STANLEY BLACK & DECKER INC.

Lennon Caldwell
Sakisha Dovey
Shailja Patel
Lauren Winstead
Sajan Zaver

Professor Arup Ganguly

February 18, 2019

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The Stanley Works, Inc. and Black & Decker Corp. are both industrial tools and household

hardware companies with similar lines of business. In the past, several strategic combinations have been

proposed. This case shows how acquiring firms can create value and different opportunities to acquirees

using a variety of merging options. It is also riddled with corporate governance issues surrounding the

executive members and results of the merger itself. In 2009, The Stanley Works agreed to acquire Black

& Decker for a stock valued at 21.6% premium in exchange for $3.6 billion in its own stock. This is

because The Stanley Works drew attention to management, board control, and its shareholders to own

more than half of the stock with 50.5% of the stock in the combined company. This merger saved the

combined company about $350 million annually. With both companies having minor issues, the merging

of the companies will have a positive impact on increasing revenues along with maintaining a competitive

advantage in the market.

I. Most merger and acquisition transactions require the payment of a premium to the seller. As a

manager of the acquiring firm in this case, how would you justify this premium to the market?

A. An acquisition premium is the price paid to obtain the company less the actual value of

the company that is being bought. Premiums are often implemented so as to outdo

competing firms within the industry. As a manager of the ​acquiring​ firm in this case, The

Stanley Works, Inc. would pay a premium of 21.6% to the market of Black & Decker

Corp. This premium could be easily justified through the argument that the synergy

created by the acquired firm is greater than the actual cost of acquiring the target. This

level of synergy in relation to the market must be able to outpace competing firms in the

business cycle. The premium can also be justified by the annual cost savings of $350

million.

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II. After failing to complete a merger the three prior attempts noted in the case, why should the

proposed transaction be successful this time?

A. Though a merger between The Stanley Works, Inc. and Black & Decker Corp. had been

discussed several times in the past, ultimately each attempt failed due to doubts over who

would be in charge. The final agreement to let The Stanley Works, Inc. acquire Black &

Decker has a greater chance of being successful due to the cost savings associated with

the merger. Not only is the $350 million annual cost savings a huge incentive to merge,

but also the GAAP earnings per share increasing from $1.00 to $5.00 in just three years is

a major win for the company.

III. Methods of payment in mergers and acquisitions include both, stocks of the acquiring entity and

cash. As a manager of the acquiring firm, would you prefer using stock or cash as a method of

payment? Give two reasons supporting the cash option, and two reasons in favor of the stock

option.

A. Cash Option:

1. Payment of a merger with stock options often leads to confusion over who has

control of what company. In a cash deal, however, the acquiring company holds

all stocks and maintains control of the merged company. This could be

particularly beneficial seeing as how previous attempts to merge have failed due

to debates over who would be in charge.

2. The cash option would meant that the synergies acquired are realized by the

acquiring company, creating value for their shareholders. In a stock option,

releasing new shares dilutes the value created for your shareholders. The

acquiring company would take on more risk if the synergies did not transpire,

however, they would reap all of the benefits if it did.

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B. Stock Option:

1. Payment using a stock option can be extremely beneficial to the acquiring firm.

Instead of releasing a lump sum of cash, they can provide stock options to the

acquiree. In doing so, they limit their asset losses and free up cash for future

projects. Not having to pay cash for the merger itself could be extremely

beneficial if there are other expenses associated with the merger other than the

payment. In this case, there is a one time restructuring cost of $400 million. By

not paying cash for the merger, The Stanley Works, Inc. would have no trouble

financing the restructure.

2. Acquiring firms may prefer stock options as payment for a merger because, in

doing so, the risk is shared with the target company. If the merger was paid for in

cash, and the synergy paid for by the premium does not materialize, then all of

that risk falls on by the acquiring firm. If the merger is paid for by a stock option,

the acquiring firm relieves themselves of some of this risk.

IV. How much of the incremental value created in this transaction will go to the CEOs of the two

firms involved?

A. If an annual savings of $255 million was achieved then the incentive payment to be

received would be $15 million. If the year around savings was $300 million, an incentive

payment of $30 million would be received. If projected annual savings of $350 million or

more was achieved then an incentive payment of $45 million would be received.

V. How do you think the leadership team at Black & Decker (other than the CEO) will view this

transaction? How about the governor of Maryland (Black & Decker’s headquarters state)?

A. Leadership team’s opinion: Leadership other than the CEO will be pleased with the

merger’s incentive payments as well as conclusive results over management delegations.

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Management receives 3 year pay, benefits and income tax gross ups to 92.3M. Payments

to B&D long-term incentive plan amount to 13.2 M for the 19 executives and 41.7M in

stocks. B&D’s top 5 senior executives receive 22.7M in retirement plans as well. B&D

also changed its control agreements punishing anyone or charging payments if anyone

were to be terminated or if there were a change in responsibilities or power during this

transition. Pecuniary incentives implemented within the top management as well as

punishment for any change of leadership will force employees in the company to stay

motivated and cooperate with the changes that will be faced.

B. Governor’s opinion: The governor of Maryland, where Black and Decker’s headquarters

currently resides, will not agree with the merger. The merger results in 4,000 layoffs.

These layoffs hinder the state of Maryland’s workforce and could increase the percentage

of citizens taking part in Welfare or temporary assistance programs.

VI. What issues of corporate governance and social policy are raised by the Stanley Black & Decker

merger?

A. The merger of Stanley Black & Decker raises a few major issues with corporate

governance and social policy. Both the number of layoffs as well as the impressive

incentives provided to executives will likely be seen as controversial. With a change in

ownership of the company, there will be a change in the corporate culture. This may

result in uncertainty and risk when business decisions and adjustments are required.

However, ultimately the merger is the best thing for the companies and their

shareholders. By attaining economies of scale and immense cost savings, the merger

would appease the shareholders. Such synergy will reflect positively on shareholders. The

three previous attempts at merging are evidence that incentives are necessary for the

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success of the transaction. The success of this merger can only be accomplished with

effective management which is what the incentives will promise.

VII. If you were a shareholder of Stanley would you vote in favor of this transaction? Would you vote

in favor of the compensation arrangements? Would you vote to re-elect the directors at the next

annual meeting?

A. A shareholder of Stanley would vote in favor of the transaction to acquire Black &

Decker. The merger would result in higher returns for shareholders as well as increase

free cash flow by $1 billion by the third year. The increase in FCF could be used to pay

back shareholders in repurchases or dividends, or be reinvested in the company. The

merger will also increase earnings per share from $1 to $5 in just three years as well as

increase working capital. All of these benefits would motivate shareholders to vote in

favor of the proposed merger. I would vote in favor of the compensation agreements

because the company does have cost synergies risk and business risk.