Why Merge Now? Age, Economy Seem Obvious Answers

November 04, 2009|By JAY HANCOCK

It was the first thing analysts asked Black & Decker boss Nolan D. Archibald about the Maryland company's sale to The Stanley Works.

"Why now?" James C. Lucas of Janney Montgomery Scott in Philadelphia queried during a Tuesday conference call. "What drove this transaction today as opposed to any time in years past?"

Archibald had an answer, which I'll get to. But the real answers seem obvious.

After one of the longest reigns in history for a Fortune 500 CEO, Archibald is old enough to retire and ready to relinquish power. That's the first answer. The second: Both Stanley and Black & Decker are probably worried about the economy.

If ever a corporate combo made sense according to Wall Street logic, this is it. The companies sell different stuff to the same customers. A Junior Achievement kid could figure out what to do. Merge sales staffs and headquarters, lay off extra people and make money.

It could have been done decades ago. It almost was. The tool companies have talked about merging three times over the years, once as early as 1981, according to Black & Decker spokesman Roger Young.

The deal is such a natural that shares for both companies rocketed Tuesday. Stanley was up 10 percent; Black & Decker, 31 percent. That hardly ever happens. Usually the acquiring company - in this case Stanley - craters as investors worry that it's wasting resources and taking on too much.

So why didn't the merger happen before?

Because executives couldn't agree on who would manage the combined show. "The issue of who would run the company was always a challenge," Young said. (Archibald was unavailable for interviews Tuesday, he said.)

In other words, big egos, careers and paychecks were at stake. But Archibald turned 66 in June. Having been named Black & Decker's CEO in 1986 and chairman the next year, he's one of the longest-serving corporate bosses in the country. The normal retirement age for Black & Decker execs is 65.

He has given up $20 million in cash severance associated with the sale, presumably to deflect accusations that he did the deal to enrich himself. But he has pocketed tens of millions in pay in his career - $35 million in the past three years. His pensions are worth another $35 million.

Maybe he just thought it was time for a change.

"You can speculate if you want, but his retirement was certainly not imminent," Young said. "Nolan will be executive chairman [of the combined company] for three years, with a significant role in the integration process. So he is not retiring."

No, but for a CEO with two decades of tenure, taking a different role at a combined company amounts to the same thing. The Stanley guys are clearly in charge.

Executives at both companies, with deep insight into the residential and commercial construction markets, may also know something about the economy we don't. They've gotten plastered by the housing meltdown, although Stanley's home-security and industrial businesses have helped it hold up better than Black & Decker.

"I think if they wait another year in this deal they actually get less" from Stanley, said Steven Isberg, associate professor of finance at the University of Baltimore.

That's another reason to seek shelter with Stanley now. Black & Decker's stock price reflected expectations of a recovery that might not happen.

"Selling out now makes you wonder whether they had much confidence in the path of recovery," said Nicholas Heymann, an analyst with Sterne Agee in New York.

Archibald demurs. "It had nothing to do with the current economic situation," he said on the conference call. "We're anticipating things are going to be turning up."

So the merger is happening, and Maryland is losing a Fortune 500 headquarters, and thousands are getting laid off because Archibald and Stanley boss John Lundgren started having lunch in June and suddenly realized "the significant shareholder value that could be created by the combination of these two," Archibald said.

As if they couldn't figure that out years ago. It's no accident that the first time the companies talked about merging, in 1981, there was a terrible recession and housing slump. Economic cycles determine merger schedules. So do CEO career paths.

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