Case example: 1
Newell and Rubbermaid Corporation: The Critical Decisions That Make or Break the Deal

The top deal makers focus on four key imperatives that make or break the deal, and they are disciplined in their decision making. Kellogg's purchase of Keebler shows how discipline can put an acquisition on the right track and keep it there. Newell's 1999 acquisition of Rubbermaid Corporation reveals the high cost of weak discipline.

When Newell's top managers approached their counterparts at Rubbermaid in 1999 about the possibility of a merger, it looked like a deal from heaven. Newell had a 30-year track record of building shareholder value through successful acquisitions of companies like Levelor blinds, Sharpie pens, and Calphalon cookware. Rubbermaid, which had recently topped Fortune's list of the most admired U.S. companies, was a true blue-chip firm. With its long record of innovation and smart brand marketing, it was very profitable and growing quickly.

Because Newell and Rubbermaid both sold household products through essentially the same sales channels, the cost synergies from the combination loomed large. Newell expected to reap the benefits of Rubbermaid's high-margin branded products-a range of low-tech plastic items, from laundry baskets to Little Tikes toys-while fixing a number of weak links in its supply-chain management.

Rubbermaid's executives were encouraging: As long as the deal could be done quickly, they said, they'd give Newell an exclusive right to acquire their company. Eager to seize the opportunity, Newell rushed to complete the $5.8 billion megamerger-a deal ten times larger than any it had done before.

But the deal from heaven turned out, to use BusinessWeek's phrase, to be the "merger from hell." Instead of lifting Newell to a new level of growth, the acquisition dragged the company down. In 2002, Newell wrote off $500 million in goodwill, leading its former CEO and chairman Daniel Ferguson to admit, "We paid too much." By that time, Newell shareholders had lost 50% of their value; Rubbermaid shareholders had lost 35%.

The failure can be traced to errors at each of the key decisions:

How not to pick a target? Newell knew its growth strategy required a big acquisition-its prospects for organic growth from existing products were limited. With the Rubbermaid deal, it thought it was building scale and gaining a strong brand-just what it needed to go toe-to-toe with buyers at the big discount chains like Wal-Mart and Target. But at a deeper level, the deal did not fit. While Rubbermaid and Newell were both selling a lot of household basics to the same customers, the two companies had fundamentally different bases of competition. Rubbermaid competed on the basis of innovation and brand, whereas Newell competed on the basis of low-cost production. Their production processes and costs were different; their value propositions were different. They were actually in very different businesses, and Rubbermaid's strategy wasn't going to work for the markets that Newell was relying on.

Which deals smell bad? Although Newell had made many modest acquisitions over the years, the Rubbermaid deal was something entirely different. Neither minnow nor fish, Rubbermaid was a whale-ten times the size of the largest acquisition Newell had previously attempted. Rubbermaid had also worked hard, within legal bounds, to make its business look a whole lot prettier than it really was.

By agreeing to complete such a vast deal after only three weeks of due diligence, Newell doomed itself to a cursory examination of Rubbermaid, one that provided no time to ask, never mind answer, critical questions about the health of Rubbermaid's business. The reality was that beneath Rubbermaid's well-polished exterior, there was a raft of problems, from extensive price discounting for wholesalers to poor customer service to weak management. As a result, Newell never arrived at a clear sense of what the company was really worth. Recalls Ferguson: "We should have paid $31 a share, but we paid $38."

A case of overintegration? Newell took an undisciplined, broad-brush approach to combining Rubbermaid's complex operations into its own. The putative investment thesis-to broaden Newell's scope in branded products-should have called for selective integration. Instead, Newell attempted to "Newellize" Rubbermaid, and in doing so squeezed out what little top talent was left at the acquired company. The results tell the story: Newell predicted $300 million in cost savings and $50 million in revenue increases in the first two years of the Rubbermaid merger. But when the dust settled in 2001, Rubbermaid had delivered no new sales and only $230 million in cost savings, most of it wiped out by increases in the price of polymer resins, the most important of Rubbermaid's raw materials.

What did Newell forget to do when the deal strayed? Newell, a low-cost producer of largely unbranded housewares, had to learn how to leverage a high-margin brand when it bought Rubbermaid. But it sorely underestimated this challenge. The company's warning system should have set off alarm bells: synergies failed to materialize and gaps in know-how emerged. As it turned out, however, it took years to fix the problems.

There is a silver lining to the story. Newell did ultimately learn important lessons, but getting the acquisition on track entailed jarring disruptions to the business. Says Ferguson: "We had to replace a lot of people. The guys now running Newell understand brand power and how to market it. That's a revolution. It takes a different mind-set, a different group of people." Ferguson ultimately came to see that he needed to move the company into turnaround mode, but it took a while for him to find the right person to lead the charge. He started by looking inside the company. He had retired as chairman of the board in 1997 and made his CEO, William Sovey, chairman, promoting insider John McDonough to CEO. In late 2000, less than three years later, McDonough was gone and Sovey was serving as interim CEO. In 2001, Ferguson, still a company director, began looking for help outside Newell's walls. He hired Joseph Galli, a veteran of Black & Decker, as CEO-and it was Galli's fresh perspective that began to stabilize the situation.

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