There are two alternatives to this, either merge or don’t merge with Nicholson File Company. If we merge, we have to buy the 177,000 shares from Porter at a cost of $50 per share. We then would have to acquire 86,000 additional shares from either the speculators who own shares, or find the shares that are unaccounted for and purchase them. If we don’t merge, we are being safe and not putting anything to risk, we would just be leaving the company the way it is and letting it grow at the pace it’s currently growing. Recommendation
We recommend that Cooper offer to purchase shares from Porter and existing shareholders to merge with Nicholson because Nicholson is such an inviting takeover; poor sales and profit performance in recent years, conservative accounting and financial policies, low percent share of stocks owned by the Nicholson family, annual sales growth of 2% while industries is 6%, and low profit margins make Nicholson a perfect candidate for an acquisition. Nicholson strengths include a great distribution system and being a leader in two main markets of the tool industry.
This would be beneficial to Cooper’s sales and their acquisitions within the hand tool industry. Before Cooper can acquire any company though, they must make sure the target company meets the three criteria they have in place. The first criterion is the company must be in an industry that will allow Cooper to be a major factor; Nicholson fits this because they have a 50% share in a 50 million dollar file and rasps market and a 9% share in a 200 million dollar hand saw and saw blades market.
The second criterion is the company must have small ticket items to sell so Cooper doesn’t rely on selling a few large items to a small range of customers. Nicholson fits this because they sell hand tools. The last criterion is that the company must be a leader within their respective market segment. Nicholson is the leader in the file and rasps market and fourth in the hand saws and saw blades market. Cooper did not want to make this a hostile takeover; so they made an offer to Nicholson.
Within this offer, it states that Nicholson must have satisfactory long-term returns and Cooper must continue to improve its earnings per share (EPS) over the next five years. This was achievable because if Cooper took over, they could expect an increase in net sales of 6% each year instead of the 2% that Nicholson was currently having, 6% being the industry average. There would also be a decrease in cost of goods sold by 4% along with a decrease in selling, general, and administrative expense of 3%.
These would take in effect because Cooper already had products in these fields, so they could combine the selling and advertising that is needed. Also, they would be able to reduce inventories and have more efficient manufacturing. By increasing the net sales and lowering some of the expenses this will enable EPS to rise throughout the five years. Justifications To gain controlling share of Nicholson, Cooper needs 292,000 shares of Nicholson. Cooper already had 29,000 shares of Nicholson, and had the backing of Porter who controlled 177,000 shares of Nicholson.
Porter’s shares came under some terms though. First off, the exchange would have to be tax free, eliminating buying their shares out right. Secondly, Porter must receive Cooper common stock or convertible securities, and lastly the exchange must be worth at least $50 for each Nicholson share Porter held. So, if we could come up with an offer and an exchange rate that followed these terms, Cooper then would have control of 206,000 shares, leaving only 84,000 shares needed to have control of Nicholson.
These 84,000 should be easy to get, as the offer that would fall under Porter terms should also be a very good offer to other shareholders. To come up with the exchange rate we used the Common Stock exchange ratio with Nicholson shares priced at $50 per share to meet Porters terms. The exchange ratio came up as . 48(A 4). Meaning that for every 100 shares of Nicholson owned the shareholders would get 208 shares of Cooper. The EPS of the merged company would be $1. 29, increasing earnings of Nicholson shareholders by $14. 39 for every 100 shares owned(A 4).
The new market price of the company would be $27. 40 per share (assuming the P/E multiple remains the same), increasing Nicholson shareholders wealth by $708. 32 for every 100 shares owned(A 4). This exchange rate increased earnings and wealth for Nicholson shareholders, and also fit in the terms of the Porter deal; the exchange would be tax-free, and it would be for Cooper common stock. Once the offered is made it would be up to Porter and other outstanding shareholders to accept the offer and let Cooper acquire Nicholson.