1. WHAT’S NEXT? Case Study on Diversification at Cooper
By:
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Good day to all! This presentation is entitled “What’s Next?” and is a case study on the diversifications strategy of Cooper Industries, a diversified industrial corporation in the U.S.

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
After you finish all the rest of this presentation file, come back to this slide and provide a summary of:
the ‘strategic problem’ to be solved by the focal firm (read, ‘challenge to be overcome’ to reach sustainable competitive advantage), and
the solutions that will be offered.
The strategic challenge for Cooper Industries is whether it can buy two companies, or only one, or none at all, given the problems associated with the acquisition.
The solution arrived at after a thorough strategic analysis of Cooper’s internal capabilities using the VRIO framework and its external opportunities using the S-C-P framework is that Cooper can buy both companies, sustain its growth strategy, enhance shareholder value, and develop an international diversification strategy..

3. Solution: Cooperization
GENERAL ENVIRONMENT
Business Cycles
Operating Inefficiencies
Increased Competition
Need for Consolidation
Solution: Cooperization
It does not matter whether you provide external or internal analysis first. You should have completed both before competing this part. Why? Either analysis makes sense only in the context of the other. Start, for no particular reason, for the first assignment (in later assignments, choose your own order), with the external analysis. And, in the above slide, include the results of your General Environmental Analysis.
You should have prepared by examining the elements of the General Environment, and analyzed how in combination, or singly, they influence the Local Environment (industry) and therefore, the performance of the focal firm differentially.
Your slide above should be show that analysis (impact on local environment and the focal firm).
It should not be a summarization of the data about different elements of the General Environment.
However, in support of item 1, you should use the data/evidence/symptoms appropriately.
You do not have to include every element of the General Environment, only the ones that have serious impact, based on your prioritization.
At the end of the slide, include a summary (bottom line) statement, that should link this slide with the rest of the content.
Cooper’s growth depends on wise diversification, buying companies that are inefficiently managed but with valuable brand names in industry sectors that are counter-cyclical to its traditional business of compression and drilling for energy. With its experience and strength in Cooperization – the ability to transform poorly managed companies into highly efficient, profitable, and competitive businesses – it has been able to digest the companies that it buys and make them blend with what they have.

4. At Cooper: Crisis = Opportunity
LOCAL ENVIRONMENT
Growth from Diversification into:
Related industries: s
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
You include Local Environment Analysis in this slide. Principles of the last slide hold here as well. Do not summarize data. Indicate the impact of the Local Environment on the focal firm. Prioritize the relative importance of the impact of different elements. Use data only to support your argument about impact on focal firm. Add a summary (bottom line) statement in the end to provide logical connection with the rest of the document.
Cooper’s growth strategy is through diversification and acquisition. After a business crisis in the late 1950s allowed an outsider to buy shares in the company, Cooper CEO Miller saw that the company needed to manufacture products that would not be affected by the business cycle in the same way and at the same time.
Cooper decided to buy companies instead of building them up from scratch because of high entry barriers in the manufacturing business, intense competition from business rivals, a limited number of suppliers (Cooper acquired some suppliers out of necessity), a growing base of customers, and the increasing number of product substitutes.
The 5-forces analysis shows increased business competition in the industry sectors where Cooper competes, giving the company the opportunity to benefit from economies of scope and scale by consolidating manufacturing and sales, marketing, and distribution channels. By cutting down overhead and fixed costs, closing down inefficient factories, and laying off workers, Cooper can generate more profit while growing its sales. Cooper can grow because it is good at turning crisis into opportunity.

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

6. Diversification = Additions & Subtractions
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
Sometime it is useful to do an analysis of the impact of the competitors in greater detail (than as just one threat/force in a local environment analysis). You can include an optional Competitor Analysis here. Again, do not just describe the competitors, show what impact they have on the performance of the focal firm. Also, remember the ‘bottom line.’
Diversification at Cooper is not always about buying companies. It also means knowing when to abandon an industry to dominant and well-run competitors. Cooper lost to Dresser Industries and Carrier Industries, two large companies that are very profitable and highly efficient. It also decided not to compete with Black & Decker in the electric power tools industry sector.
But it had opportunities that it could exploit in the hand tools industry, where there are many small companies that are cheap and very inefficient. It also identified a company, Gardner-Denver, that was large but inefficient. Cooper bought that company too. It bought Crouse-Hinds, a large and efficient company, when the opportunity came up because Crouse-Hinds was the object of a hostile takeover attempt. Cooper was able to buy these companies because of its image as a high value-added, competitive, and quality manufacturing company.
At Cooper, growth by acquisition includes not only knowing which companies to buy, but which ones to sell or close down. Companies that do not meet financial and operating targets are either sold or closed down.

7. Cooper is good at “digesting” acquisitions!
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!
Include your ‘base’ Internal Analysis in this slide.
In preparation, evaluate the value chain of the focal firm. What is good, what is bad? Why? Then, state in the slide above the impact of the ‘internal components’ on the strategic position of the focal firm. Do not just describe the value chain, but state how it affects the firm’s ability to exploit the current opportunities and threats. Add a bottom line too.
Cooper has very important strengths that are valuable, rare, and difficult to imitate.
It also has a structure that allows management to exercise close control over its diversified operations, but at the same time allows managers and workers to act on their own most of the time. The structure is a balanced M-Form structure where Business Units are accountable for performance according to well-defined metrics. Its managerial staff are highly competent and well-rewarded using appropriate compensation systems like profit-sharing and performance-linked bonuses for all workers. Its MD&P system allows top management to align its 21 profit centers in 3 business segments regularly to find value in making operations more efficient, cutting costs, and increasing sales.
The result is a diversified business that is successful in sustaining its competitive advantage of making its operations more efficient and profitable. Its good performance is shown in the price of its stock outperforming industry benchmarks like the S&P 500 (Exhibit 6) from 1974 to 1989.

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.
Add a VRIO (same as VRINE) analysis of the resources and capabilities. Add the bottom line!
Cooper generates value by following a set of characteristics that are RARE and DIFFICULT TO IMITATE.
It has clear cash flow targets that allow it to buy companies with healthy cash flow so that it could pay off debts used to buy the company.
Cash flow is generated by buying companies that meet Strategic Guidelines for Acquisitions: they look for companies with large and stable customer bases, high-quality products, and valuable brand names. By keeping or growing sales figures, Cooper can generate higher profits by cutting costs.
Cooper is also flexible with its organization. It changes its structure after each acquisition to find the best combination of people running the different business units and profit centers. It also combines decentralized operational management with centralized policy-making. The structure is unique because it is NOT a holding company structure but an OPERATING structure. Top Management and the Board are involved in ALL policy decisions made at the company, which is how they exercise CONTROL, while day-to-day issues are addressed at the operations level.
Strategic planning is bottom up: each profit center comes out with annual plans that are coordinated at the Business Segment level, and all Business Segment plans are coordinated by Top Management through the corporate planning function.
Its MD&P system has been developed internally to train workers and managers and prepare them to take on more responsibility by improving their understanding of the different parts of Cooper’s business.
Cooper’s MSG or Manufacturing Services Group (or MSG) is tasked with getting the manufacturing operations of its acquired companies in line with the rest of the company. MSG experts use cross-referencing and benchmarking to identify improvements, develop training plans for workers, and recommend capital investments or asset divestitures that would increase manufacturing efficiency.

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
You have competed the internal and external analyses in the preceding slides. In the above slide, provide Strategic Opportunities and Strategic Strengths, based on all of your analyses. Add a bottom line to summarize.
The opportunities identified in the case have to do with the purchase of Champion and Cameron, two companies that have a strategic fit with Cooper.
Champion has a good brand name. Its problem is poor management, old technology, and failures at diversification, all of which are areas where Cooper is very strong. Champion’s product lines would be an extension of Cooper’s existing electrical and electronics product lines that account for the biggest part of the company. The well-known Champion brand and its large proportion of overseas sales would complement Cooper’s efforts to increase sales in foreign markets.
Cameron makes equipment that complement Cooper’s product lines at its Compression and Energy Business Segment, which used to be the biggest until By 1988, this segment was the smallest of Cooper’s Business Segments, the only one with sales below $1 billion. Buying its number one competitor – Cameron – would make Cooper increase total sales of this Segment and allow it to dominate the market, which would leave Cooper with only one major competitor – FMC.
Cooper has a good track record of buying companies and digesting them, but then…
Cooper has a proven track record of buying companies, but then…

10. Cooper must be able to manage these Threats & Weaknesses to succeed.
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?
In the above slide, provide Strategic Threats and Strategic Weaknesses, based on your preceding analyses. Add a bottom line to summarize.
The question comes up: should Cooper buy both companies at the same time? Can Cooper digest two big acquisitions? Although both companies fit Cooper’s acquisition strategy, would buying them be worth the higher debt levels that would result when Cooper buys a famous but failing company (Champion) and a large and efficient competitor (Cameron)?
Cooper is bidding $825 million for Champion and $700 million for Cameron, for a total of $1,525 million. Cooper’s total assets as of end-1988 is $4,383 million; stockholders equity is $1,771 million; and total long-term debt is $1,170 million.
If Cooper wants these two acquisitions badly, it has to make sure that it manages the Threats & Weaknesses in the acquisition before going ahead. It can also decide to buy only if these businesses generate free cash flow.
Given Cooper’s increasing earnings per share ($1.06 in 1984 to $2.20 in 1988), Cooper can succeed in buying and integrating Champion and Cameron into Cooper’s operations.
Cooper must be able to manage these Threats & Weaknesses to succeed.

11. STRATEGIC FIT Champion Cameron Iron Works
[-] Mismanaged, Bloated, Money-losing
[+] Brand Name & Overseas Markets
Cameron Iron Works
[+] Main competitor
[+] Cheap due to industry problems
In this slide you should discuss the “diagnosis.” You should state what the ‘fit’ among SWOT means for the focal firm. You can optionally add a bottom line.
The two target companies reflect good strategic fit with Cooper’s long-term plans.
Both target companies are in related industries where Cooper is already doing business – automotive and petroleum equipment – and it is very profitable in these two businesses.
Champion offers a good opportunity because it is mismanaged, bloated, poor at developing new markets, and is therefore losing money. Cameron is also going for a cheap price because of problems in the industry. Besides, it is Cooper’s main competitor in the industry sector, so buying it would help Cooper by managing the Five Forces: it avoids high entry barriers, eliminates a competitor, increases its power over customers, acquires a substitute, and exercises greater control over suppliers. Cooper would have a near-monopoly in this sector if it buys Cameron.
Target companies reflect good strategic fit with Cooper’s capabilities and intentions

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
In this slide you should discuss the “Problem Description,” which is the strategic challenge the focal company should overcome in order to get sustainable competitive advantage. Please be absolutely certain that a “Problem Description” would never be a restatement or summarization of symptoms.
You should show here how the ‘diagnosis’ in the last slide logically leads you to the “Problem Description.” You can optionally add a bottom line.
After many giant acquisitions, Cooper’s sales continue to grow, and its business efficiency is also increasing as seen from increases in return on equity, return on assets, and earnings per share.
Its strategic problem can be summarized into 4 courses of action: buy another company and which one, or do nothing? It can either wait for the purchase price to go down or to grab the target while it is still in the market. Waiting for another year might make these target companies more expensive. By then, it might be too late.
On the other hand, it is possible that the prices would continue to go down. Does Cooper (it is not in the case study paper) have the information that the purchase price might still go down? If so, it can act based on that information.
Cooper has a unique opportunity to hit two birds with one stone: by buying two strong brands (Champion and Cameron) Cooper can dominate an industry (petroleum equipment) and penetrate overseas markets (through Champion). Cooper needs to explore and develop its international diversification strategy to take advantage of low-cost production sites like China.

13. STRATEGIC OPTIONS Buy Status Quo Which one? Champion, Cameron, both?
Do nothing
Prepare the company for other buying opportunities
Wait until purchase price goes lower or Cooper stock price goes higher
State the Strategic Options – being the logical strategic initiatives many smart managers would have developed to solve the ‘problem’ on hand. They should be based on the preceding analyses.
There are a number of strategic options open to Cooper: it can buy, but it has to decide whether it can buy one or both, even at the risk of violating its acquisition strategy of limiting debt-to-capital ratio to 40% and raising this ratio to 55 to 60%. Can Cooper handle the extra 15 to 20% of debt-to-capital? Can it generate enough savings and added profits from the acquisition to justify the price and the risk?
Cooper can also decide to do nothing, squeezing its past acquisitions to get more cash. It can also wait until the prices of Champion and Cameron fall so that Cooper could buy them at a lower price. But must Cooper wait? Can it afford to wait?
The answer is NO, because the industries where Champion and Cameron operate are countercyclical. Champion is in the automotive business while Cameron is in the oil and gas business. If gas prices go up, automotive business will go down, but the petroleum business will go up. Therefore, if Cooper waits, the prices of Champion and Cameron will always behave opposite each other. If the price of one goes down, the price of the other will go up.
The decision therefore depends on whether Cooper is willing to take the risk. The answer is YES, because it has succeeded in the past, and there are many sources of value from the acquisitions.
So, our proposal is for Cooper to buy both companies now.

14. WHAT COOPER SHOULD DO BUY BOTH COMPANIES NOW! Doable
Exploit Profit Opportunities to Offset Losses
Grow two segments together
State the Strategic Prescriptions, a smaller sub-set of the Strategic Options, that YOU would choose (because nobody can do everything). Show why you chose the particular ones (why you think they are more important). You might add a VRIO analysis here to emphasize the superiority of your choice.
The solution we propose is for COOPER TO BUY BOTH CHAMPION AND CAMERON. There is a high certainty that Cooper can make Champion more efficient given Cooper’s track record. It is also certain that Cameron’s market share as #2 in the market would go completely to Cooper, the #1.
First, Cooper has shown that it can digest acquisitions well. It can digest Cameron, its biggest competitor in one business segment, in the same way it digested Crouse-Hinds and McGraw Edison in the Electrical business and Joy’s petroleum equipment business in the same sector where Cameron and Cooper compete.
Second, it can offset potential write-offs from Champion’s mismanagement losses with profits from Cameron. Cooper can use the profits from Cameron to offset the price of the Champion acquisition without affecting much Cooper’s total value to shareholders. If it wants to, Cooper can raise prices of Cameron’s and Cooper’s products in the industry that it would dominate. Buyers, who have no power, would have no choice but to get its products (FMC is a small #3). Or, Cooper can decide to just use economies of scale to reduce costs and increase profits.
Third, by buying two companies in two different segments (instead of just one segment), Cooper will be growing in two business segments and the acquisition will be managed by two respective EVPs. This means that the problems arising from the acquisition would be distributed instead of being concentrated in only one set of managers. It would be easier for each segment to craft a profitable growth strategy for each acquisition.

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
Add the Action Plan, to show how as a senior manager you would execute the Strategic Prescriptions.
Cooper must move quickly because Champion is a very attractive brand and there are other potential buyers (like Dana Corporation).
Also, make sure that Cameron would not include FMC in the bidding game because this would increase the price at which Cameron would be willing to sell itself.
There are many areas where Cooper can squeeze value from Champion and Cameron, and it has to also make sure that there are no hidden time bombs from the acquisition, such as Anti-Trust issues (Cooper and Cameron might be too big that it wields monopoly power, but if it can keep prices low and satisfy customers with high-quality products, then nobody would complain), liabilities from labor layoffs and plant closures, etc.
Cooper can also generate value by studying Champion’s overseas sales and distribution channels and see how Cooper can learn to grow its overseas businesses and tap international production sites. This is a tremendous challenge that holds promise for Cooper’s future growth.
Given Cooper’s long experience in buying large companies, we are sure that the company knows what to do and how to do it in the shortest possible time.

16. Presentation Text Below is the Text for the Presentation.
Please copy to a Word Document and Print out.
Then, delete this Slide.
What Next? Cooper Industries Case Study on Diversification
Slide 1: Good day to all! This presentation is entitled “What’s Next?” and is a case study on the diversifications strategy of Cooper Industries, a diversified industrial corporation in the U.S.
Slide 2: The strategic challenge for Cooper Industries is whether it can buy two companies, or only one, or none at all, given the problems associated with the acquisition.
The solution arrived at after a thorough strategic analysis of Cooper’s internal capabilities using the VRIO framework and its external opportunities using the S-C-P framework is that Cooper can buy both companies, sustain its growth strategy, enhance shareholder value, and develop an international diversification strategy..
Slide 3: Cooper’s growth depends on wise diversification, buying companies that are inefficiently managed but with valuable brand names in industry sectors that are counter-cyclical to its traditional business of compression and drilling for energy.
With its experience and strength in Cooperization – the ability to transform poorly managed companies into highly efficient, profitable, and competitive businesses – it has been able to digest the companies that it buys and make them blend with what they have.
Slide 4: Cooper’s growth strategy is through diversification and acquisition. After a business crisis in the late 1950s allowed an outsider to buy shares in the company, Cooper CEO Miller saw that the company needed to manufacture products that would not be affected by the business cycle in the same way and at the same time.
Cooper decided to buy companies instead of building them up from scratch because of high entry barriers in the manufacturing business, intense competition from business rivals, a limited number of suppliers (Cooper acquired some suppliers out of necessity), a growing base of customers, and the increasing number of product substitutes.
The 5-forces analysis shows increased business competition in the industry sectors where Cooper competes, giving the company the opportunity to benefit from economies of scope and scale by consolidating manufacturing and sales, marketing, and distribution channels. By cutting down overhead and fixed costs, closing down inefficient factories, and laying off workers, Cooper can generate more profit while growing its sales. Cooper can grow because it is good at turning crisis into opportunity.
Slide 5: This is a summary of the Five Forces Analysis on Cooper Industries.
Slide 6: Diversification at Cooper is not always about buying companies. It also means knowing when to abandon an industry to dominant and well-run competitors. Cooper lost to Dresser Industries and Carrier Industries, two large companies that are very profitable and highly efficient. It also decided not to compete with Black & Decker in the electric power tools industry sector.
[S-6] But it had opportunities that it could exploit in the hand tools industry, where there are many small companies that are cheap and very inefficient. It also identified a company, Gardner-Denver, which was large but inefficient. Cooper bought that company too. It bought Crouse-Hinds, a large and efficient company, when the opportunity came up because Crouse-Hinds was the object of a hostile takeover attempt. Cooper was able to buy these companies because of its image as a high value-added, competitive, and quality manufacturing company.
At Cooper, growth by acquisition includes not only knowing which companies to buy, but which ones to sell or close down. Companies that do not meet financial and operating targets are either sold or closed down.
Slide 7: Cooper has very important strengths that are valuable, rare, and difficult to imitate.
It also has a structure that allows management to exercise close control over its diversified operations, but at the same time allows managers and workers to act on their own most of the time.
The structure is a balanced M-Form structure where Business Units are accountable for performance according to well-defined metrics.
Its managers are highly competent and well-rewarded using appropriate compensation systems like profit-sharing and performance-linked bonuses for all workers.
Its MD&P system allows top management to align its 21 profit centers in 3 business segments regularly to find value in making operations more efficient, cutting costs, and increasing sales.
The result is a diversified business that is successful in sustaining its competitive advantage of making its operations more efficient and profitable. Its good performance is shown in the price of its stock outperforming industry benchmarks like the S&P 500 (Exhibit 6) from 1974 to 1989.
Slide 8: Cooper generates value by following a set of characteristics that are RARE and DIFFICULT TO IMITATE.
It has clear cash flow targets that allow it to buy companies with healthy cash flow so that it could pay off debts used to buy the company.
Cash flow is generated by buying companies that meet Strategic Guidelines for Acquisitions: they look for companies with large and stable customer bases, high-quality products, and valuable brand names. By keeping or growing sales figures, Cooper can generate higher profits by cutting costs.
Cooper is also flexible with its organization. It changes its structure after each acquisition to find the best combination of people running the different business units and profit centers. It also combines decentralized operational management with centralized policy-making. The structure is unique because it is NOT a holding company structure but an OPERATING structure.
[S8] Top Management and the Board are involved in ALL policy decisions made at the company, which is how they exercise CONTROL, while day-to-day issues are addressed at the operations level.
Strategic planning is bottom up: each profit center comes out with annual plans that are coordinated at the Business Segment level, and all Business Segment plans are coordinated by Top Management through the corporate planning function.
Its MD&P system has been developed internally to train workers and managers and prepare them to take on more responsibility by improving their understanding of the different parts of Cooper’s business.
Cooper’s MSG or Manufacturing Services Group (or MSG) is tasked with getting the manufacturing operations of its acquired companies in line with the rest of the company. MSG experts use cross-referencing and benchmarking to identify improvements, develop training plans for workers, and recommend capital investments or asset divestitures that would increase manufacturing efficiency.
Slide 9: The opportunities identified in the case have to do with the purchase of Champion and Cameron, two companies that have a strategic fit with Cooper.
Champion has a good brand name. Its problem is poor management, old technology, and failures at diversification, all of which are areas where Cooper is very strong. Champion’s product lines would be an extension of Cooper’s existing electrical and electronics product lines that account for the biggest part of the company. The well-known Champion brand and its large proportion of overseas sales would complement Cooper’s efforts to increase sales in foreign markets.
Cameron makes equipment that complement Cooper’s product lines at its Compression and Energy Business Segment, which used to be the biggest until By 1988, this segment was the smallest of Cooper’s Business Segments, the only one with sales below $1 billion. Buying its number one competitor – Cameron – would make Cooper increase total sales of this Segment and allow it to dominate the market, which would leave Cooper with only one major competitor – FMC.
Cooper has a good track record of buying companies and digesting them, but then…
Slide 10: The question comes up: should Cooper buy both companies at the same time? Can Cooper digest two big acquisitions? Although both companies fit Cooper’s acquisition strategy, would buying them be worth the higher debt levels that would result when Cooper buys a famous but failing company (Champion) and a large and efficient competitor (Cameron)?
[S-9] Cooper is bidding $825 million for Champion and $700 million for Cameron, for a total of $1,525 million. Cooper’s total assets as of end-1988: $4,383 million; stockholders equity is $1,771 million; and total long-term debt is $1,170 million.
If Cooper wants these two acquisitions badly, it has to make sure that it manages the Threats & Weaknesses in the acquisition before going ahead. It can also decide to buy only if these businesses generate free cash flow.
Given Cooper’s increasing earnings per share ($1.06 in 1984 to $2.20 in 1988), Cooper can succeed in buying and integrating Champion and Cameron into Cooper’s operations.
Slide 11: The two target companies reflect good strategic fit with Cooper’s long-term plans.
Both target companies are in related industries where Cooper is already doing business – automotive and petroleum equipment – and it is very profitable in these two businesses.
Champion offers a good opportunity because it is mismanaged, bloated, poor at developing new markets, and is therefore losing money. Cameron is also going for a cheap price because of problems in the industry.
Besides, it is Cooper’s main competitor in the industry sector, so buying it would help Cooper by managing the Five Forces: it avoids high entry barriers, eliminates a competitor, increases its power over customers, acquires a substitute, and exercises greater control over suppliers.
Cooper would have a near-monopoly in this sector if it buys Cameron.
Slide 12: After many giant acquisitions, Cooper’s sales continue to grow, and its business efficiency is also increasing as seen from increases in return on equity, return on assets, and earnings per share.
Its strategic problem can be summarized into 4 courses of action: buy another company and which one, or do nothing? It can either wait for the purchase price to go down or to grab the target while it is still in the market. Waiting for another year might make these target companies more expensive. By then, it might be too late.
On the other hand, it is possible that the prices would continue to go down. Does Cooper (it is not in the case study paper) have the information that the purchase price might still go down?
Cooper has a unique opportunity to hit two birds with one stone: by buying two strong brands (Champion and Cameron) Cooper can dominate an industry (petroleum equipment) and penetrate overseas markets (through Champion). Cooper also needs to explore and develop its international diversification strategy to take advantage of low-cost production sites like China.
Slide 13: There are a number of strategic options open to Cooper: it can buy, but it has to decide whether it can buy one or both, even at the risk of violating its acquisition strategy of limiting debt-to-capital ratio to 40% and raising this ratio to 55 to 60%. Can Cooper handle the extra 15 to 20% of debt-to-capital? Can it generate enough savings and added profits from the acquisition to justify the price and the risk?
Cooper can also decide to do nothing, squeezing its past acquisitions to get more cash. It can also wait until the prices of Champion and Cameron fall so that Cooper could buy them at a lower price. But must Cooper wait? Can it afford to wait?
The answer is NO, because the industries where Champion and Cameron operate are countercyclical. Champion is in the automotive business while Cameron is in the oil and gas business. If gas prices go up, automotive business will go down, but the petroleum business will go up. Therefore, if Cooper waits, the prices of Champion and Cameron will always behave opposite each other. If the price of one goes down, the price of the other will go up.
The decision therefore depends on whether Cooper is willing to take the risk. The answer is YES, because it has succeeded in the past, and there are many sources of value from the acquisitions.
So, our proposal is for Cooper to buy both companies now.
Slide 14: The solution we propose is for COOPER TO BUY BOTH CHAMPION AND CAMERON.
There is a high degree of certainty that Cooper can make Champion more efficient given Cooper’s track record. It is also certain that Cameron’s market share as #2 in the market would go completely to Cooper, the #1.
First, Cooper has shown that it can digest acquisitions well. It can digest Cameron, its biggest competitor in one business segment, in the same way it digested Crouse-Hinds and McGraw Edison in the Electrical business and Joy’s petroleum equipment business in the same sector where Cameron and Cooper compete.
Second, it can offset potential write-offs from Champion’s mismanagement losses with profits from Cameron. Cooper can use the profits from Cameron to offset the price of the Champion acquisition without affecting much Cooper’s total value to shareholders.
If it wants to, Cooper can raise prices of Cameron and Cooper products in the industry that it would now dominate. Buyers, who have no power, would have no choice but to get its products (FMC is a small #3). Or, Cooper can decide to just use economies of scale to reduce costs and increase profits.
Third, by buying two companies in two different segments (instead of just one segment), Cooper will be growing in two business segments and the acquisition will be managed by two respective EVPs. This means that the problems arising from the acquisition would be distributed instead of being concentrated in only one set of managers. It would be easier for each segment to craft a profitable growth strategy for each acquisition.
Slide 15: Cooper must move quickly because Champion is a very attractive brand and there are other potential buyers (like Dana Corporation).
Also, make sure that Cameron would not include FMC in the bidding game because this would increase the price at which Cameron would be willing to sell itself.
There are many areas where Cooper can squeeze value from Champion and Cameron, and it has to also make sure that there are no hidden time bombs from the acquisition, such as Anti-Trust issues (Cooper and Cameron might be too big that it wields monopoly power, but if it can keep prices low and satisfy customers with high-quality products, then nobody would complain), liabilities from labor layoffs and plant closures, etc.
Cooper can also generate value by studying Champion’s overseas sales and distribution channels and see how Cooper can learn to grow its overseas businesses and tap international low-cost production sites. This is a tremendous challenge that holds promise for Cooper’s future growth.
Given Cooper’s long experience in buying large companies, we are sure that the company knows what to do and how to do it in the shortest possible time.