B&D Case MMUGM

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BLACK & DECKER CORPORATION Lecturer : Bambang Riyanto L.S., MBA, Ph.D

Adhi Prabowo Herning Ratna Kusumawati Robby Apriansyah Wahyu Widyatmoko

PROGRAM STUDI MAGISTER MANAJEMEN SEKOLAH PASCA SARJANA UNIVERSITAS GADJAH MADA JAKARTA 2008

BLACK & DECKER CORPORATION

Background of the Company

Black & Decker was incorporated in 1910. Begun by Duncan Black and Alonzo Decker, Decker, Black & Decker’s Decker’s first power tool was an electric drill in 1916. They went went on to develop develop and offer the first portable screwdr screwdriver iver,, electric hammer, hammer, as well as finishing sanders and jigsaws all the way up to the hugely successful dustbuster in 1978. Over the next 70 years, the company established itself as dominant name in power tool and accessories, first in the United States and then accr accros os a broa broad d glob global al fron frontt but but part partic icul ular arly ly in euro europe pe.. Grow Growth th was was achieved by adding to its lineup of power tools and accessories and by increasing its penetration of more and more foreign markets

Here are some milestones of the Black & Decker Corporation: -

1910 1910 Black Black & Deck Decker er was was found founded ed by Alon Alonzo zo Deck Decker er and and Duncan Duncan S.Black

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1917 1917 Recei Receive ved d a patent patent on the the world’ world’s s first first porta portable ble power power dril drilll with pistol grip and trigger switch

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1936 1936 Blac Black k & De Deck cker er shar shares es bega began n bein being g trad traded ed on the New New York Stock Exchange

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1989 1989 B&D B&D acquis acquisitio ition n of Emhart Emhart Corpor Corporati ation on

Symptons, Issues and Problems Issues Issues in this this case case is divers diversifi ificat cation ion strate strategy gy runne runned d by Black Black &  Decker corporation. As a diversified global manufacturer and marketer of  household, commercial, and industrial product, Black & Decker need to develop and choose the right strategy for diversification. This This case case partic particula ularly rly discus discuss s divers diversifi ificat cation ion of Black Black & De Deck cker er corporatio corporation n

during during late 1980’s 1980’s to early 1990’s, 1990’s, where where Black & Decker Decker

which is established as dominant name in power tools and accessories,

began to pursue diversification. It is because the continuing maturity of its core power tools business. During the 1980’s Black and Decker had established themselves as a leader leader in the power tool industry industry.. However However,, they were feels that the market for such tools was maturing to the point where expansion within the industry would provide little or no additional revenues so they decided to diversify. Black Black and De Deck cker er began began their their expans expansion ion operat operation ion by acquir acquiring ing General General Electric’ Electric’s s housewar housewares es business, business, the leader leader in the industry industry,, for $300 million in 1984. The success of the GE deal, and the reorganization efforts of their new CEO Nolan Archibald, led Black and Decker to continue on this path of acquisitions and diversification in other areas. Then, various acquisitions and acquisition attemp made by Black &  Decker in their strategy to diversified. But the biggest and most noticed was the acquisition of Emrat Corporation, a diversified manufacturer of  indu indust stri rial al prod produc uct, t, for for a $2.8 $2.8 bill billio ion n in Marc March h 1988 1988.. This This step steps s is considered to be very bad decisions made by Black & Decker.

Analysis

Change in strategy In the mid 1980s, Black & Decker feels that the power tool market had matured to the point where there is no much room for further growth. Black Black & De Deck cker er then then decide decided d to change change their their corpor corporate ate strate strategy gy from from single business firm into diversified company. company. In 1984 they began to diversify. diversify. First they tried to get into the small household appliance market. Rather than create their own line, Black &  Decker decided to acquire General Electric’s unit of household appliances for $300 million. Although it was a small part of GE’s company, it held more market share than other houseware distributors (25 percent of the market and the leadership position). That acquisition gives an additional $500 million a year in revenue revenue for Black & Decker because because it was able to offer products like irons, coffee makers and toasterswhich. This began a trend of acquisitions by Black and Decker expanding into various related and unrelated markets with varying levels of success.

This various acquisitions allowed Black & Decker to offer even more new products such as portable woodworking tools and stronger drill bits. After all all the the new new chan change ges, s, Blac Black k & De Deck cker er Manu Manufa fact ctur urin ing g Comp Compan any y also also changed its name to Black & Decker Corporation to help market those changes The The

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acquisition in 1988, has triggered Black & Decker to tried again. Only this time time the com compan pany y of intere interest st was Am Ameri erican can Standa Standard rd Inc. Inc. Am Ameri erican can Standard had an impressive $127 million profit in 1987, which towered above the mere $70 million for Black & Decker. But then, the acquisition was unsuccessful.

The Emhart acquisitions The failed attempts by Black & Decker in 1988 did not stop Black &  Decke Deckerr mo move ves s to acquir acquiring ing other other com compan pany y. In 1989, 1989, Black Black & Decke Deckerr acquiring Emhart for the price of $2.8 billion, a price that 33% premium over Emhart’s Emhart’s preannoun preannounceme cement nt value. value. This acquisitio acquisition n may not have have been the best move for Black & Decker because its stock price dropped 15 points after the announcement of the acquisition. After difficult negotiation of exactly how the acquisition would occur, Black & Decker decided to pay for Emhart for the next 48 years. The deal put over $2 billion in goodwill on Black & Decker's books and increased debt to over $4 billion just before the credit markets were about to contract contract severely severely..

With the exceptio exception n of a few businesses businesses like

Price Price Pfiste Pfisterr fauce faucets ts and Kwikset wikset locks, locks, which which repres represent ented ed just just $600 $600 million in sales, Emhart Emhart made no sense for Black Black & Decker. Decker. Several of its subsidiaries were quickly placed on the block. But then suddenly the economy became sluggish and the market slowed down, Black & Decker stock slumped from a pre-acquisition $25 to $8 per share. share.

Archib Archibald ald (Black (Black & Decke Decker’ r’s s CEO at that time) time) had to

scramble scramble to keep the company company solvent solvent..

Archibald’ Archibald’s s plan was to sell off 

about $1.8 billion of Emhart assets to pay down debt while merging the company's line of Kwikset locks and Price Pfister Inc. plumbing fixtures with Black & Decker's Decker's offering offerings. s.

According According to Archibald, Archibald, the plan would would

have been successful enough under normal economic conditions. However,

he failed to sell the Emhart businesses for the set prices leaving a long term debt of a hefty $3 billon and annual interest payments of more than $300 million. Black & Decker initially sold $1 billion in Emhart assets to reduce the interest costs. It met this demand by selling whole divisions of Emhart and also by selling equipment and other assets. By 1991, Black & Decker reduced the debt acquired by more than 25%. From 1993 to 1996, Black & Decker sold off three segments of Emhart that did not prove to be strategic parts of the acquisition. By 1997, Black & Decker was able to meet its liquidity requirements and management chose to amortize the costs on a straight-line basis for the next 40 years. This shows that the acquisition of Emhart Corporation is a Black &  Decker’s bad move. Black & Decker’s Decker’s decision to acquire a company company that was larger than $2.3 billion (revenues) Black & Decker itself, (the Emhart Corporation were $2.7 billion in revenues), was too risky and apparently Archibald didn’t too aware about it. The purchase and acquisition of Emhart had proven a lack in the synergy synergy required required to make such purchases purchases profitabl profitable. e.

Also the company company

had had not not been been able able to redu reduce ce its its am amou ount nt of debt debt (pri (prima mari rily ly from from the the purchase of Emhart) over the subsequent 10 years. Archibald made poor decisi decisions ons in the Emhart Emhart acquis acquisiti ition, on, which which impact impacted ed its profit profit margin margin,, lowere lowered d its com compet petiti itive ve advant advantage age,, and killed killed any chance chance of creati creating ng above-average returns. There are things that has to be done in order to ascertain whether the acquisition may create value for the shareholders, which is the CEO’s primary responsibility. Effort should have concentrated on three essential tests: •

The attractiveness test. The The indu indust stri ries es chos chosen en for for dive divers rsif ific icati ation on must must be stru struct ctur urall ally y attractive or capable of being made attractive.

•

The cost-of-entry test. The cost of entry must not capitalize all the future profits.

•

The better-off test.

Either the new unit must gain competitive advantage from its link with the corporation or vice-versa. vice-versa. Conceding the point that the purchase provided some benefits, such as increased market share and well-known consumer brands, the cost-ofentry and better-off tests provide evidence that the Emhart purchase was very risky ri sky..

Black & Decker SWOT Analysis Strengths •

Brand recognition recognition is a strong attribute for Black and Decker Decker.. Black and Decker has a reputation for producing electrical engines, power tools and appliances.

•

Black and Decker produce a variety of products in its respected industry, and it is involved in constant research and development (e.g. (e.g.,, develo developin ping g

cordle cordless ss applia appliance nces s

and tools, tools, recha recharge rgeabl able e

batteries that are compatible with both tools and small appliances). •

Blac Black k and and De Deck cker er have have pene penetr trat ated ed the the ma mark rket et ca caus usin ing g it to dominate market share in the industry. industry.

Weaknesses •

Black and Decker’s reputation for quality tools and appliances has been been decrea decreasin sing. g.

This This was likely likely due to the fact fact that Black and

Decker was busy dealing with its non-strategic businesses. Opportunities •

Opport Opportuni unitie ties s to gain gain mo more re marke markett share share by sponso sponsorin ring g home home improvement shows.

•

Gain Gain more ore ma mark rket et shar share e with with indu indust stri rial al ma mark rket et,, by offe offeri ring ng quantity-based deals and advertising the quality of its products.

Threats •

Sears is the strongest competitor in the power tools division with 13.4 percent of the US market share.

•

Blac Black k and and De Deck cker er need needs s to be awar aware e of new new item items s that that the the consumer can use and develop them before their competitors.

Conclusion and Recommendation When an industry became mature and not offered enough room for further growth, it is important for a company to change their strategy to keep keep growin growing g contin continuou uously sly.. This This is what what Black Black & Decke Deckerr did, did, althou although gh being a dominant player in power tools and accessories for many years, Black & Decker realized the industry is being mature, so they decided to change their strategy into a diversified company. To be successful, a diversified company should have a portfolio of  produc productt with with differ different ent growth growth rates rates and differ different ent market market shares shares.. The portfo portfolio lio com compos positi ition on is a functi function on of the balanc balance e betwe between en cash cash flows flows.. High-growth product, that important for company to keep growth in the future, need lot of cash inputs. Low-growth product, product that already in maturity growth, should generate cash. How to balance between this two is the most important things in managing multi-business (diversified) company. The Emhart Emhart acquis acquisiti itions ons is an exampl example e of bad acquis acquisiti itions ons from from Black & Decker in their strategy to diversified. There can be many reasons that an acquisition strategy fails to earn its cost of capital. An acquirer may have no real real strate strategy gy to begin begin with with and thus thus pay an unjust unjustifi ified ed acquisition premium right from the beginning. Or there may be a complete failure in executing a fundamentally sound strategy. One major risk in acquisitions is the failure to close the gap that may exist between the strategic objectives and organizational design of the new organization and those of the old. Issues such as new information systems and channels, management succession, new decision rights, and incentive systems must be planned carefully in light of where competitive performance gains are expected to result. This case is also an example of the problems where mismanaged growth growth can bring bring divers diversifi ificat cation ion away away from from core core busine businesse sses s and core core competencies rarely creates value for the shareholders. High leveraged acquisitions put the firm at higher financial risks, particularly when the firm’s products depend on business cycles. Shocks

to the economy may result in insolvency and possible bankruptcy. The company may have to sell assets at low prices to meet debt obligations. As fina financ ncia iall inve invest stor ors s

may ma y

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diversification less attractive. Firms must continue to strengthen their core competencies and sustain their competitive advantages. In conclusion, the fundamental reason for the failed acquisition is due to lack of long term planning, forecasting and predicting of the return on investment investment relative to cost. cost. The highly leveraged leveraged acquisition acquisition of Emhart placed Black & Decker at higher financial risks, primarily when the firm’s products depended on on business cycles. cycles. As result of the inherited inherited debt and the unanticipated market fluctuations and weak economy may result in collap collapse se or possib possible le bankrupt bankruptcy cy of the corpor corporatio ation. n.

Black Black & Decke Deckerr

Executives’ lack of strategic direction and poor application of funds may lead the corporation to sell of assets at low prices or lay off employee to meet debt obligations. Our recommendation for this case is, Black & Decker should stick with its original vision that includes the consolidation of their portfolio. The company should continue in investing in, and strengthening, its core products within its existing portfolio, so that these products will generate cash cash flow flow that that will will enab enable le the the comp compan any y to em emba bark rk upon upon expa expans nsio ion n opportunities. In the the futu future re,, Blac Black k & De Deck cker er shou should ld co cons nsid ider er inte intern rnat atio iona nall compan com panies ies with with strong strong recogn recognitio ition n in the countr countries ies that that they they plan plan on expanding into, considering either acquisition, merger, or creating a joint venture. venture.

The affiliation affiliation between between Black Black & Decker Decker and these companie companies s

must must crea create te syne synerg rgy y in orde orderr to just justif ify y such such deli delibe bera rate te mo move ves s and and expansions. These planned executive executive decisions decisions and actions will will help Black & Decker to obtain competitive advantages which will result in aboveaver average age return returns, s, leadin leading g to greate greaterr inve investo storr wealt wealth h and value value to its employees.