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 purchase was very risky. Table 1 below provides a snapshot of the financial health of Black and Decker following the purchase of Emhart. It should be noted that prior to the purchase, B&D’s debt to total capitalization ratio was only 40.5%. 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 purchase was very risky. Table 1 below provides a snapshot of the financial health of Black and Decker following the purchase of Emhart. It should be noted that prior to the purchase, B&D’s debt to total capitalization ratio was only 40.5%. Return on average equity prior to the acquisition was 14.1%. After the acquisition it dropped to 4.2%.

TABLE 1

 What alternative strategies could Nolan Archibald take at this juncture?

ALTERNATIVES

Divesting of non-core business assets

This strategy can take advantage of Archibald’s expertise in operations. Continue streamlining

Operations and increasing efficiency without non-core business distractions. Cash freed up by divestitures over and above those connected to Emhart will immediately improve the financial health of the firm and create value for the shareholders.

Lowest cost-producer strategy

This strategy can only go so far by itself. Quality and R&D must continue to be supported. Innovation should be the focus of R&D. Low cost should be a by-product of streamlining operations and increasing efficiencies. Transferring skills and sharing activities among divisions can further reduce costs.

Continue "Cut-and-Build" strategy

This strategy is Archibald’s strength and it focuses on operational efficiencies, through which lower costs are achieved, thereby improving earnings. Archibald’s demonstrated expertise in taking advantage of the value chain had tremendous success with this strategy.

Recommendation

1 and 3. Continue the "Cut-and Build" strategy and divest.

Black and Decker must concentrate on its core business and core competencies, mainly power tools and household appliances. It is critical for the firm to address the financial situation the company is in (as of 1989-1990). Any downturn in the economy can seriously hurt the company and put it in severe financial distress. Concentrating on core-businesses and divesting of others will improve the situation and create value for the shareholders.

Uncertainty

Investors do not like uncertainty. The financial ratios presented above provide enough evidence of uncertainty to make many an investor nervous. The low TIE and Cash coverage ratios are the

most worrisome. If there was a downturn in the economy, the firm could be insolvent in a very short period of time. TABLE 2 shows solvency ratios for 1990, which demonstrate that even after the sale of some assets, the situation had not improved significantly. Debt to Equity decreased, but TIE and cash coverage remained at unacceptable levels.

TABLE 2

At the end of 1990, the company was not in substantial trouble, but it was in a delicate position to withstand shocks to the economy or competitive threats. Investors were right to downgrade the stock because the risk of investing in the company increases with the level of debt and the capacity to meet debt obligations. Interest expense increased 76% from Sept 1989 to Dec 1990!

Question # 3

TABLE 3 (In $ millions)

Clearly, Archibald’s efforts were having a positive effect on the company’s financial health and creating value for shareholders. As we noted above however, after the acquisition, return on average equity dropped to 4.2%, a 10% decline. This dropped can be clearly attributed to the enormous debt and interest expenses. Future value is inextricably connected to future risk. The risk of insolvency, as we have seen, increased dramatically after the Emhart purchase.

Question 4

Given the financial situation the company was in at the end of 1990, Archibald should continue to "cut", but he should place less emphasis on "build." The faster the company improves efficiency and earnings, the sooner the financial risk can be reduced.

Alternatives

One year after the acquisition, Archibald’s strategic alternatives have not changed much. However, in addition to the alternatives mentioned previously, i.e. Continue Cut-and-Build, Low Cost Producer and Divestiture, Black and Decker could consider Streamlining Product Lines.

Streamline Product Lines – This alternative suggests the restructuring of all product lines and brands. It involves a close look at all brands and products in all business segments where the company competes. Unprofitable and under-performing products should be discontinued and strong brands and products should be supported.

Implementation

Aggressive strategic outsourcing and partnering with suppliers. Network organizational structure, e.g. placing B&D employees with suppliers and customers.

Reward and incentive systems must be adjusted to encourage the desired behaviour. All heads of the various businesses should guide the initiatives.

Layoffs – terminations should be reached first by attrition followed by plant consolidations. Change management specialists should be brought in as needed to assist in the transition to leaner structures. Morale and commitment must remain high with remaining employees.

Discontinue under-performing brands and products - Division heads to evaluate all products and brands for which they are responsible and discontinue under performers.

Focus on core-business/core competency-Archibald and his executives at headquarters to evaluate all businesses in order to designate some units for sale.

Continue globalization of operations. Focus on core design and branding competencies. Utilize the best capabilities of each SBU and design and install appropriate information systems, such as LANs, WANs and Intranets that will allow cross-functional teams from different geographic areas to collaborate on product development.

Question 5

The Employee Retirement Income Security Act (ERISA) of 1974 established guidelines for how money in employee retirement plans is managed (including 401K plans). The employee’s retirement money is not considered an asset of the employer-it is held in a separate account for the employee. This means that the employee’s plan money (which includes all the employee’s contributions and all vested company contributions) is not commingled with the company’s money. The company cannot access the employee’s plan money for any purpose related to maintaining its business.

 Furthermore, Title 26, Volume 5, Part 1 (Sec. 1.401-1.440) of the U.S. Code of Federal Regulations specifies in sub-section 3) that

"In order for a trust forming part of a pension, profit-sharing, or stock bonus plan to constitute a qualified trust under section 401(a), the following tests must be met…

iv) It must be impossible under the trust instrument at any time before the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be used or diverted to, purposes other than the exclusive benefit of the employees or their beneficiaries."

Clearly, it is illegal to use 401(k) funds to meet company debt requirements. The scope of this report precludes us from investigating the legal issues surrounding the use of funds to retire corporate debt. Perhaps attorneys for Black & Decker argued that retiring debt is for the benefit of the employees. Attorneys may make an argument that the corporation wanted to avoid laying off employees in order to reduce costs and pay debt, thus borrowing from employee funds to avoid layoffs is for the employee’s benefit.

Illegal or not, it is unethical to use funds destined to support employees retirement needs for the following reasons:

The funds do not belong to the corporation.

These funds represent employees’ sacrifices today for their benefit in the future.

The corporation entered into an agreement with tax authorities (see above) that the funds would not be used for purposes other than the exclusive benefit of the employees.

Question 6

The Black & Decker Corporation is staging a comeback, ten years after the acquisition of Emhart glass. The company has changed strategic directions. It is focusing on becoming a global company focused on its core Power Tool and Product service business.

Archibald is still the Chief Executive Officer.

Debt to total Cap has declined to 67% from a high of 88.5% in 1989 (See B&D’s current Balance Sheet)

The company has continued to reduce costs and sell assets since 1989.

The company is currently selling its household products business in North America, Latin America and Australia. This unit includes SnakeLight, Toast-R-Oven, Dustbuster, Spacemaker appliances and Black & Decker can openers, irons, and coffee makers.

Furthermore, the company is divesting of Emhart Glass, which makes container-forming and inspection equipment, and its sports unit True Temper Sports, golf-club shafts maker.

The stock has been improving in price for the last eight years to a current price of $49.8

The company’s total capitalization as of March 14, 1998 is 4.746B and the stock is selling at 20.85 times earnings.

Power Tools and Product Service is by far the largest contributor to the company’s revenues representing 42% of the total. This is still Black & Decker’s major strength and distinct core competency. TABLE 3 breaks down sales by Business Segments.

TABLE 3

(Millions of Dollars) Year Ended

December 31, 1997

It should be noted that the firm suffered a major setback in 1992 when sales dropped and the corporation had to renegotiate its debt payment schedule. It is precisely what the financial ratios predicted that could happen and why investors downgrade the stock. (See Exhibit 2 -10 Year Historical stock performance).

Also, as the balance of power continues to shift from the manufacturer to the retailer, companies like Black & Decker must work harder at maintaining good relationships with their biggest customers. Moreover, these firms must increase their branding and communications efforts to pull the market so that the end users demand that the retailers carry the company’s products.

"Sales for the year ended December 31, 1997, to The Home Depot accounted for approximately 13% of sales in the Consumer and Home Improvement Products segment. Sales to the Home Depot during 1997 represented approximately 11% of the Corporation’s consolidated sales. The loss of this customer would have a material adverse effect on the corporation."

www.yahoo!Finance.com

Black & Decker CORP (BDK) Annual Report (SEC form 10-K) February 19,1998

www.401k.com

Fidelity 401k FAQ’s

www.irs.ustreas.gov

Code of Federal Regulations, Title 26—Internal Revenue

Pension, Profit-Sharing, Stock Bonus Plans, etc.

www.zacks.com

Edgar online research

Stock information and charts

Cravens, David W. Strategic Marketing, Fifth Edition. Mcgraw-Hill

Globe and Mail

Forbes Magazine

© Jaime Horwitz 1998