Politics in the long-term financing, capital structure, risk management policy and analysis of acquisition

Cooper Industries [Cooper], founded in 1919, by mid-1950 was known as the leading manufacturer of extraction of natural gas engines and compressors as well. Cooper made several acquisitions to expand its business and expand its diversification to gain market share. Cooper management was very concerned about their need to diversify the instruments relied on the sale of oil and gas to industrial customers.

Similarly, the volatility of earnings was caused by the cyclical nature of heavy machinery and equipment sales. Unfortunately, the effort to reduce earnings volatility for Cooper Industries was unsuccessful because the sales were entirely concentrated in the same sector. In 1959, Cooper has ceased operations in four of the acquired companies that have expanded their market, however, did not satisfy the need to diversify the company. In order to avoid any more ineffective acquisitions, Cooper developed three criteria that must be met for all future acquisitions, Cooper Industries, Inc. - Case (1974). The industry should allow the choice of leading industry Cooper was * must be stable and allow sales of "ticket" small objects.

Industry leaders would be acquired only acquire leading Cooper to implement these policies by acquiring Lufkin Rule Company in 1967. The new strategy should ensure that Cooper acquisitions benefit them and their shareholders. Cooper next step was to acquire Nicholson File Company [Nicholson]. This article is going to expand further and analyze this acquisition. Meeting the Criteria Nicholson as one of the largest domestic producers of hand tools, has resulted in its two main product areas: files and rasps. Had 50% market share of $ 50 million files and rasps, where they had established an excellent reputation for quality and brand. The hand saw blades, and also had an excellent reputation for quality and held a respectable 9% share of a $ 200 million market. Nicholson's best asset, their distribution system, has given them a competitive advantage that is attractive to Cooper.

In addition to these attributes Nicholson was in financial difficulties. Their shares were trading at $ 23 to $ 32 per share, well below its book value of $ 51.25 per share. The company reflects a low price-earnings ratio of 10-14 compared to 14-17 times earnings for companies on the other hand, leading tool. All aspects of the business Nicholson has met the criterion of acquisition that has been previously established by Cooper.

Advantages of acquisition

Cooper has analyzed the benefits of the merger with Nicholson. Cooper Nicholson has estimated that the cost of goods sold can be reduced by 69% to 65% of sales. The acquisition is expected to eliminate duplication of sales and advertising, which would reduce general and administrative expenses from 22% to 19% of sales. In addition, "75% of sales were for Nicholson industry and only 25% of the consumer market" (page 5) with respect to reverse Cooper, as distributed between the consumer market to 25% and industrial market to 75%.

Synergies

Synergy can be defined as the value that is created by combining company that produces a result greater than the value of these companies as separate entities. It 'important to recognize the synergy with the two companies. The acquisition should provide a greater marketability for both companies. Both companies improve their profit margins by working together rather than as competitors. When companies are acquired, competition must be reduced by giving businesses more opportunities to control the price advantage. In addition, the acquisition will provide growth. With each of these product lines, both companies together can achieve greater sales expansion. Improved methods of distribution of Nicholson Cooper could reduce operating costs for the company as a whole.

Capital Structure

Cooper Industries should structure the agreement to finance the acquisition of Nicholson. Cooper has options, capital structure to finance this acquisition. They can issue debt, arrange financing leases, bond swap, offering preferred stock, warrants, convertible bonds and callers. These selections offer investment options for Cooper.

"Financing decisions typically include debt and equity and to sell, what types of debt and equity to sell and when to sell debt and equity. Just as the criterion of net present value was used to evaluate capital projects budgeting, we now want to use the same criterion for funding decisions "Five years projection (Appendix H) was created to demonstrate progress towards the desired goal of this acquisition provided for synergies. Appendix A illustrates the combined financial statements, without synergies in detail. In 1972, the true effect of the acquisition is felt with the increase in net income and then level off as the year progress. Earnings per share were a big impact in 1972. This merger has an impact long-term debt. In order to acquire Nicholson File Company, Cooper Industries would have to find a way to finance long-term, thus increasing its debt and debt / equity ratio.

The Cooper / Nicholson acquisition has a positive impact on both society and it is believed that the two companies have a great synergistic value. The acquisition will not only reduce operating costs but also reduce the additional sales and administrative expenses, as well. SGandA expenses should decrease by 10% the first year and should experience no increase in the years after. Revenue also had an increase of 5% and also to have stabilized in a significant increase of 8% annually. The projection of 5 years after the acquisition provides a positive vision for the future.

Pursuant to due diligence, we have compiled the following report of assessment of these financing options:

* Annex A Income Statement Balance Sheet without synergies

* Exhibit B Income Statement Balance Sheet with Synergies Financing with bonds

* Exhibit C Income Statement Balance Sheet with Synergies Financing with Common Stock Cooper

* Exhibit D Income Statement Balance Sheet with Synergies Financing with Preferred Stock Cooper

* Exhibit E Summary associated with the bonds to finance Synergies

* Exhibit F Summary associated with the funding synergies with Cooper common stock

Summary Exhibit G * associated with Cooper Preferred Stock financing with Synergies

* Attachment H 5-year income statement and balance sheet projection

* Expose The calculation of net present value

This team of authors recommended a bond issue, as the preferred structure of capital financing for a number of reasons. Debt capital is used more capital means that a higher debt equity ratio, partners.financenter.com (2004). As this ratio increases the leverage of the business and then increases to a point. The maximum ratio between debt and equity is achieved when a company can no longer honor the debts. The inability of a maintenance company to pay its debts or is insolvent as defined. Capital debt, the interest rate assumption of 8% is used, with a 20 and a sinking fund for future debt retirement for the duration of the debt from the first year or 1972.

This use of debt rather than equity to finance the acquisition of Nicholson causes a higher return on equity since the use of other people money (OPM) will cause an enlargement on the back of the structure of existing capital. If the firm were to issue more shares instead of debt, then the structure would dilute existing equity and return on equity of reduced. The company's goal would be to maximize shareholder wealth and debt financing structure achieves the objective of better than issuing more shares. Another cause of a debt issue for funding is tied to the U.S. Tax Code allowing companies to expense interest costs of financing as an expense accounted for in the cash flow which is deducted from net income before taxes before calculating federal income tax. The advantage of this tax benefit is not available in many foreign countries where interest expense is not a tax preference item.

Therefore, interest expense is reduced by 8% net profit before interest and taxes dollar for dollar and higher income tax to 34 ¢ on the dollar of earnings before interest and taxes. Moreover, as the company grows, the debt equity ratio will probably change by taking the profitability and assumptions are mostly correct. While profits are generated over time and are kept within the company as retained earnings at that point in time are decreased and the total equity in the company grew. This is exactly what most companies look for in a merger or acquisition.

Since the buyer and Nicholson are two companies heavily loaded with inventory and that needs to be funded with cash or debt to the extent that this case was first analyzed the Computer Wal-Mart/Dell new method of financing working capital. In this model, the vendor does not invoice the purchaser (Wal-Mart or Dell or the company), prior to purchase, but the customer thereby avoiding the need to finance. In the case of the Firm, inventory is a requirement. Depending on the sector and to the extent in which case it is generated by lever requires more or less. In other words, the more cash generated from operations less the leverage required during the operations of a company, despite the acquisitions. To the extent that the underwriters of the bonds will issue bonds and debentures will be classified (price) to the extent of the relationship between debt and equity, the value of solvency and the future is essential.

This key is the cost of capital. The team of authors have assumed a flat rate of 8% per annum during the five year pro-forma....