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Posts Tagged ‘acquisition’

Long-Term Financing Policy, Capital Structure, Risk Management Policy and Acquisition Analysis

Cooper executed several acquisitions to expand its business and broaden its diversification to gain market share. Cooper’s management was highly concerned about their need to diversify since they relied heavily on the sale of oil and gas tools to industrial customers.

Likewise, earnings volatility was caused by the cyclical nature of heavy machinery and equipment sales. Regrettably, the effort to reduce the earnings volatility for Cooper Industries was not successful since sales were entirely concentrated the same industry. By 1959, Cooper ceased operations in four of the acquired companies that broadened their market, yet they did not satisfy the need to diversify the company. In order to avoid any more ineffective acquisitions, Cooper developed three criteria that must to be met for all future acquisitions, Cooper Industries, Inc.- Case (1974). Industry choice should permit Cooper major player status · Industry should be stable and enable sales of “small ticket” items.

Industry leading firms would be acquired Only acquire industry leader Cooper implemented these criteria by acquiring Lufkin Rule Company in 1967. The new strategy would ensure that Cooper’s acquisitions benefited them and their shareholders. Cooper’s next step was to acquire Nicholson File Company [Nicholson]. This paper is going to further expand and analyze this acquisition. Meeting the Criteria Nicholson as one of the largest domestic manufacturers of hand tools, led in its two main products areas: files and rasps. It had 50% share of the million market for files and rasps where they had established excellent reputation for quality and brand name. Its hand saw and saw blades also had excellent reputation for quality and held a respectable 9% share of a 0 million market. Nicholson’s best asset, their distribution system, gave them a competitive advantage that was attractive to Cooper.

Aside from these attributes Nicholson was in financial trouble. Their common stock was trading at to per share well below its book value of .25 per share. The company reflected a low price-earnings ratio of 10-14 compared to 14-17 times earning for other leading hand tool companies. Every aspects of Nicholson’s business met the acquisition criterion that was previously established by Cooper.

Benefits of Acquisition

Cooper analyzed the benefits of merging with Nicholson. Cooper estimated that Nicholson’s cost of good sold could be reduced from 69% of sales to 65%. The acquisition would eliminate the sales and advertising duplication, which would lower the general and administrative expenses from 22% of sales to 19%. In addition, “75% of Nicholson’s sales were to the industrial market and only 25% to the consumer market” (page 5) compared to the inverse for Cooper, since they distributed between the consumer market at 25% and industrial market at 75%.

Synergies

Synergy can be defined as the value that is created by combining companies, which yields a result greater than the value of these companies as separate entities. It is important to recognize the synergy that existed with the two corporations. The acquisition would provide a greater marketability for both of these companies. Both of these companies will improve their profit margin by working together instead of as competitors. When companies are acquired, competition should be reduced giving companies better opportunities to advantageously control price. In addition, the acquisition will provide growth. With each of these product lines, both of these companies together can achieve greater sales expansion. Improved distribution methods by Nicholson to Cooper would reduce operating costs to the venture as a whole.

Capital Structure

Cooper Industries should structure the deal to finance the acquisition of Nicholson. Cooper has capital structure options to finance this acquisition. They can issue debt, arrange lease financing, bond swapping, offer preferred stocks, warrants, convertible bonds and callers. These selections offer investment options for Cooper.

“Typical financing decisions include how much debt and equity to sell, what types of debt and equity to sell, and when to sell debt and equity. Just as the net present value criterion was used to evaluate capital budgeting projects, we now want to use the same criterion to evaluate financing decisions” A five-year projection (Exhibit H) has been created to demonstrate the desired progress toward the projected goal of this acquisition in regards to the 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 leveling out as the year’s progress. Earnings per share were greatly impacted by 1972. This merger also impacts long-term debts. In order to acquire Nicholson File Company, Cooper Industries would have to look for a way of long-term financing, thereby increasing its debt and debt/equity ratio.

The Cooper/Nicholson acquisition has a positive impact on both companies and it is believed that the two companies have great synergistic value. The acquisition will not only reduce operating costs but it will also reduce additional selling and administrative expenses, as well. The SG&A expenses should decrease by 10% the first year and should experience no increase in them in years after. Revenue too had a 5% increase and it too stabilized into having a consistent increase of 8% every year. The 5-year projection after the acquisition provides a positive glimpse for the future.

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

· Exhibit 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 Cooper Common Stock

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

· Exhibit E Summary Combined with Synergies Financing With Bonds

· Exhibit F Summary Combined with Synergies Financing With Cooper Common Stock

· Exhibit G Summary Combined with Synergies Financing With Cooper Preferred Stock

· Exhibit H 5-Year Projection Income Statement and Balance Sheet

· Exhibit I Net Present Value Calculations

This team of authors recommends a bond issue as the preferred capital financing structure for a variety of reasons. Debt capital used more than equity capital causes a higher debt to equity ratio, partners.financenter.com (2004). As this ratio increases then the financial leverage of the business increases to a point. The maximum ratio of debt to equity is achieved when a firm can no longer service its debt. The inability of a firm to service or pay its debts is termed as insolvent. Debt capital, the assumed interest rate of 8% is used, with a twenty-year term and a sinking fund for future debt retirement over the term of the debt commencing in year one or 1972.

This usage of debt rather than equity to finance the acquisition of Nicholson causes a greater return on shareholder equity since the use of other peoples money (OPM) causes a magnification on return of the existing capital structure. If the Firm were to issue more stock in lieu of debt then the existing equity structure would be diluted and the return on shareholder’s equity reduced. The objective of the Firm would be to maximize shareholders’ wealth and debt-financing structure achieves the objective better than the issuance of more shares of stock. Another cause for debt issue for the financing is linked to the United States Tax Code allowing companies to expense interest expense as a financing expense accounted for in the statement of cash flows where it is deducted from net income before taxes prior to federal income tax calculation. The boon of tax benefit is not available in many other foreign nations where interest expense is not a tax preference item.

Therefore, the 8% interest expense will reduce net income before interest and taxes dollar for dollar and subsequent income taxes at 34¢ on the dollar of earnings before interest and taxes. Furthermore, as the Firm grows, the debt to equity ratio will probably change assuming profitability and the assumptions are mainly correct. As profits are generated over time and they are kept in the Firm in the form of retained earnings at that point in time will have dropped and the total equity in the company will have grown. This is exactly what most companies look for in a merger or acquisition.

Since the acquirer and Nicholson are both companies heavily laden with inventory and that inventory needs to be financed either by cash or accounts payable to the extent that this case was analyzed prior to the new Wal-Mart/Dell Computer method of working capital financing. In this model, the vendor does not bill the purchaser (Wal-Mart or Dell or the Firm) 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 industry and to the extent that cash is generated by it leveraging is needed more or less. In other words, the more cash generated from operations the less leverage required during the operations of a company notwithstanding the acquisitions. To the extent that the bond underwriters will issue bonds and the bonds will be graded (priced) to the extent of the debt to equity ratio, solvency and future value is key.

That key is the cost of capital. The team of authors have assumed a rate of 8% annually flat over the 5 year pro-forma.

Guy McCord, MBA, CBC turnaround specialist with small closely held businesses, expert in consumer driven health plans, deferred compensation, asset protection, property and casualty insurance, commercial landscape, industrial staffing, staffing, dallas, fort worth, austin, houston, http://www.landstartexas.com

 

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Green Environmental Business; To Develop Partnerships, Strategic Alliances, Venture Capital Investor Partners, Mergers, And Or Acquisition, To Expand

Restoration Environmental, one of Canada’s leading GREEN specialty environmental remediation contractors in Asbestos Removal, Demolition and Disaster Recovery Emergency Response is looking for Strategic Alliances, Joint-Venture Partners, and to Venture Capital expand in Canada and USA.

Restoration Environmental Contractors-REC Demolition announced their 20th anniversary of being GREEN. Established in 1989, the company has completed over 9,000 environmental restoration and demolition projects throughout Canada specializing in demolition, asbestos removal, lead abatement and industrial plant cleaning, plant decommissioning & closures, site remediation, disaster recovery and emergency response in the industrial, commercial, governmental and institutional sectors.

Restoration Environmental prides themselves on their outstanding safety record, their commitment to environmental stewardship, the high level of productivity of their skilled unionized workforce and by enforcing the Three R’s – Reduce, Re-use and Recycle, the company’s “Green LEED Philosophy” and market strategy.

Restoration Environmental’s senior project management and site supervisory team has accumulated more than one million hours of on-site contracting experience, whether they are small or large projects, from emergency service response calls, or maintenance calls, or multi-million dollar demolition, disaster recovery, and environmental remediation projects.

REC believes the process should be simple, while at the same time creating options for their clients that offer sound environmental solutions in plant decommissioning, site decontamination, soil remediation and demolition.

The company’s commitment to meet the needs of their clients with experienced, highly skilled unionized workers, well-planned project planning and an assurance to quality means that Restoration Environmental can help with a disaster recovery emergency response readiness plan, plant decommissioning or closure, an asbestos removal, an environmental remediation, demolition or historic restoration project.

Restoration Environmental Contractors – REC Demolition – REC Disaster
Recovery services include:
- Environmental Abatement and Soil Remediation Contractors
- Demolition; Deconstruction, Asset Recovery, Equipment Dismantling
- Hazardous Materials Removal; asbestos removal, Mold, PCBs, Lead.
- Plant Closures: Industrial Plant Decommissioning, Soil & Site
Remediation
- Removal and Interior Plant Cleaning of Heavy Metals
- Disaster Recovery; Planning Cost saving Service Contracts
- Fire, Sewage Backup, Flood, Water, Wind Damage Restoration
- Emergency Response: bonded secure, CPIC Police Cleared Staff.

Corporate Profile Background:

Restoration Environmental REC Demolition REC Disaster Recovery is a turnkey, full-service, emergency response contractor and environmental contractor, a recognized leader in the environmental, demolition, restoration and construction industry. Their exceptional reputation, aggressive health & safety program and quality client services make them one of Canada’s leading environmental and government emergency response contractors.

Don Bremner and David Bremner are the founders of The Passion Campaign.ca an awareness campaign bringing together local food banks and thirteen charities that help the poor, homeless and less fortunate every day in Brantford, Hamilton, Markham and Toronto-GTA www.thepassioncampaign.ca;

Don Bremner and Restoration Environmental Contractors – REC Demolition – REC Disaster Recovery were the Proud Owners of The Markham Waxers Junior “A” Hockey Club for 11 years, from 1994-2005 Web: markhamwaxersarchives.ca;

Don Bremner is the President and majority owner of Abcott Construction Ltd. a Design Build General Contractors (Est. 1972), an awarded Butler Builders, Project Managers and Construction Managers. Builders of ICI specializing in manufacturing, commercial, institutional, government (schools), steel and automotive dealerships / industries.

Press Contact: Don Bremner
P.O. Box 746, 10 Stalwart industrial Drive Unit 5
Gormley, Ontario, Canada, L0H 1G0 tel:1-905-888-0066 fax: 905-888-0071
donbremner ( @ ) restorationenvironmental dot com http://www dot environmentalhazards dot com/new (Under Construction new web site)
http://www.environmentalhazards.com/

Call 1-800-894-4924 – Please forward all Project or Tender Related E-Mails to: rec ( @ ) restorationenvironmental dot com or info ( @ ) abcott dot ca

For more information on all REC’s services, please visit our Websites: www.recdemolition.com, www.environmentalhazards.com, www.recdisaster.com or www.soilremediation.com. www.leadabatement.com, www.toxicmold.ca, www.pcbremoval.com, www.asbestoscleanup.com;

See our BLOG: http://recdemolition.blogspot.com and www.soilremediation.com

For further information: Don Bremner President, at 1-800-894-4924 toll-free or Email donbremner ( @ ) restorationenvironmental dot com

Environmental Green Business wants to develop Partnerships, Strategic Alliances, Joint-Venture, to Merger or Acquisition with Venture Capital Partners to expand across Canada and USA.

Source:
http://www.1888pressrelease.com/green-environmental-business-to-develop-partnerships-strat-pr-193038.html

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