The most important reason why Cooper Industries was interested in Nicholson File is its pretty good market positioning. Nicholson File at the moment of acquisition holder a stunning 50% of the domestic market for files and rasps. It also had a lower, but still considerably strong positioning, of 9% in the hand saw and saw blades market. This market position came with a strong brand name and brand recognition among consumers. But there are also two important facts that should be mentioned in favor of the acquisition of Nicholson File. The first was its basic competitive strength and the second, most important, is the fact that it has a consolidated and efficient distribution system. In fact, this is Nicholson’s most precious asset which Cooper can use in its advantage for other products as well.
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All of the above mentioned reasons are in accordance with the principles, criteria, of acquisition of Cooper. Nicholson deals with electronic hand tools. This is an industry where Cooper can play a significant role, why not become its leader, since it has already experience with electrical tools and machines due to its other acquisitions. Secondly, the industry is fairly stable and it has a wide variety of product possibilities. Also the market size is huge considering the 50$ million for files and rasps and 200$ million for hand saws. And finally, Nicholson does fulfill the third criteria of acquiring only leader companies in their markets. The market shares it possesses are an argument in favor of this claim. Thus the acquirement of Nicholson would be an affair by Cooper and would open the door to new markets for it.
Key benefits Cooper believes it would bring to Nicholson File
On the other hand we cannot forget the fact that Nicholson File has been going through difficult times. But since its assets and market position are relatively strong and stable it is the mismanagement of the direction of Nicholson that has brought the company to this situation. This mismanagement has made possible that Nicholson’s revenues, sales, and subsequently profits, diminish year after year until in 1967 it even reported losses. This was a strange situation for company having a solid market positioning of its products along with positive brand recognition. Thus the major benefit that Cooper could give to Nicholson was to reshape and redesign the direction and management of the company in order to bring it back to become a very profitable one. And Cooper had a reputation of successful management with its products. Another benefit for Nicholson would be that the acquisition by Cooper would bring back investor confidence. Since Cooper was a successful company, investors would perceive the acquisition of Nicholson by Cooper as signs of a better future and might reconsider investing their capital in Nicholson File once again.
Improvement Nicholson will gain from Cooper acquisition
- A new and more efficient form and method of management.
- The backup of a big company with the necessary liquidity to support its market operations.
- The opportunity of new investments in critical areas, like research and development, etc.
- The re-gaining of investors trust because of the back-up of Cooper.
- This will result in a dominant market position on the future.
- By incorporating into a bigger company with different sub-companies (like Nicholson would become) it will enhance its product range.
Assumptions and rationale of part 3 and 4
Four key assumptions to be considered are the percentages of growth of the industry Nicholson is in and the company itself (6% the first and 2% the second). Also, the cost of goods as a percentage of sale and the expenses (administrative and selling) as a percentage of sales should be considered. The first is 69% and the second 22%. This is done in order to have a clearer view of company’s cost-to-revenues ratio in order to assess the current net profit and its potential growth for the future.
Also the depreciation rate is needed in order to have an idea about fixed costs for the company. Since it has been 3.8% for the past years, it can be induced that will remain at the same rate for the next decade.
The market capitalization when Cooper had 50.1% of the shares compared to when it achieved 100% of ownership are two other assumptions to be made in order to see the actual and potential growth of the firm. Also it is used to assess the benefits that Cooper can have from this acquisition. Since the NPV comes out to be greater than 0, then new investments are needed for Nicholson.
Rationale – explanation of the calculations
FCF=NOPAT+DA- WC- CAPEX
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NOPAT represents the net operating profit after the tax. To calculate it we must discount the tax rate from the earnings before interest taxes (EBIT)
Earnings before interest taxes are calculated by discounting the depreciation expenses from the operating income. This one is a sum of the net sales, the cost of goods sold and the selling, general and administrative expenses.
WC represents the working capital is calculated:
WC= Current assets-Current liabilities