Case Study_ Black & Decker.doc


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Case Study_ Black & Decker.doc

  1. 1. IntroductionSince 1910 Black and Decker (B&D) has dominated the tool industryi. With clear dominance in the thisindustry, B&D set it’s eyes on expanding. Did B&D bite off more than it could chew? How dopotential shareholders feel about a company known for making drills expanding its portfolio as far outas golf clubs? This report will address the mistakes B&D made, and may still be making.How does the best get better?The power tool market is a mature and cyclical market, with an annual growth rate around 4%.ii CEOArchibald felt that diversifying out of B&D’s core competency of power tools, was necessary toachieve satisfactory corporate growth. Black & Decker Manufacturing Company (1984) Global Leader inConsumer & Power Tools B&D Acquires GE Small Appliances Division (1984) B&D Acquires GE Small Appliances Division (1984)Advantages DisadvantagesMarket Leader Low profit margin(25%) ½ revenue comes from 1/150 product)$500 million Strong brand alliance
  2. 2. annual revenue to GE “Would you buy a toaster from a drillmaker?”Black & Decker Corporation (1985) Emphasis being on marketing &sales of consumer productsCEO Archibald had turned a B&D which had posted $156.4 million loss in 1985, into a thrivingprofitable firm posting profits of $91.7 million in 1988. Archibald’s success lies within his strategy. ARCHIBALD’S STRATEGY ARCHIBALD’S STRATEGYConsolidate Production – Boost factory Increase Research and Development –production by utilizing newer plants more Goaled division to produce 12+/yearefficiently & closing down the older ones.Centralized Global Operations – product Diversification – growth as a company liedvariations reduced, and production runs within expanding products and serviceswere lengthened.Archibald Goes OverboardWith a successful rebranding strategy of GE products previously acquired under his belt, Archibaldattempted to acquire two other firms unsuccessfully. In 1989, B&D agreed to acquire EmhartCorporation for $2.8 billion. Concerns with Emhart PurchaseStockholders failed to see ‘strategicfit’Substantially larger than B&D perbusinesses and products
  3. 3. Acquired heavy loans to finance purchase Paid 3x the book value per share Maximum Debt/Equity Ratios (per creditors) Source: SEC Filings (1988) BDK Emhart operated in over a dozen different product categories under three specific business divisions. In order to satisfy requirements of the financing B&D agreed upon, divesting assets was a necessity. Source: 1988 Annual Report (BDK) Correct Decision to DivestI nformation/Electronic Systems Recreational Outdoor Products Glass Container Forming
  4. 4. Operational Cost too high Minimal Growth Potential Fierce Competition Lack of Synergy/Strategic Fit Poor Decision to DivestCorbin Russwin Dynapert Household Products *See Appendix for weight evaluations High Market Potential/Share High Brand Equity
  5. 5. Synergy w/B&D productsStrategic FitBlack and Decker TodayB&D Companies (2005)Black and Decker Dewalt Porter-CableDelta MachineryKwikset Baldwin Weiser Lock Price Pfister Emhart TeknologiesBlack and Decker currently own a variety of brands under 9 different companies. Net income hascontinued to rise for B&D since 2001 with net income lastreported of $543.9 million.
  6. 6. Black and Decker continues its quest to perfect its portfolio. B&D purchased Baldwin HardwareCorporation and Weiser Lock Corporation from Masco for $275 million in 2003.iii B&D companieslike Porter-Cable and Delta were purchased as a part of Tools Group from Pentair, Inc in 2004 for $775million.ivStockholder’s Point of ViewFor nearly 100 years B&D has been discovering new ways to tap a mature market. Innovations like theSnakelight flashlight and cordless tools have found ways to keep demand alive in a saturated market.Stockholders today shouldn’t be surprised that B&D look constantly to find ways and means to makethe company more profitable. The only realm B&D is not willing to do business outside of is the realmof profitless opportunities.Quick CurrentShareholders should take notice the drastic difference1996 .54 1.201997 .86 1.511998 .64 1.271999 .62 1.222000 .56 1.202001 .89 1.772002 .86 1.512003 .85 1.682004 .87 1.632005 .93 1.48between the quick and the current ratios. The difference is showing that in order to meet all currentliabilities,inventory would have to be sold.11996 1.041997 1.041998 2.371999 1.55
  7. 7. 2000 1.802001 1.652002 2.082003 1.082004 .772005 1.15Debt/Equity Ratio Shareholders should be aware that B&D isn’t afraid to finance their Growth and expansion as shown by a not favorable Debt/Equity Ratio.Profits are on the rise, as well as corporate growth on the whole. Earnings Per Share have increasedsteadily since 1998 to a 10 year in 2005.vSome at B&D will argue they paid down the entire balance of their Emhart acquisition loan as early as1990.Since so much of their operations are financed by debt, could it be possible they merely “robbed Peterto pay Paul?”Stockholder Suggestion: Due to high debt burden, slow market growth (4%) and risk takingmanagement, Do not purchase Black and Decker.ConclusionWhile B&D was trying to get their sales figures in line with the goals and expectations of the creditors,they ignored the shareholders. B&G was stretched too thin. In a firm highly leveraged by debt, it cannot afford to tarnish its reputation and credibility with creditors. Shareholders come second to the bankin the decision making process. To have to acquire the “package deal” of Emhart was not a soundstrategic move. Opportunity Costs of other firms that could have been easier managed were not anoption. Selling many of the firms under management expectations is another indication of itsdissatisfactory performance. B&D would have been better off doing nothing than trying to tripleproducts over night.1 All data used for ratios were provided by Securities Exchange Commission Reports/Annual Reportsfrom 1996-2005 for Black and Decker Corporation (BDK)i Black and Decker Corporation. 2006ii “Tool market to exceed $13 billion”, Assembly 43 (5) May 2000
  8. 8. iii Black & Decker Company Information. 2006iv Black & Decker Company Information. 2006v SEC Filings for BDK Annual Reports 1