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WHAT’S NEXT? Case Study on Diversification at Cooper By:

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1 WHAT’S NEXT? Case Study on Diversification at Cooper By:

2 2 DIVERSIFICATION AT COOPER  Strategic Challenge: Buy Champion or Cameron or both to reach sustainable competitive advantage?  Solutions: Buy both now  Internal Capabilities  VRIO  External Opportunities  S-C-P Develop international diversification strategy

3 3 GENERAL ENVIRONMENT  Business Cycles  Operating Inefficiencies  Increased Competition  Need for Consolidation Solution: Cooperization

4 4 LOCAL ENVIRONMENT  Growth from Diversification into: Related industries: 1967-1970s Unrelated industries: 1980s  High entry barriers (Factories expensive)  Intense Rivalry (Target market leaders)  Suppliers (Economies of scale)  Substitutes (Cheaper Products)  Buyers (Stable, profitable, and growing) At Cooper: Crisis = Opportunity

5 5 FIVE FORCES ANALYSIS Intensity of Rivalry (Many Inefficient Competitors) Substitutes (Cheaper Products) High Entry Barriers Cooper Industries Buyers (No Power) Suppliers (No Power)

6 6 LOSSES & GAINS Losses  Dresser and Carrier: compressors for petrochemical applications  Black & Decker: Electric power tools Gains  Hand Tools: hundreds of small companies  Gardner-Denver: Big but inefficient  Crouse-Hinds: Big and Efficient Diversification = Additions & Subtractions

7 7 INTERNAL ANALYSIS Strengths  Clear Acquisition Strategies  Management Development & Planning (MD&P)  Squeezing & Adding Value  Organizational structure Weaknesses  Increased Debt Cooper is good at “digesting” acquisitions!

8 8 HOW COOPER CREATES VALUE  Cash Flow is KING!  DYNAMIC organizational structure changes with each acquisition  Strategic Planning is bottom-up  MD&P System  Manufacturing Services Group These (and more) are difficult for competitors to imitate and are the sources of Cooper’s sustainable competitive advantage.

9 9 OPPORTUNITIES & STRENGTHS  Grow Business Segments through More Acquisitions Champion Cameron (main competitor)  More Power in the Oil & Gas Industry  Develop foreign markets via Champion  Strategic Fit Champion  Commercial & Industrial Iron Works  Compression & Energy  Management Expertise Cooper has a proven track record of buying companies, but then …

10 10 THREATS & WEAKNESSES  Champion Poor diversification Losses and cost of liabilities  Cameron Anti-trust issues Serious growth potential?  Higher debt after acquisition: 55- 60% of capital  Can it digest two big “meals” at the same time? Cooper must be able to manage these Threats & Weaknesses to succeed.

11 11 STRATEGIC FIT  Champion [-] Mismanaged, Bloated, Money-losing [+] Brand Name & Overseas Markets  Cameron Iron Works [+] Main competitor [+] Cheap due to industry problems Target companies reflect good strategic fit with Cooper ’ s capabilities and intentions

12 12 WHAT CAN COOPER DO?  Increase E&E Segment Sales and Expand Overseas Market by buying Champion  Dominate industry sector by buying #1 competitor Cameron  Hit 2 birds with one stone  Explore International Diversification

13 13 STRATEGIC OPTIONS  Buy Which one? Champion, Cameron, both?  Status Quo Do nothing Prepare the company for other buying opportunities Wait until purchase price goes lower or Cooper stock price goes higher

14 14 WHAT COOPER SHOULD DO BUY BOTH COMPANIES NOW!  Doable  Exploit Profit Opportunities to Offset Losses  Grow two segments together

15 15 ACTION PLAN  Conduct Due Diligence on Champion and Cameron & look for Value (e.g.): Sell Champion’s executive planes Close Champion’s losing businesses Downsize Cameron’s Sales Force Integrate Cooper’s and Cameron’s R&D  Make sure No Anti-Trust Issues from Cameron purchase  Check liabilities from closures  Meet CEOs of companies; make offer ASAP  Study International Diversification Strategy

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