Wall Street Applauds Stanley-Black and Decker Merger

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Nov 04, 2009 (The Hartford Courant - McClatchy-Tribune Information Services via COMTEX) -- BDK | Quote | Chart | News | PowerRating -- Wall Street cheered The Stanley Works' purchase of Black & Decker Corp. Tuesday, sending shares of Stanley up strongly after executives made their case for the creation of a merged tools giant with large cost savings.

Stanley shares closed at $49.61 on the New York Stock Exchange, up $4.46, or 9.9 percent from Monday's close on a flat day for the Dow -- indicating that investors believe the acquisition will boost Stanley's per-share performance. Shares of companies making large acquisitions often slump immediately after an announcement.

Shares of Towson, Maryland-based Black & Decker closed at $62, up a whopping 31 percent.

The companies -- longtime peers in the tool business, which have held merger talks in earlier years -- said late Monday they had agreed to combine, forming Stanley Black & Decker, with headquarters in New Britain and Stanley's top executives running the company.

Black & Decker shareholders will receive 1.275 shares of Stanley stock for each of their old shares if the deal is approved by the middle of next year, as expected. At Monday's close, that would have been a 22 percent premium for Black & Decker shareholders, but Wall Street pushed the premium higher on Tuesday.

In a conference call with analysts early in the day, Stanley CEO John F. Lundgren and Black & Decker CEO Nolan Archibald said the first order of business would be the integration of the businesses -- a task Lundgren called "a huge challenge," given their scale.

"We've never taken on anything of this magnitude," he said, while noting Stanley's extensive experience in smaller mergers and an "A-team" of merger veterans already identified for the job.

Blending the companies involves cost-cutting, and Lundgren said Archibald, who is to serve as executive chairman for three years, will focus on realizing the deal's "full potential," with "particular emphasis on achieving the significant synergies that we know are there."

Job cuts are expected to amount to about 4,000, or about 10 percent of the combined companies workforces, as Stanley Black & Decker pares $350 million in yearly expenses, within three years. The executives singled out corporate and support offices, sales forces and purchasing and distribution organizations as certain targets for consolidation, especially in the construction and do-it-yourself category.

Manufacturing operations do not appear to be a major target for cuts.

"Corporate, of course, is an obvious one," Archibald said.

It is too soon to say how and whether New Britain would be affected by job cuts. The company has about 1,300 employees in central Connecticut, including corporate offices and a tape measure plant.

Cost savings, which drove the stock prices Tuesday, will lead to an increase of $1 per share in earnings within three years, the executives said.

Lundgren said new company would use its considerable cash for expanding "high-growth" business lines. Here, the word of the day was "security."

"We have never been more committed to security than we are today," he said.

Stanley's aggressive expansion into security systems and services, starting in 2002 under John M. Trani, the previous Stanley CEO, is the engine that gave it financial strength to buy a company with more sales. When both companies were at their peak of stock value in 2007, Black & Decker was worth more than Stanley. The recession, which hit construction especially hard, hurt Black & Decker more as security buttressed Stanley, leaving Stanley as the more valuable, stronger business.

Lundgren approached Archibald earlier this year to start the talks, but unlike other mergers, this one would not come as a complete surprise. Three previous times in the last 28 years, Stanley and Black & Decker executives have discussed a possible merger, the companies said.

Beyond security -- already Stanley's biggest single business, accounting for 42 percent of sales -- Lundgren said Stanley Black & Decker would develop health care and infrastructure "solutions" and "engineered fasteners," a business that Black & Decker would bring with it.

The executives acknowledged that both companies have, independent of each other, already made deep cuts in expenses during the recession.

"We've taken so much out that any further reductions on our own would likely get into the bone," Archibald said, at least $200 million in the last couple of years at Black & Decker.

Now the two toolmakers can merge their corporate and back office organizations and eliminate whatever amounts to unnecessary duplication.

"That's why this thing was so attractive to both companies," Archibald said.

As for the macro economy, neither company is expecting "a major surge in the economy next year," according to James Loree, Stanley's chief operating officer, perhaps 1 or 2 percent GDP growth.

Nonetheless, said Loree, who will be the combined company's chief operating officer, "We really believe we're at a trough point in the cycle." If the companies were together in 2009, they would have $8.4 billion in sales -- down sharply from $10.6 billion in 2008. Forty-nine percent of its total sales would be in the construction and do-it-yourself tools market, based on estimates for this year for both companies. The industrial market would account for 23 percent and security, 28 percent.

The combined company would have more bargaining power over big box retailers, analysts and executives said. It would have had 12 percent of its sales to the companies' biggest customer, which is not named but is Home Depot. Stanley now has 6 percent of its sales through Home Depot, a figure that has fallen from 22 percent less than a decade ago despite overall sales growth.

The combined company would have a strong appetite for acquisitions, using two-thirds of its available capital to buy other companies, after using one-sixth to buy back shares and one-sixth for dividends.

What color will the company be? Nothing is announced yet. But Stanley, founded in 1843 is famous for its yellow and black, and the 99-year-old Black & Decker uses orange along with, of course, black. The colors on the PowerPoint presentation today: black, yellow and orange.

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