (tax shield). The ultimate goal would be to maximize shareholder value and this can be supported through a lower WACC resulting from a higher leverage (as effect outweighs increase of risk). The interest on debt is tax deductible resulting in a higher Net Income and, thus, EPS.
Nicholson management had accepted an offer from VLN Corporation using convertible stock but rejected a cash offer from H.K Porter. Nicholson may not want cash for their company. If that was the case, Cooper would need to offer cumulative convertible stock.

With an exchange ratio of 2, about 78% of the new firm would be owned by Cooper. The relatively high exchange ratio would result in a severe reduction of control to Nicholson’s shareholder (22%). Under the given circumstances with an exchange ratio of 2, the acquisition premium for paid would be $ 14 per share. The minimum synergies required that this offer makes sense would be $ 8.18 Mio. Given my synergy valuation from

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