Case Study Stanley Black and Decker, Inc

Case Study Group 5 Q1.What is the incremental value to shareholders of the cost savings (synergies) projected in this merger? How will the value of synergies be shared in the proposed transaction? Answer : 1 (1) Premium paid Premium Pre-deal value of B&D 21.6% = 3600 / 1.216 = 3600 2961 2,961 639 Premium (2) Synergy gains year 0 1 2 3 4 5 350 361 330 350 361 80 132 140 144 120 198 210 216 Annual cost savings 125 250 350 Restructuring costs (330) (50) (20) (205) 200 (82) (123) Pre-tax cash flow Tax expenses (40%) After-tax cash flow (t=40%) - - 2,70 4 Terminal value (g=3%) Total after-tax cash flow PV of synergy gains Assumptions: Tax rate Cost of capital Terminal value growth rate - (123) 120 B&D Total 2,003 40% 11% 3% (3) Distribution of synergy gains, All-stock deal Stanle 198 210 2,92 0 y Acquisition premium Ownership in NewCo Remaining synergies Total synergy gains Share of total synergies 50.5% 639 639 49.5 % 688 675 1,363 688 1,314 2,003 34% 66% 100% Alternative calculation (merger analysis) Stanle y Ownership in NewCo Synergies Pre-deal stock price (p 1) # of shares in NewCo 50.5% B&D Total 49.5 % 100% 2,003 45.23 81.20 79.59 3,673 160.8 Pre-deal value Contribution to value 55.4% 2,961 6,633 44.6 % Value of NewCo 4,361 4,275 = OldCo + synergies 53.71 NewCo stock price Value increase Share of total synergies Gains in % of predeal value 8,636 3600 / 45.23 = 79.59 79.59 / 0.495 = 160.8 = P * # of shares 688 1,314 2,003 34% 66% 100% 19% 44% 30% Syn = Post-deal - pre-deal value = increase - predeal value 2.After failing to complete a merger following the three prior attempts noted in this case, why should the proposed transaction be successful this time? Answer : 2 After failing to complete a merger following three prior attempts, the proposed merger will be successful this time because the ground work has been laid out for the structure of the combined company. Prior merger discussions typically stalled because of disagreements over who would be in charge. With this attempt, leadership was agreed upon. John Lundgren, CEO of Stanley would become CEO of the combined company while Nolan Archibald, CEO of Black & Decker would become executive chairman of the combined company. The merger will also be successful because Stanley has agreed to pay a fair 21.6% premium to Black & Decker’s shareholders which will leave Stanley’s shareholders with 50.5% of the stock in the combined company and Black & Decker’s shareholders will receive 49.5% of the stock of the combined company. 3.How much of the incremental value created in this transaction will go to the CEO’s of the two firms involved? Answer 3 The amount of incremental value that goes to the CEOs of each firm is highly dependant on the decisions that these leaders make. Along with this new merger contract, John Lundgren and Nolan Archibald are not only guaranteed their salaries, but special bonus incentives as well. The incentive that seems to be the most imperative is the one regarding annual savings for the company. The higher the company’s annual savings the higher the bonus Nolan Archibald receives. This goes along with numerous stock options available to both CEOs to complement their contracts. While the transactions incentives for the CEOs are significantly high, that doesn’t mean it won’t benefit the shareholders. Shareholders get a return from the increase in stock price. If the CEOs make it their mission to increase annual savings it will eventually lead to profit which will only benefit the shareholders. This investment capital will have a positive outcome if the company remains on track, which projected by the EPS increase of $1 after the merger. (1) Nolan Archibald (B&D) Annua l Base salary Target bonus Equity awards 1.5 1.88 6.65 Total Period in years Total over contract life 10.0 3 30.1 One-time bonus Golden parachute severance payment Give up golden parachute severance payment Total golden parachute cost 45 20.5 Opportunity cost conditional on -20.5 transaction 0 Value of option grant # of underlying shares (in million) Typical option value on day of grant Pre-announcement stock price 1.0 Executive options are typically 31% granted with strike price = market price of underlying stock 45.23 Pre-announcement value of option grant 14.0 Increase in stock price at announcement 16% Post-announcement stock price MV of underlying shares ($ mill.) Post-announcement value of option grant Total value of Archibald's three-year package (p 1) (from stock-price graph) 52.62 52.62 16.3 $ mill. Total compensation compared to no 91.4 transaction (2) John Lundgren (Stanley) Option grant # of underlying shares (in million) MV of underlying shares ($ mill.) Post-announcement value of option grant 1.1 57.9 17.9 $ mill. (3) Compared to transaction value (in $ million) Total additional CEO compensation After tax compensation Tax deductibility of fixed (cash) 109.3 comp. is limited, 65.6 but not that of variable compensation % of synergy estimate 3.3% Archibald's share of the compensation value 84% (4) 19 other B&D top executives Severance, benefits, income gross-ups 92.3 Change-in-Control payments Payments under B&D LT incentive plan Vesting of unvested restricted stock and options Supplemental executive retirement plan Additional Change-in-Control payments % of synergy estimate Paid out irrespective of actual 13.2 performance 41.7 Merger triggers immediate vesting 22.7 169.9 Typically not deductible (IRC 280g) 8.5% 4.Given the similar size of the two companies, why was Stanley the acquirer? Answer 4 While the two companies are similar in size, Stanley was the acquirer. The details of the merger usually requires intense negotiation between the two companies and sometimes a buyer will offer the executive of the seller hefty incentives to reach an agreement. I believe that in this case large incentives offered to Black & Decker executives by Stanley were a large factor in the outcome of the negotiations. As part of the merger contract, Nolan Archibald would receive a new three-year contract and while his annual compensation would decrease slightly, he would receive a one-time grant of stock options on 1.0 million of the combined company’s shares along with a special incentive payment based on the amount of annual cost savings achieved by the third anniversary following the merger. Archibald’s incentives were as follows; $15 million if annual savings of $225 million were achieved, $30 million if annual savings of $300 million were achieved, or a total of $45 million if savings of $350 or more were achieved. Nineteen Black & Decker executives (not including Nolan Archibald) had change of control agreements extending back to 1986 which would trigger payments should they be terminated or experienced a change in responsibilities due to a merger. Due to the overwhelming amount of large incentives for Black & Decker to merge, this is why Stanley was the acquirer and not the other way around.