Cooper Industries Proposal to Acquire Nicholson File Company

Cooper Industries Proposal to Acquire Nicholson File CompanyMAY 3, 1971

Previous Acquisitions

1967Lufkin Rule Company

1969Crescent Niagara Corporation

1970Weller Electric Corporation

Criteria for Acquisition

1. Industry must be one where Cooper Industries can be a major leader

2. Industry must be stable, with a broad appetite for “small ticket” items

3. Only acquire leading companies in their respective markets

Nicholson File Company Strengths

One of the largest domestic manufacturers of hand tools

50% market share of $50 million market for files and rasps

9% market share of $200 million market for hand saws and saw blades Only Sears, Roebuck, and Company and Disston hold larger shares

48 salespeople and 28 file and saw engineers

Marketed to 2,100 hardware wholesalers

Products in 53,000 stores

Sold in 137 countries

Why Merge?

Opportunity to leverage complementary product offerings between Cooper and Nicholson

Increased long-term growth potential by increasing exposure of respective product lines to new markets and customers

Annual synergies from the reduction of COGS and SG&A

Financial Implications of MergerCooper Industries & Nicholson File Company

Nicholson Est. Income Statement

1972 1973 1974 1975 1976

Net Sales 58.62 Growth @ 6% 74.00

COGS 38.10 65% of Sales 48.10

SG&A 11.14 19% of Sales 14.06

Dep. Exp 2.10 Constant 2.10

Int. Exp 0.80 Constant 0.80

Other Exp. 0.20 Constant 0.20

EBT 6.28 6.84 7.44 8.07 8.74

Taxes 2.51 40% of EBT 3.50

NI 3.77 4.10 4.46 4.84 5.24

Exhibit 1

Analysis of Nicholson Cash Flows

1972 1973 1974 1975 1976

NI 3.77 4.10 4.46 4.84 5.24

Dep 2.10 2.10 2.10 2.10 2.10

Capex 2.10 2.10 2.10 2.10 2.10

+/- NWC 1.56 1.64 1.63 1.73 1.83

Net CF 2.21 2.46 2.83 3.11 3.41

Value 49.04

Total FCF 2.21 2.46 2.83 3.11 52.45

Exhibit 1

Value of Operations

1971 1972 1973 1974 1975

Total FCF 2.21 2.46 2.83 3.11 52.45

NPV of Equity (in millions): $34.89Required return = 13.95%Growth = 7%

Nicholson Shares Outstanding: 584,000Value Per Share: $59.74

Exhibit 1

Is $59.74/share an accurate value?

The value represents conservative sales and earning growth.

Conducted sensitivity analysis (Exhibit 3) Low valuation: $45.11 High valuation: $92.12 Median valuation: $58.39 Mean valuation: $61.77

Consideration for Offer

All stock offering Preserves cash on balance sheet

2.25 shares of Cooper for every share of Nicholson (Exhibit 4)

Offer price = $54.00/share New EPS = $2.70

Summary

Nicholson Shareholders Offer premium is 22.73% over

last close

Offer is 1.69% over VLN offer

Cooper shares provide greater liquidity than VLN shares

Nicholson will become a fully integrated part of Cooper

Cooper Shareholders Offer price is 9.6% discount to

current value

New EPS will be 2.26% higher

Cooper gains a large distribution system

Cooper will benefit from cross-selling current products line from both company's in new markets