A few months back, The Stanley Works announced the acquisition of Black & Decker Corporation (BDK), and has recently completed the merger. According to the agreement, each outstanding share of BDK will be converted into 1.275 shares of Stanley Works.
Stanley’s shareholders will own approximately 50.5% of the equity of the combined company and Black & Decker shareholders will own the balance. The combined company will be traded as Stanley Black & Decker (SWK) on the NYSE stock exchange.
Management expects an increase in EPS by $1.00 in three years. The company also estimates annual cost synergies of $350 million by 2013. Moreover, improvements in working capital and asset efficiency are expected to generate free cash flow of $1.0 billion by the end of March 2013. Thus, going forward the transaction will support the continued expansion of Stanley’s global business platform.
Stanley has embarked on a growth strategy of aligning its business portfolio with growth markets through acquisitions and divestitures, and thereby reducing risk associated with large customer concentrations.
Stanley has been able to maintain a diversified customer base and has gradually decreased its customer concentration risk. Based on this, sales in markets outside the home center and mass merchant distribution channels have grown at a greater rate. In this regard, sales to the company’s largest customer as a percentage of total sales have decreased from 22% in 2002 to a single digit in 2009. A diversified customer base is one reason for Stanley to bank on higher revenues in the long-term.
However, active competition in all of its businesses creates a difficult situation. Huge dependence on the housing industry may have a considerable unfavorable impact on sales, earnings and cash flows in future. Thus, we maintain our Neutral recommendation on the stock.