Cooper Industries -Case Study
Case Analysis
Cooper Industries
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
Cooper Industries
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