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Hammers and nails

2 November 2009 By Rob Cox

Leave it to the tool industry to engineer something like the perfect deal. Stanley Works $3.5bn purchase of rival Black & Decker leaves almost nothing for investors in the two companies to fret over. The combination creates a hand-tool colossus with $8.4bn in sales. If only deal-making was always this simple.

That s not to say nobody loses. Employees will be sacked and managers will be let go. Facilities will be closed. But this is capitalism at work in a downturn. By combining, the two purveyors of everything for the handyman put themselves in a better position to battle upstart manufacturers from overseas and negotiate with consolidating retailers.

And they do so without sacrificing the interests of their respective owners. Take the consideration. Stanley Works is issuing 1.275 of its shares for every Black & Decker share. That means not a single dollar of debt is added to the new combination.

Moreover, the 22% premium based on Monday’s share prices is justified. For one, Stanley Works shareholders will own a majority of the company. And the Connecticut manufacturer founded by Frederick Trent Stanley in 1843 will contribute nine of 15 board seats – and its chief executive. It is only right that Black & Decker s shareholders should receive something for ceding control.

But Stanley Works isn t overpaying by any stretch of the ruler. True, the premium amounts to about $615m over and above the market capitalisation of Black & Decker on Monday morning. This, too, is more than justified mathematically by the two companies plans to cut some $350m of annual expenses as a result of the merger.

Once taxed and discounted to reflect the time value of money, those synergies carry a net present value of about $1.9bn. Since Stanley Works shareholders will own 50.5% of the enlarged group, their take amounts to $965m. After paying the premium to Black & Decker shareholders, that s still some $350m, or $4.40 a share, of upside.

If these two can integrate their businesses as neatly as they ve engineered their deal, investors will happily stand back and admire their handiwork.


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