From the beginning, the amalgamation announced on November 2, 2009, appeared promising. Stanley Works agreed to acquire Black & Decker in exchange for stock valued at a 22% premium, totaling $3.6 billion. This decision was justifiable because it granted Stanley Works management and board control, as well as more than half of the stock in the combined company (50.5%).
This paragraph not only investigates opportunities for creating shareholder value and delivering in merger and acquisition transactions, but it also raises concerns about corporate governance related to CEO compensation. What’s more important, the amount that Stanley was paying above Black & Decker’s market capitalization was much smaller compared to the value of cost reductions promised by the deal. However, it should be noted that achieving these cost cuts was not guaranteed; it relied entirely on effective management.
Business background and SWOT Analysis
The Stanley plants, which were established in 1843, focused on manufacturing manual tools. In contrast, Black & Decker, founded in 1910, specialized in power tools. Despite operating in similar industries, the two companies had occasionally discussed a strategic merger for many years. Consolidation discussions occurred in the early 1980s and late eighties before another attempt was made in the early 1990s. However, it wasn’t until 2009 that the exciting news of a successful announcement was finally made.
The SWOT analysis provides insight into the internal and external factors influencing the current business and industry. In this case, it appears that the new combined corporation has a strong presence with minimal weaknesses affecting the company. There are various opportunities that can be utilized to potentially increase revenues and maintain a competitive advantage in the market. Additionally, given the current economic threats and competition, some of these opportunities may offer alternative ways for Stanley Black & Decker to thrive. As a result of the merger, the company was expected to save $350 million annually, and furthermore, the highly profitable transaction resulted in approximately $5.00 of earnings per share in the year.
Cost Synergies Risk
According to predictions, the merged company would save $350 million annually. This saving would occur over three years and involve a total restructuring cost of $400 million. According to Exhibit 1, this $400 million would be divided into four specific areas within the three-year period.
- Fabrication and Distribution
- Corporate Operating expense
- Business Unit and Regional Integration
By investing in the four countries mentioned above, the newly combined company aims to consolidate its workforce and distribution network. Furthermore, Stanley Black & Decker now purchases a greater amount of direct and indirect materials and has increased spending on transportation compared to when they were operating separately. Additionally, as the merger began, the new company’s management and sales teams incurred significant costs due to the integration of forces and consolidation of regional shared services.
As the director of Stanley Black & Decker estimated, if the synergism mentioned above were to actually work in practice, the company could potentially save $350 million annually for three years. This would be achieved through cost savings in distribution network consolidation, materials spending, transportation costs, and management. However, it should be noted that the realization of these savings is not guaranteed and depends on effective management implementation.
The director may encounter several cost synergism risks during the operation after the merger. These risks stem from differences in manufacturing methods and distribution channels, which could lead to higher consolidation costs than initially estimated or a failure to fully achieve the expected benefits of consolidation. This is because both original companies have well-established product lines that are already mature.
Secondly, while the merger would bring significant economic advantages and increased sales to the new combined company, Stanley Black & Decker will face tough competition in this industry. This includes competition from other companies and potential alliances that could impact purchasing materials and sales, making it challenging to counter the merger of Stanley Works and Black & Decker. Additionally, as shown in Exhibit 1, the cost savings from business and regional consolidation are highest in the long term. Therefore, I believe that the biggest risk to achieving the cost-saving goals lies in aligning the companies’ business management strategy and business operating culture.
After the preceding treatment, there exist numerous operational risks that could hinder the effectiveness of targeted cost-saving strategies. For instance, the current and future economic conditions should be considered in relation to the company’s operational activities. As observed, various industries have been affected by the ongoing financial crisis since 2009, which inevitably impacts Stanley Black & Decker’s sales and revenue. Furthermore, given the growth of the merged company, it is crucial for Stanley Black & Decker to prioritize mitigating purchasing risks.
Merger Announcements of Synergies Effect
When it comes to the anticipated synergies, I believe that disclosure is preferable to non-disclosure. Firstly, I think it is the responsibility of a public company to reveal information, especially regarding the combination of information. When these synergies are revealed, it benefits both the general public and employees in terms of understanding and operating the company more effectively. It is inevitable that our actual outcomes differ from estimations when it comes to these disclosures. In practice, these differences impact shareholder investment preferences and employee attitudes towards work.
Overall, achieving a desired outcome during the consolidation of companies can be a complex process, involving aspects such as business culture and operational details. In this particular case, the expectation was for the combined company to save $ 350 million per year. This would be accomplished over a period of three years, with a total restructuring cost of $ 400 million. However, the new combined company also faces significant risks in terms of cost synergies and business hazards.
Additionally, I believe that the reason for the merger at this time is the unfavorable economic conditions in 2009, which necessitated the creation of a powerful and large tool company to withstand the crisis. Moreover, the implementation of an appealing compensation program for officers serves as another rationale for this merger. If I were not only a stockholder of Stanley and Black & Decker management, I would also…
I would prefer this combination. Firstly, as a shareholder of Stanley, I give more attention to the EPS information, which is expected to be $5.00 as per the director. Secondly, as the management of Black & Decker, I cannot reject the fair compensation program offered by Stanley.