1. If you were Mr. Cizik of Cooper Industries, would you try to gain control of Nicholson File Co in May 1972?
Yes. The synergies for a Nicholson and Cooper merger will increase the earnings for shareholders of both companies, as they can cross-sell their products across a wider market also at a higher margin. Expenses will be reduced.
Cooper is planning on keeping Nicholson’s management, freeing Nicholson’s management to focus on growth of their products – stronger balance sheet. Nicholson’s shareholders will have a PE ratio of 14 to 17. EPS will go from $2.28 in 1971 to $5.72 in 1973. Cooper offers growth opportunity for Nicholson’s product lines and its offer at $50 a share will attract more shares. Moreover, Cooper will provide more liquidity to Nicholson’s shareholders, because it trades on the NYSE.
2. What is the maximum price that Cooper can afford to pay for Nicholson and still keep the acquisition attractive from the standpoint of Cooper?
According to DCF valuation of Nicholson on standalone basis at about a book value of $30 mm the price per share for Nicholson comes out to be $50 a share. Mr. Cizik should issue 2.08 Cooper Shares for 1 Nicholson share with the current Cooper share price of $23 (1.2 mm Cooper shares to Nicholson shareholders for a 100% stock for stock exchange).
DCF Valuation of Nicholson
Nicholson has potential of achieving 6% annual sales growth as also bringing down the cost of goods sold from 69% to 65% and selling administrative expenses from 22% to 19%, thereby increasing its profitability and if Cooper acquires it, it will be able to move the EPS up to $14 to $17 range. Nicholson sales growth will increase from 2% to 6% because of synergies between the two companies and Nicholson will have access to both the industrial and consumer segment. Its valuation will increase to $32 mm in 1972 to $42 mm in 1976. Its share price will go up from $73 to $89 in 1972 and $96 to $117 in 1976. Its EPS will be from $5.72 to $6.88 from 1972 to 1976. The merger will also help Cooper gain significant share in Industrial markets.