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
 BLACK & DECKER CORPORATION

Background of the Company

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

and Alonzo Decker, Black & Decker’s first power tool was an electric drill in
1916. They went on to develop and offer the first portable screwdriver,
electric 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
accros a broad global front but particularly in europe. Growth 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 Black & Decker was founded by Alonzo Decker and Duncan
S.Black
- 1917 Received a patent on the world’s first portable power drill
with pistol grip and trigger switch
- 1936 Black & Decker shares began being traded on the New
York Stock Exchange
- 1989 B&D acquisition of Emhart Corporation

Symptons, Issues and Problems

Issues in this case is diversification strategy runned by 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 case particularly discuss diversification of Black & Decker
corporation during late 1980’s to early 1990’s, where Black & 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 in the power tool industry. 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 and Decker began their expansion operation by acquiring
General Electric’s housewares business, the leader in the 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
industrial product, for a $2.8 billion in March 1988. This steps 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 & Decker then decided to change their corporate strategy from
single business firm into diversified company.
In 1984 they began to 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 for Black & Decker 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 the new changes, Black & Decker Manufacturing Company also
changed its name to Black & Decker Corporation to help market those
changes
The successful story of GE’s household appliance division
acquisition in 1988, has triggered Black & Decker to tried again. Only this
time the company of interest was American Standard Inc. American
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 &
Decker moves to acquiring other company. In 1989, Black & Decker
acquiring Emhart for the price of $2.8 billion, a price that 33% premium
over Emhart’s preannouncement value. This acquisition may not 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 severely. With the exception of a few businesses like
Price Pfister faucets and Kwikset locks, which represented just $600
million in sales, Emhart made no sense for Black & 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. Archibald (Black & Decker’s CEO at that time) had to
scramble to keep the company solvent. Archibald’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 offerings. According to Archibald, the plan 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 decision to acquire a 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 required to make such purchases profitable. Also the company
had not been able to reduce its amount of debt (primarily from the
purchase of Emhart) over the subsequent 10 years. Archibald made poor
decisions in the Emhart acquisition, which impacted its profit margin,
lowered its competitive advantage, and killed any chance of creating
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 industries chosen for diversification must be structurally
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.
Conceding the point that the purchase provided some benefits, such
as increased market share and well-known consumer brands, the cost-of-
entry and better-off tests provide evidence that the Emhart purchase was
very risky.

Black & Decker SWOT Analysis

Strengths
• Brand recognition is a strong attribute for Black and 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., developing cordless appliances and tools, rechargeable
batteries that are compatible with both tools and small appliances).
• Black and Decker have penetrated the market causing it to
dominate market share in the industry.
Weaknesses
• Black and Decker’s reputation for quality tools and appliances has
been decreasing. This was likely due to the fact that Black and
Decker was busy dealing with its non-strategic businesses.
Opportunities
• Opportunities to gain more market share by sponsoring home
improvement shows.
• Gain more market share with industrial market, by offering
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.
• Black and Decker needs to be aware of new items that 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 growing continuously. This is what Black & Decker did, although
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
product with different growth rates and different market shares. The
portfolio composition is a function of the balance between cash 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 acquisitions is an example of bad acquisitions 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 strategy to begin with and thus pay an unjustified
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 can bring diversification away from core businesses and 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 financial markets become more and more sophisticated,
investors may diversify more easily, thereby making corporate
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 relative to cost. The highly leveraged acquisition of Emhart
placed Black & Decker at higher financial risks, primarily when the firm’s
products depended on business cycles. As result of the inherited debt and
the unanticipated market fluctuations and weak economy may result in
collapse or possible bankruptcy of the corporation. Black & Decker
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 flow that will enable the company to embark upon expansion
opportunities.
In the future, Black & Decker should consider international
companies with strong recognition in the countries that they plan on
expanding into, considering either acquisition, merger, or creating a joint
venture. The affiliation between Black & Decker and these companies
must create synergy in order to justify such deliberate moves and
expansions. These planned executive decisions and actions will help Black
& Decker to obtain competitive advantages which will result in above-
average returns, leading to greater investor wealth and value to its
employees.