B&D Case MMUGM

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PAPER

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

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BLACK & DECKER CORPORATION

Background of the Company Background of the Company

Black & Decker was incorporated in 1910. Begun by Duncan Black Black & Decker was incorporated in 1910. Begun by Duncan Black and Alonzo Decker

and Alonzo Decker, Black & , Black & Decker’Decker’s first power tool s first power tool was an electric drill was an electric drill inin 1916.

1916. They wenThey went on t on to develto develop and offer the first portable scrop and offer the first portable screwdrewdriveriver,, electric hammer

electric hammer, as well , as well as finishing sanders and as finishing sanders and jigsaws all the way up jigsaws all the way up toto the hugely successful dustbuster in 1978.

the hugely successful dustbuster in 1978.

Over the next 70 years, the company established itself as dominant Over the next 70 years, the company established itself as dominant name in power tool and accessories, first in the United States and then name in power tool and accessories, first in the United States and then ac

accrcros os a a brbroaoad d glglobobal al frfronont t bubut t papartrticicululararly ly in in eueuroropepe. . GrGrowowth th wawass achieved by adding to its lineup of power tools and accessories and by achieved by adding to its lineup of power tools and accessories and by increasing its penetration of more and more foreign

increasing its penetration of more and more foreign marketsmarkets

Here are some milestones of the Black

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

-- 1911910 Bla0 Black & Dck & Deckecker wer was foas foundunded by Aed by Alonlonzo Dzo Deckecker aner and Dund Duncancan S.Black

S.Black

-- 1911917 Re7 Receiceiveved a pated a patent on thnt on the wore world’ld’s firs first post portartable poble power dwer drilrilll with pistol grip and trigger

with pistol grip and trigger switchswitch

-- 191936 Bl36 Blacack & k & DeDeckcker sher sharares bees begagan n bebeining g trtradaded on the Need on the Neww York Stock Exchange

York Stock Exchange

-- 1981989 B9 B&D &D acqacquisuisitioition n of of EmhEmhart art CorCorporporatiationon

Symptons, Issues and Problems Symptons, Issues and Problems

Iss

Issues ues in in thithis s cascase e is is divdiversersifiificatcation ion strstrateategy gy rurunnenned d by by BlaBlack ck & & Decker corporation. As a diversified global manufacturer and marketer of Decker corporation. As a diversified global manufacturer and marketer of household, commercial, and industrial product, Black & Decker need to household, commercial, and industrial product, Black & Decker need to develop and choose the right strategy for diversification.

develop and choose the right strategy for diversification. Thi

This s cascase e parparticticulaularly rly disdiscuscuss s divdiversersifiificatcation ion of of BlaBlack ck & & DeDeckckerer corpo

corporatioration n durinduring late 1980’g late 1980’s to early 1990’s to early 1990’s, whers, where Black & Deckee Black & Deckerr which is established as dominant name in power tools and accessories, which is established as dominant name in power tools and accessories,

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began to pursue diversification. It is because the continuing maturity of its began to pursue diversification. It is because the continuing maturity of its core power tools business.

core power tools business.

During the 1980’s Black and Decker had established themselves as During the 1980’s Black and Decker had established themselves as a

a leadleader in er in the power tool industhe power tool industrytry. . HoweHoweverver, they were feels that the, they were feels that the market for such tools was maturing to the point where expansion within market for such tools was maturing to the point where expansion within the industry would provide little or no additional revenues so they decided the industry would provide little or no additional revenues so they decided to diversify.

to diversify. Blac

Black k and and DeDeckcker er begbegan an thetheir ir expexpansansion ion opeoperatration ion by by acqacquiruiringing Gener

General al ElecElectric’tric’s s houshousewarewares es businbusiness, ess, the the leadeleader r in in the the induindustrystry, , forfor $300 million in 1984. The success of the GE deal, and the reorganization $300 million in 1984. The success of the GE deal, and the reorganization efforts of their new CEO Nolan Archibald,

efforts of their new CEO Nolan Archibald, led Black and Decker to continueled Black and Decker to continue on this path of

on this path of acquisitions and diversification in other areas.acquisitions and diversification in other areas.

Then, various acquisitions and acquisition attemp made by Black & Then, various acquisitions and acquisition attemp made by Black & Decker in their strategy to diversified. But the biggest and most noticed Decker in their strategy to diversified. But the biggest and most noticed was the acquisition of Emrat Corporation, a diversified manufacturer of was the acquisition of Emrat Corporation, a diversified manufacturer of in

induduststririal al prprododucuct, t, fofor r a a $2$2.8 .8 bibillllioion n in in MaMarcrch h 19198888. . ThThis is ststepeps s isis considered to be very bad decisions made by Black & Decker.

considered to be very bad decisions made by Black & Decker.

Analysis Analysis

Change in strategy Change in strategy

In the mid 1980s, Black & Decker feels that the power tool market In the mid 1980s, Black & Decker feels that the power tool market had matured to the point where there is

had matured to the point where there is no much room for further growth.no much room for further growth. Blac

Black k & & DeDeckcker er thethen n decdecideided d to to chachange nge thetheir ir corcorporporate ate strstrateategy gy frofromm single business firm

single business firm into diversified companyinto diversified company.. In 1984 they

In 1984 they began to diversifybegan to diversify. First they tried to . First they tried to get into the smallget into the small household appliance market. Rather than create their own line, Black & household appliance market. Rather than create their own line, Black & Decker decided to acquire General Electric’s unit of household appliances 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 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 more market share than other houseware distributors (25 percent of the market and the leadership position). That acquisition gives an additional market and the leadership position). That acquisition gives an additional $500 million a year

$500 million a year in revenuin revenue for e for Black & Decker becausBlack & Decker because it e it was able towas able to offer products like irons, coffee

offer products like irons, coffee makers and toasterswhich.makers and toasterswhich.

This began a trend of acquisitions by Black and Decker expanding This began a trend of acquisitions by Black and Decker expanding into various related and unrelated markets with varying levels of success. into various related and unrelated markets with varying levels of success.

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This various acquisitions allowed Black & Decker to offer even more new This various acquisitions allowed Black & Decker to offer even more new products such as portable woodworking tools and stronger drill bits. After products such as portable woodworking tools and stronger drill bits. After al

all l ththe e nenew w chchanangeges, s, BlBlacack k & & DeDeckcker er MaManunufafactctururining g CoCompmpanany y alalsoso changed its name to Black & Decker Corporation to help market those changed its name to Black & Decker Corporation to help market those changes

changes Th

The e susuccccesessfsful ul ststorory y of of GEGE’’s s hohoususeheholold d apapplpliaiancnce e didivivisisionon acquisition in 1988, has triggered Black & Decker to tried again. Only this acquisition in 1988, has triggered Black & Decker to tried again. Only this tim

time e the the comcompanpany y of of intintereerest st was was AmAmerierican can StaStandandard rd IncInc. . AmAmeriericancan Standard had an impressive $127 million profit in 1987, which towered Standard had an impressive $127 million profit in 1987, which towered above the mere $70 million for Black & Decker. But then, the acquisition above the mere $70 million for Black & Decker. But then, the acquisition was unsuccessful.

was unsuccessful.

The Emhart acquisitions The Emhart acquisitions

The failed attempts by Black & Decker in 1988 did not stop Black & The failed attempts by Black & Decker in 1988 did not stop Black & Dec

Deckeker r momoveves s to to acqacquiruiring ing othother er comcompanpanyy. . In In 1981989, 9, BlaBlack ck & & DecDeckekerr acquiring Emhart for the price of $2.8 billion, a price that 33% premium acquiring Emhart for the price of $2.8 billion, a price that 33% premium over Emhart’

over Emhart’s s preapreannounnnouncemecement nt valuvalue. e. This This acquacquisitioisition n may may not not havhavee been the best move for

been the best move for Black & Decker because its stock price dropped Black & Decker because its stock price dropped 1515 points after the announcement of the

points after the announcement of the acquisition. After difficult negotiationacquisition. After difficult negotiation of exactly how the acquisition would occur, Black & Decker decided to pay of exactly how the acquisition would occur, Black & Decker decided to pay for Emhart for the next 48 years.

for Emhart for the next 48 years.

The deal put over $2 billion in goodwill on Black & Decker's books 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 and increased debt to over $4 billion just before the credit markets were about to contr

about to contract seveact severelyrely. . With the excWith the exceptioeption of n of a few businessa few businesses likees like Pri

Price ce PfiPfistester r faufaucecets ts and and KKwikwikset set loclocks, ks, whiwhich ch reprepresresentented ed jusjust t $60$6000 million in sales, Em

million in sales, Emhart made no sense for Blachart made no sense for Black & Deckerk & Decker. . Several of itsSeveral of its subsidiaries were quickly placed on the block.

subsidiaries were quickly placed on the block.

But then suddenly the economy became sluggish and the market But then suddenly the economy became sluggish and the market slowed down, Black & Decker stock slumped from a pre-acquisition $25 to slowed down, Black & Decker stock slumped from a pre-acquisition $25 to $8 per sha

$8 per share. re. ArcArchibhibald (Blald (Black & Decack & Deckeker’r’s CEO at that tims CEO at that time) had toe) had to scra

scramble to keep the commble to keep the company solpany solventvent. . ArchiArchibald’bald’s plan was to sell off s plan was to sell off about $1.8 billion of Emhart assets to pay down debt while merging the 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 company's line of Kwikset locks and Price Pfister Inc. plumbing fixtures with Black & Deck

with Black & Decker's offeer's offeringrings. s. AccoAccording to Archrding to Archibald, the plan woibald, the plan woulduld have been successful enough under normal economic conditions. However, have been successful enough under normal economic conditions. However,

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he failed to sell the Emhart businesses for the set prices leaving a long 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 term debt of a hefty $3 billon and annual interest payments of more than $300 million.

$300 million.

Black & Decker initially sold $1 billion in Emhart assets to reduce Black & Decker initially sold $1 billion in Emhart assets to reduce the interest costs. It met this demand by selling whole divisions of Emhart 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 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 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 & 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 strategic parts of the acquisition. By 1997, Black & Decker was able to meet its liquidity requirements and management chose to amortize the meet its liquidity requirements and management chose to amortize the costs on a straight-line basis for the

costs on a straight-line basis for the next 40 years.next 40 years.

This shows that the acquisition of Emhart Corporation is a Black & This shows that the acquisition of Emhart Corporation is a Black & Decker’s

Decker’s bad move. bad move. Black & DeckBlack & Decker’s decision er’s decision to acquire a comto acquire a company thatpany that was larger than $2.3 billion (revenues) Black & Decker itself, (the Emhart was larger than $2.3 billion (revenues) Black & Decker itself, (the Emhart Corporation were $2.7 billion in revenues), was too risky and apparently Corporation were $2.7 billion in revenues), was too risky and apparently Archibald didn’t too aware about it.

Archibald didn’t too aware about it.

The purchase and acquisition of Emhart had proven a lack in the The purchase and acquisition of Emhart had proven a lack in the syne

synergy requirgy required to make such purcred to make such purchases prohases profitablfitable. e. Also the comAlso the companypany ha

had d nonot t bebeen en abable le to to rereduduce ce itits s amamouount nt of of dedebt bt (p(pririmamaririly ly frfrom om ththee purchase of Emhart) over the subsequent 10 years. Archibald made poor purchase of Emhart) over the subsequent 10 years. Archibald made poor dec

decisiisions ons in in the the EmhEmhart art acqacquisuisitiition, on, whiwhich ch impimpactacted ed its its proprofit fit marmargingin,, low

lowereered d its its comcompetpetitiitive ve advadvantantageage, , and and kilkilled led any any chachance nce of of crecreatiatingng above-average returns.

above-average returns.

There are things that has to be done in order to ascertain whether 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 the acquisition may create value for the shareholders, which is the CEO’s primary responsibility. Effort should have concentrated on three essential primary responsibility. Effort should have concentrated on three essential tests:

tests:

•

• The attractiveness test.The attractiveness test.

Th

The e ininduduststriries es chchososen en fofor r didiveversrsifificicatiation on mumust st be be ststruructctururallallyy attractive or capable of being made

attractive or capable of being made attractive.attractive.

•

• The cost-of-entry test.The cost-of-entry test.

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

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Either the new unit must gain competitive advantage from its link Either the new unit must gain competitive advantage from its link with the corporation or

with the corporation or vice-vervice-versa.sa. Conceding the point that

Conceding the point that the purchase provided some benefits, suchthe purchase provided some benefits, such as increased market share and well-known consumer brands, the as increased market share and well-known consumer brands, the cost-of-entry and better-off tests provide evidence that the Emhart purchase was entry and better-off tests provide evidence that the Emhart purchase was very ri

very riskysky..

Black & Decker SWOT Analysis Black & Decker SWOT Analysis Strengths

Strengths

•

• Brand recognitioBrand recognition is a strong attribute n is a strong attribute for Black and Decfor Black and Deckerker. . BlackBlack

and Decker has a reputation for producing electrical engines, power and Decker has a reputation for producing electrical engines, power tools and appliances.

tools and appliances.

•

• Black and Decker produce a variety of products in its respectedBlack and Decker produce a variety of products in its respected

industry, and it is involved in constant research and development industry, and it is involved in constant research and development (e.

(e.g.g., , devdeveloelopinping g corcordledless ss appapplialiancences s and and tootools, ls, rerechachargergeablablee batteries that are compatible with both

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

•

• BlBlacack k anand d DeDeckcker er hahave ve pepenenetrtratated ed ththe e mamarkrket et cacaususining g it it toto

dominate market share

dominate market share in the in the industryindustry.. Weaknesses

Weaknesses

•

• Black and Decker’s reputation for quality tools and appliances hasBlack and Decker’s reputation for quality tools and appliances has

bee

been n decdecreareasinsing. g. ThiThis was likes was likely due to the ly due to the facfact that Black andt that Black and Decker was busy dealing with

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

Opportunities

•

• OppOpportortuniunitieties s to to gaigain n momore re marmarkeket t shashare re by by sposponsonsorinring g homhomee

improvement shows. improvement shows.

•

• GaGain in mmorore e mamarkrket et shsharare e wiwith th ininduduststririal al mamarkrketet, , by by ofoffeferiringng

quantity-based deals and advertising the quality of its

quantity-based deals and advertising the quality of its products.products. Threats

Threats

•

• Sears is the strongest competitor in the power tools division withSears is the strongest competitor in the power tools division with

13.4 percent of the

13.4 percent of the US market share.US market share.

•

• BlBlacack k anand d DeDeckcker er neneededs s to to be be awawarare e of of nenew w ititemems s ththat at ththee

consumer can use and develop them before their competitors. consumer can use and develop them before their competitors.

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Conclusion and Recommendation Conclusion and Recommendation

When an industry became mature and not offered enough room for When an industry became mature and not offered enough room for further growth, it is important for a company to change their strategy to further growth, it is important for a company to change their strategy to ke

keep ep grogrowinwing g concontintinuouuouslysly. . ThiThis s is is whwhat at BlacBlack k & & DecDeckeker r diddid, , altalthouhoughgh being a dominant player in power tools and accessories for many years, being a dominant player in power tools and accessories for many years, Black & Decker realized the industry is being mature, so they decided to Black & Decker realized the industry is being mature, so they decided to change their strategy into a diversified company.

change their strategy into a diversified company.

To be successful, a diversified company should have a portfolio of To be successful, a diversified company should have a portfolio of pro

producduct t witwith h difdifferferent ent grogrowth wth rarates tes and and difdifferferent ent marmarket ket shasharesres. . TheThe por

portfotfolio lio comcompospositiition on is is a a funfunctiction on of of the the balbalancance e betbetweween en cascash h floflowsws.. High-growth product, that important for company to keep growth in the High-growth product, that important for company to keep growth in the future, need lot of cash inputs. Low-growth product, product that already future, need lot of cash inputs. Low-growth product, product that already in maturity growth, should generate cash. How to balance between this in maturity growth, should generate cash. How to balance between this two is the most important things in managing multi-business (diversified) two is the most important things in managing multi-business (diversified) company.

company. The

The EmhEmhart art acqacquisuisitiitions ons is is an an exaexamplmple e of of bad bad acqacquisuisitiitions ons frofromm Black & Decker in

Black & Decker in their strategy to diversified. There can be their strategy to diversified. There can be many reasonsmany reasons that an acquisition strategy fails to earn its cost of capital. An acquirer that an acquisition strategy fails to earn its cost of capital. An acquirer may have no

may have no rereal al strstrateategy gy to to begbegin in witwith h and and ththus us pay an pay an unjunjustustifiifieded acquisition premium right from the beginning. Or there may

acquisition premium right from the beginning. Or there may be a completebe a complete failure in executing a fundamentally sound strategy. One major risk in failure in executing a fundamentally sound strategy. One major risk in acquisitions is the failure to close the gap that may exist between the acquisitions is the failure to close the gap that may exist between the strategic objectives and organizational design of the new organization and strategic objectives and organizational design of the new organization and those of the old. Issues such as new information systems and channels, those of the old. Issues such as new information systems and channels, management succession, new decision rights, and incentive systems must management succession, new decision rights, and incentive systems must be planned carefully in light of where competitive performance gains are be planned carefully in light of where competitive performance gains are expected to result.

expected to result.

This case is also an example of the problems where mismanaged This case is also an example of the problems where mismanaged gro

growth wth can can bribring ng divdiversersifiificatcation ion awaway ay frofrom m cocore re busbusineinessesses s and and corcoree competencies rarely creates value for the shareholders.

competencies rarely creates value for the shareholders.

High leveraged acquisitions put the firm at higher financial risks, High leveraged acquisitions put the firm at higher financial risks, particularly when the firm’s products depend on business cycles. Shocks particularly when the firm’s products depend on business cycles. Shocks

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to the economy may result in insolvency and possible bankruptcy. The to the economy may result in insolvency and possible bankruptcy. The company may have to sell assets at low

company may have to sell assets at low prices to meet debt obligations.prices to meet debt obligations. As

As fifinanancnciaial l mamarkrketets s bebecocomme e momore re anand d momore re sosophphisistiticacateted,d, in

inveveststorors s mamay y didivverersisify fy momore re eaeasisilyly, , ththererebeby y mamakiking ng cocorprpororatatee diversification less attractive. Firms must continue to strengthen their diversification less attractive. Firms must continue to strengthen their corecore competencies and sustain their competitive advantages.

competencies and sustain their competitive advantages.

In conclusion, the fundamental reason for the failed acquisition is In conclusion, the fundamental reason for the failed acquisition is due to lack of long term planning, forecasting and predicting of the return due to lack of long term planning, forecasting and predicting of the return on investm

on investment relative to coent relative to cost. st. The highly levThe highly leveraged acquisieraged acquisition of Emharttion of Emhart placed Black & Decker at higher financial risks, primarily when the firm’s placed Black & Decker at higher financial risks, primarily when the firm’s products depended o

products depended on business cyclen business cycles. s. As result of the inhAs result of the inherited debt anderited debt and the unanticipated market fluctuations and weak economy may result in the unanticipated market fluctuations and weak economy may result in col

collaplapse or se or pospossibsible bankrle bankruptuptcy of cy of the corthe corporporatioation. n. BlaBlack & ck & DecDeckekerr Executives’ lack of strategic direction and poor application of funds may 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 lead the corporation to sell of assets at low prices or lay off employee to meet debt obligations.

meet debt obligations.

Our recommendation for this case is, Black & Decker should stick Our recommendation for this case is, Black & Decker should stick with its original vision that includes the consolidation of their portfolio. with its original vision that includes the consolidation of their portfolio. The company should continue in investing in, and strengthening, its core The company should continue in investing in, and strengthening, its core products within its existing portfolio, so that these products will generate products within its existing portfolio, so that these products will generate ca

cash sh flflow ow ththat at wiwill ll enenabable le ththe e cocompmpanany y to to emembabark rk upupon on exexpapansnsioionn opportunities.

opportunities. In

In ththe e fufututurere, , BlBlacack k & & DeDeckcker er shshouould ld coconsnsidider er ininteternrnatatioionanall com

companpanies ies witwith h strstrong ong recrecognognitioition n in in the the coucountrntries ies thathat t thethey y plaplan n onon expanding into, considering either acquisition, merger, or creating a joint expanding into, considering either acquisition, merger, or creating a joint vent

venture. ure. The affiliThe affiliation betation between Blacween Black & Deckek & Decker and these comr and these companiepaniess mu

must st crcreaeate te sysynenergrgy y in in orordeder r to to jujuststifify y susuch ch dedelilibeberarate te momoveves s anandd expansions.

expansions. These planned exThese planned executive deciecutive decisions and actions wisions and actions will help Blackll help Black & Decker to obtain competitive advantages which will result in & Decker to obtain competitive advantages which will result in above-av

avererage age retreturnurns, s, lealeadinding g to to gregreateater r ininvevestostor r wewealtalth h and and vavalue lue to to itsits employees.