Cooper's novel splitoff.

Cooper Industries is offering to exchange one share of Cooper Cameron Corporation (CCC) for a fraction of each Cooper share in a corporate splitoff. A splitoff is a tax-free, non-pro-rata distribution of a subsidiary's stock and is rarely done by public companies. In addition, if a minimum tender condition is satisfied, Cooper will distribute CCC stock to post-tender shareholders, turning over 85.5% of Cooper stock. (Because CCC stock was not publicly traded, the exchange ratio was set by Cooper with the advice of First Boston.) Cooper is offering a premium to induce participation in the exchange.

Conditions of the transaction depend on an Internal Revenue Service ruling or on an opinion from Cooper Industries' legal counsel. Because IRS ruling guidelines are more stringent than the actual law, it is expected that counsel's opinion will be favorable. In this regard, Cooper will retain CCC stock (14.5%) and, therefore, be required to vote its stock in proportion to the vote cast by the public. Cooper has promised to dispose of the retained stock within five years of the distribution. It is significant that Cooper has not refrained from having officers and directors in common with CCC even though this overlap is inconsistent with obtaining an IRS ruling in a retention scenario. This, however, should not prevent legal counsel from rendering a favorable opinion.

Observation: This type of exchange off will,give rise to a financial accounting loss, measured by the excess of the book value of the conveyed stock over its initial trading value. To the extent that shares are distributed rather than exchanged the book loss will shrink because the distributed stock will be accounted for as a dividend to which book value will be charged directly to retained earnings.