According to the Monmouth Inc. Case,

Harry Vincent, executive vice president of Monmouth, Inc., was reviewing acquisition candidates for his companys diversification program. One of the companies, Robertson Tool Company, had been approached by Monmouth three years earlier but had rejected all overtures. Now, however, Robertson was in the middle of a takeover fight that might provide Monmouth with a chance to gain control.

Monmouth, Inc.

Monmouth was a leading producer of engines and massive compressors used to force natural gas through pipelines and oil out of wells. Management was concerned, however, over its heavy dependence on sales to the oil and gas industries and the violent fluctuation of earnings caused by the cyclical nature of heavy machinery and equipment sales. Although the companys long-term sales and earnings growth had been above average, management believed that its cyclical nature had dampened Wall Streets interest in the stock substantially.

Initial efforts to lessen the earnings volatility were not entirely successful. Monmouth acquired a supplier of portable industrial power tools, a manufacturer of small industrial air and process compressors, a maker of small pumps and compressors, and a producer of tire-changing tools for the automotive market. The acquisitions broadened Monmouths markets but still left it highly sensitive to general economic conditions.

The continued volatility prompted a full review of the companys acquisition strategy. After several months of study, three criteria were established for all acquisitions. First, the industry should be one in which Monmouth could become a major player. This requirement was in line with managements goal of leadership within a few distinct areas of business. Second, the industry should be fairly stable, with a broad market for the products and a product line of small ticket items. This product definition was intended to eliminate any company that had undue profit dependence on a single customer or several large orders per year. Finally, it was decided to acquire only leading companies in their respective market segments.

This new strategy was initially implemented with the acquisition of the Dessex Rule Company, the worlds largest manufacturer of measuring rules and tapes. Monmouth acquired a quality product line, an established distribution system of 15,000 retail hardware stores throughout the United States, and plants in the United States, Canada, and Mexico. It also gained the services of Michael Rudd, president of Dessex, and Jim Hackett, vice president of sales. Both were extremely knowledgeable in the hand tool business and had worked together effectively for years. Their goal was to build, through acquisition, a hand tool company with a full product line that would use a common sales and distribution system and joint advertising. To do this they needed Monmouths financial strength.

Dessex provided a solid base to which two other companies were added. In 2000 the Keane Corporation was acquired. The company had been highly profitable but suffered in recent years under the mismanagement of some investor-entrepreneurs. A series of acquisitions of weak companies with poor product lines eroded Keanes overall profitability. Discouraged, the investors wanted to exit their ownership position, and Monmoutheager to add Keanes well-known and high-quality measuring and fastening tools to its linewas interested in the opportunity. It was clear that some of Keanes lines would have to be dropped and inefficient plants would have to be closed, but the rules, ratchets, and wrenches would play an important part in Monmouths product strategy.

Monmouth further expanded into hand tools with the acquisition of the Kroll Electric Corporation. Kroll was the worlds leading supplier of soldering tools to the industrial, electronic, and consumer markets. It provided Monmouth with a new, high-quality product line and production capacity in England, Germany, and Mexico.

Monmouth was less successful in its approach to a fourth company in the hand tool businessthe Robertson Tool Company. Robertson was on the original shopping list of acceptable acquisition candidates that Mr. Vincent and Mr. Rudd had developed, but several attempts to interest Robertson in exploring merger possibilities had failed. The Robertson family had controlled and managed the company since its founding in 1864, and Paul Robertson, chairman of the board, had no interest in joining forces with another organization.

Robertson Tool Company

Nevertheless, Robertson was too inviting a takeover target to be overlooked or ignored for long. A relatively poor sales and profit performance in recent years, conservative accounting and financial policies, and a low percentage of outstanding stock held by the family and management all contributed to its vulnerability. Annual sales growth of 2% was far behind the industry growth rate of 6% per year, and profit margins had slipped to only one-third of those of other hand tool manufacturers. Its common stock was trading near its lowest point in many years and well below its book value of $53 per share. The lack of investor interest in the stock was reflected in its low price-earnings ratio of 1014, which compared with 1215 times earnings for other leading hand tool companies. The stock was clearly trading on the basis of its dividend yield, with only limited hopes for capital appreciation. (Exhibits 1 and 2 summarize Robertsons operating results and balance sheet.)

What made Robertson so attractive were its basic competitive strengths, which the family-dominated management had not translated into earnings. It was one of the largest domestic manufacturers of cutting-edge hand tools and a leader in its two main product areas. It held a 50% share of the $75-million market for clamps and vises, where it offered a broad, high-quality line with a very strong brand name. Its second product line, scissors, and shears, also had an excellent reputation for quality and held a 9% share of this $200-million market. Only Keystone, Inc., and Disston, Inc., had larger market shares.

Robertsons greatest asset, however, was its distribution system. Forty-eight direct salespeople and 28 sales engineers marketed its products to 2,100 hardware wholesalers in the United States and Canada. These wholesalers in turn sold to 15,000 retail outlets. Their efforts were supported by heavy advertising and promotional programs. Overseas the companys products were sold in 137 countries through 140 local sales representatives. The company seemed to have all the necessary strengths to share fully in the 6%-7% annual sales growth forecast for the industry.

1. A Brief History of Monmouth Inc.
2. What are the issues in this case?
3. Assess the strategic fit of Robertson Tool Company for Monmouth. If you were Mr. Vincent, the Executive Vice President of Monmouth, would you try to gain control of Robertson Tool in May 2003?