Cooper Case Presentation

8/11/2019 Cooper Case Presentation

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COOPER INDUSTRIES’ CORPORATE STRATEGY (A)

Merger & Acquisition

ANIRUDH SINGH – EM01

SUHAIL NASIR – 26NMP55

SANTOSH K DIWAKAR – 26NMP47

Group # 04



Big Problem : Cyclical natural gas business.How to mitigate it?

Company’s history

• More than 150 years old company.

• Before acquisition era,

– Small but reputable maker of engines and compressors to

propel natural gas through pipeline.

– Problem was faced due to cyclical natural gas business.



Risk mitigation. How?

• Increase their size and scope by diversification. How?

– Acquisition.

• But first

– To free top managers and corporate board directors fromthe restraints of daily operations.

But acquisition may result failure accompanied with

huge losses.



Acquisition : What kind of companies to be acquired?

Cooper decided to acquire companies :

• having Stable earning OR

• having Earning countercyclical to the oil and gas transmission

industry.• having Products that serves basic need.

• having Matured manufacturing technologies.

• having Own strongest asset.

• having belief in High quality.

Guidelines which can avoid wild diversification..



Acquisition ERA

Categorization can be done as under:

• Tools Group

• Energy

Both mitigate the risk of ”Cyclical natural gas business”.



Tool Group Acquisition

• Lufkin’s acquisition in 1967

• Why Lufkin

– Basic needs –

manufacturer of

measuring tools for

lumber industry. – Market leader in its area.

– Produced premium

quality products.

– Few market fluctuationsin their sales.

Help Cooper level its cyclical revenues.

• Crescent Niagara acquisition

in 1968• Why Crescent Niagara

– Basic needs –

manufacturer of Crescent

wrenches. – Recognized name in the

industry..

– Produced premium

quality products.



DIVERSIFICATION

Tool Group Acquisition Cont’d

• Weller manufacturing Corp.

acquisition in 1970• Why Weller manufacturing

Corp.

– Basic needs – manufacturer

of Soldering tools. – World leader in its area.

– Wide market accessibility –

North and South America

and in Europe. – Provide added marketing

power.

Why these companies?

VARIETY

MARKET ACCESSIBILITY



Divestment of 33 businesses between 1970 and 1988 • New tool group formation requires changes

– Revamping manufacturing operations.

– Process and equipment up gradation.

– Plant relocation to South zone. – Eliminate the low profit earning tools.

– Centralized sales and marketing.

– Retained only the best people after every acquisition.

– Increase variety, quality and market accessibility.


Keep the best, divest the rest




• Some more acquisition in

tool group• Nicholson File – 1972

– File and Saw maker.

• Xcelite Nut Runners –

1973 – Fastners.

• Wiss scissors – 1976

– Scissors.

• Plumb hammers – 1980

– Hammers.

• Dellas Airmotives – 1970

– Repaired and leased jetengines.

– Distributed aircraft parts

and supplies.

• 4 more acquisition to

supplant this business.

AVOID COMPETITION WITH MARKET LEADERS.

Reinforcing there earlier acquisition by new one

and always kept their policies and mantras before

acquisition.



Energy Division

• Cooper retrenched & concentrated to their core business –

Compression equipment for oil and gas.

• Acquire Superior.

–Makers of engines and natural gas compressors.

– Filled the product line gap (between smallest and largest)



Energy Division

• Acquire Gardner-Denver –

1979• Manufacturer of petroleum

exploration, mining and

general construction.

• Filled the gap of energydivision.

• Kept product lines capable

of healthy development.

• Eliminate others with littlepotential.

Increase of scope : Exploration, production,

transmission, distribution, and storage

• Acquire Crouse-Hinds – 1981

– World wide producer ofelectrical equipment such

as receptacles, fittings etc.

• Beldin acquisition – after

Crouse-Hinds – Maker of electronic wire

and cables, and electrical

cords.



Increased variety :

Transmission,

control anddistribution of

electrical energy

from plant to end

user.

Electrical and Electronic Business

• Acquire Crouse-Hinds – 1981

– World wide producer of electricalequipment such as receptacles, fittings

etc.

• Beldin acquisition – after Crouse-Hinds

– Maker of electronic wire and cables, andelectrical cords.

• McGraw-Edison acquisition-1985.

– Manufacturer of product for the control

and transmission of electrical energy.• RTE acquisition-1988

– Makers of transformers and supplier of

related equipments.



Cooper’s acquisition traits

• Always followed the basic policies .

• Reason for Acquisition

– Increase Variety

– Economies of Scope

– Economies of Scale – Market expansion

– Focus on stable cash flow

– Avoid competition with market leaders.



Corporate role & objective

• Long term EPS growth rate of 5% above inflation rate.

• ROE objective of 12% on top of inflation.

• Long term D/E ratio target is of 40%.

• Preferred cash or convertible preferred stock forexpansion.

CASH FLOW IS KING



Corporate role & objective

• With each acquisition:

– Tailored its structure to suit the new configuration of businesses.

– De-centralized operating philosophy.

– Active involvement in operating the acquired companies.

– Divest, if required but made it profitable to earn more.

– Operational responsibility – operations.

– Top level responsibility – Long term policies, acquisition and

divestment.

– Each division is a profit center.

– Autonomous power to profit centers – Fast decision making. – Established manufacturing service group – for manufacturing

improvement. Etc.



Champion’s deal

• Maker of spark plug for small engines.• Also windshield wiper blades.

• Well known brand name.

• Worldwide manufacturing facilities.

• CSP is in trouble because

– Declining market

– Failed diversification

– 1950 Technology – Swollen corporate overhead

– Profit dropped down to $24 million.

BASIC NEED

WORLD LEADER

MATURE

MANUFACTURING

PROCESS

WORLDWIDE

MANUFACTURINGFACILITY

OFFER: $21/share ($825 million)



FINANCIAL CALCULATION – Champion Spark Plug

Dec-88 Dec-87 Dec-86 Dec-85 Dec-84 Dec-83 Dec-82 Dec-81 Dec-80

SALES 738000 719900 883800 829400 816500 764400 783700 818600 799800

EXPENSES 189600 187200 213800 194200 183800 178400 171900 185400 190600

NET INCOME 23600 19100 -17200 15200 27300 27000 26800 30300 36900

EPS 0.67 0.5 -0.45 0.4 0.71 0.7 0.7 0.79 0.96

DIVIDEND 0.2 0.05 0.2 0.4 0.4 0.4 0.8 0.8 0.8

TOTAL ASSET 575600 653000 647700 640800 579300 571700 590900 626000 636200

TOTAL CL 170300 202900 236100 211600 165800 161000 176700 183800 162900

LT DEBT 13900 17500 23500 29700 26000 22300 23300 31400 41400

TOTAL LIABILITY 184200 220400 259600 241300 191800 183300 200000 215200 204300

TOTAL EQUITY 349900 387400 351800 368700 359400 359500 361100 384300 405900



FINANCIAL CALCULATION – Champion Spark Plug

ROE 0.0674

RR(1-PAYOFF RATIO) 0.7015

GROWTH RATE 0.0473

TOTAL NO OF SHARES 39285.71 (ASSUMPTION CONSTANT)

YEAR Dec-88 Dec-89 Dec-90

NET INCOME 23600 24716.61 25886.05

NPV 593743.94

CALCULATED SHARE VALUE $15.11



Champion’s deal

• growth rate below 5%.

• ROE is 6.74% .

• Long term D/E ratio target is of 40%.

• In case of both the acquisition, than D/E ratio will moveto 55% to 60%

• ROS & ROA of Electrical & Electronic and Commercial &

Industrial was well above 14%.

Misaligned with CORPORATE OBJECTIVE



CAMERON IRON WORKS

• Can acquire Cameron at the cost of $700 mill.

• Manufacturer of Petroleum & Natural gas related

equipment.

• Core competent in advance forging technology



Recommendation – Cameron. Why?

•Cameron deal was at low price as compared to CSP.

•Bad condition because of overall industry was suffering but on the other handCSP was suffering because of high overhead cost and declining phase of the

industry.

•Cameron has advanced forged technology, on the other hand CSP has

manufacturing technology of 1950.

•Cameron product line will complement Cooper’s on the other hand CSP’s main

product was at declining phase.• Cooper’s compression & drilling’s segment ROA & ROS was below 6% and was

performing pathetic as compared to other segments.

•Cooper has only distribution in automotive parts and adding CSP may incur

financial burden on this segment.

• There was a market slump in energy sector worldwide and this was the right

time to acquire related companies.

CSP’s D/E > 50% ; Old technology ; Declining product phase.



Special thanks to Dr Palakh Jain for her guidance

Documents

Cooper Case Presentation