Cooper Industries was organized in 1919 as a manufacturer of heavy machinery and equipment. By the mid-1950s it was a leading producer of engines and massive compressors used to force naturalgas through pipelines and oil out of wells. Management was concerned, however, over its heavy dependence on sales to the oil and gas industries and the violent fluctuation of earnings caused bythe cyclical nature of heavy machinery and equipment sales. Although the company’s long-term salesand earnings growth had been above average, its cyclical nature had dampened Wall Street’s interestin the stock substantially. (Cooper’s historical operating results and financial condition aresummarized in Exhibits 1 and 2.)
Initial efforts to lessen the earnings volatility were not successful. Between 1959 and 1966, Cooperacquired (1) a supplier of portable industrial power tools, (2) a manufacturer of small industrial airand process compressors, (3) a maker of small pumps and compressors for oil field applications, and(1) a producer of tire-changing tools for the automotive market. The acquisitions broadened Cooper’smarkets but left it still highly sensitive to general economic conditions. In 1966 Cooper began a full review of its acquisition strategy. After several months of study, threecriteria were established for all acquisitions. First, the industry should be one in which Cooper couldbecome a major factor. This requirement was in line with management’s goal of leadership within afew distinct areas of business. Second, the industry should be fairly stable, with a broad market forthe products and a product line of “small ticket” items.
This product definition was intended toeliminate any company that had undue profit dependence on a single customer or several large salesper year. Finally, it was decided to acquire only leading companies in their respective marketsegments. This new strategy was initially implemented with the acquisition in 1967 of the Lufkin RuleCompany, the world’s largest manufacturer of measuring rules and tapes. Cooper acquired a qualityproduct line, an established distribution system of 35,000 retail hardware stores throughout theUnited Slates, and plants in the United States, Canada, and Mexico. It also gained the services ofWilliam Rector, president of Lufkin, and Hal Stevens, vice president of sales. Both were extremely knowledgeable in the hand tool business and had worked together effectively for years. Their goalwas to build through acquisition a hand tool company with a full product line that would use acommon sales and distribution system and joint advertising.
To do this they needed Cooper’sfinancial strength. Lufkin provided a solid base to which two other companies were added. In 1969 the CrescentNiagara Corporation was acquired. The company had been highly profitable in the early 1960s butsuffered in recent years under the mismanagement of some investor-entrepreneurs who gainedcontrol in 1963. A series of acquisitions of weak companies with poor product lines eroded Crescent’soverall profitability until, in 1967, a small loss was reported. Discouraged, the investors wanted to getout, and Cooper—eager to add Crescent’s well-known and high-quality wrenches, pliers, andscrewdrivers to its line—was interested. It was clear that some of Crescent’s lines would have to bedropped and inefficient plants would have to be closed, but the wrenches, pliers, and screwdriverswould play an important part of Cooper’s product policy.
In 1970, Cooper further expanded into hand tools with the acquisition of the Weller ElectricCorporation. Weller was the world’s leading supplier of soldering tools to the industrial, electronic,and consumer markets. It provided Cooper with a new, high-quality product line and productioncapacity in England, West Germany, and Mexico. (Information on the three acquisitions is providedin Exhibit 3.) Cooper was less successful in its approach to a fourth company in the hand tool business, theNicholson File Company. Nicholson was on the original “shopping list” of acceptable acquisitioncandidates that Mr. Cizik and Mr. Rector had developed, but several attempts to interest Nicholson inexploring merger possibilities had failed. The Nicholson family had controlled and managed thecompany since its founding in 1864, and Paul Nicholson, chairman of the board, had no interest injoining forces with anyone.