Cooper was not the only company looking to acquire Nicholson File Company; H.K. Porter Company was also interested. Porter was a conglomerate with a wide-ranging interest in electrical, tools, nonferrous metals, and rubber products. They have already acquired 44,000 shares of common stock of Nicholson in 1967. On March 3, Nicholson received a tender offer of $42 a share for 437,000 shares from Porter, to take over the company.
Nicholson was not happy with the idea of being acquired by Porter, due to the loss of control of their company. The merger would only increase the sales figures of Porter by only one-sixth of what they already make. If the offer went through, 20% of the outstanding shares owned by the Nicholson family would not be enough to retain control of the company. Cooper made an offer to Nicholson so that Porter would not get the company; Cooper’s stock was depressed at the time, leaving them vulnerable for Porter to acquire them, forcing them to withdraw the offer.
Enough shares had been tendered that a merger was imminent for Nicholson; the question was by whom. By late March Nicholson needed to make a move and find someone to merge with soon in order to keep Nicholson management in control, instead of Porter taking over. They finally found a company to merge with that would not get rid of management, VLN Company, a broadly diversified company with major interests in original and replacement automotive equipment and in publishing. By accepting VLN’s agreement, Nicholson would still hold operating independence of their company. They liked VLN’s offer for a couple reasons; it was a tax free transaction, the stock holders would still receive the same $1.60 preferred stock dividend, and a preferred share was worth a minimum of $53.10, according to VLN. Because of these reasons, Nicholson management supported the offer. However, Porter stated that the shares were only worth $23.12. The price differed according to what recent stock price of VLN was used the low or the high.
Disputes between VLN and Porter gave Cooper another opportunity to acquire Nicholson. Porter did not want the merger between VLN and Nicholson to occur. A few reasons for that being; Cooper shares were worth more than VLN shares, VLN was traded on the American Stock Exchange, meaning it was less liquid, and the preferred dividend was below the market yield. During the time that Porter was trying to takeover Nicholson, they had acquired 133,000 shares of common stock in addition to the 44,000 shares they acquired a few years earlier. This was well short of the 292,000 shares needed for Porter to overtake Nicholson Company. If Cooper were to acquire Nicholson this would be more lucrative for Porter, so Porter had a tentative agreement with Cooper to support the Cooper-Nicholson merger.
That would lead to 177,000 shares from Porter in Cooper’s favor, including 29,000 shares they had acquired over the open market in the past months, bringing their share total to 206,000. That left the need for only 86,000 more shares to merge with Nicholson and have 50.1% control. There were 150,000-200,000 shares unaccounted for at that time, but would be purchased if Nicholson recommended the merger with Cooper. Every other merger that Cooper underwent was friendly in nature, so they wanted to make sure that the merger with Nicholson followed suit. They needed to make an offer to Nicholson that they would be interested in. Additional terms included long-term returns and improved earnings per share over the next five years. These were put in place to leave additional acquisitions, in the future, a viable option for Cooper and Nicholson.
Ratio Analysis
Nicholson File Company is suffering a low increase of sale. The rate of sale growth is only 2%, which is much lower than the 6% of industry average. But according to its financial data and some ratios, it shows that Nicholson File Company is worth to buy.
Current Ratio: this ratio is mainly used to give an idea of the company’s ability to pay back its short-term liabilities with its short-term assets. The current ratio of the industry average is only 2.3 (page A-1, A-2). The ratio of Nicholson is about 7, almost triple of industry average. It shows that Nicholson File Company is healthy in financial position and also shows that Nicholson is leading in position of in industry. As this reason, it meets cooper’s third acquisition strategy.
Quick Ratio: the quick ratio of Nicholson File Company is 0.62 (page A-2), while the industry average is 0.5. Even Nicholson File Company’s inventories cover almost 40% (page A-4). Its quick ratio is still up to the industry by 0.12. It also indicates this company’s short-term is outstanding in liquidity.
Inventory turnover: Nicholson File Company is experiencing low sale growth, so its inventory turnover ratio is not brilliant as its current ratio or quick ratio. Its inventory turnover is 2.1 (page A-3), which is same to the industry average. If it is taken over by cooper, the net sale of each year is expected to increase by 6%, instead of 2%.
Receivable Turnover: the Receivable turnover of Nicholson File Company is 6.9 (page A-4), while the industry average is about 4.6. It shows that Nicholson File Company can make a collection of credits sale and accounts receivable more efficient than other companies in the same industry. On the other hand, it also indicates Nicholson File Company has a very good ability in debt management.
Alternatives
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.
Appendix 1
Appendix 2
Current Ratio Analysis
Nicholson File Company Current Ratio = current assets / current liability = 28 / 4 =7
Quick Ratio Analysis
Nicholson File Company Current Ratio = (current assets – inventories) / current liabilities
= (47-18)/47=0.617
Appendix 3
Inventory Turnover Analysis
Nicholson File Company Inventory Turnover = sales / inventory = 37.9/18=2.1
Receivable Turnover Analysis
Nicholson File Company Inventory Turnover = sales / inventory = 55.3/8 =6.91
Appendix 4
Current Assets Breakdown
Appendix 5
Nicholson and Cooper Facts
Exchange Ratio – Nicholson at $50/share
