Case Study: Stanley Black & Decker, Inc.1 On November 2, 2009, the boards of directors of The Stanley Works, Inc. and Black & Decker Corp. agreed to a merger in which the Stanley Works would combine with Black & Decker through an exchange of stock giving Black & Deckers shareholders a 21.6% premium. Stanley would pay $3.6 billion in its stock (valued at Stanleys pre-announcement price of $45.23/ share) for all of Black & Deckers stock. The merger would leave Stanley shareholders with 50.5% of the stock in combined enterprise. John F. Lundgren, age 57, the CEO of Stanley since 2004 would become CEO of the combined company while Nolan Archibald, age 66, and CEO of Black & Decker since 1986 would become executive chairman of the combined company. Background The Stanley Works was a hand tool company founded in 1843 and headquartered in New Britain, Connecticut. Black & Decker was a power tool company established in 1910 and headquartered in Towson, Maryland. Since the companies operated in similar lines of business, they had periodically discussed a strategic combination. Merger discussions had occurred in the early 1980s, the late 1980s and again in the early 1990s. These talks typically stalled over who would be in charge.2 The Transaction Economics Cost savings associated with the combination were a strong motivating factor in the proposed merger. The combination company was expected to save $350 million annually. The transaction was expected to result in nearly 4,000 layoffs from a global workforce of 38,000.3 This level of savings would be achieved over three years at a cumulative one-time restructuring cost of $400 million (Exhibit 1). Stanleys GAAP earnings per share (once the full savings were realized at the end of year three) were expected to reach $5.00, an increase of $1.00 per share versus the EPS projection of Stanley without the merger (Exhibit 2).

The CEO and Other Officer Incentives Shareholders would not be the only winners in the transaction. As part of the merger contract John Lundgren would receive a grant of restricted stock units, the aggregate value of which will equal the value, as of the completion of the merger, of an option to purchase 1.1 million shares of Stanley common stock.4 This would be in addition to his normal compensation contract. Nolan Archibald would receive a new three-year contract. While his annual compensation would be reduced somewhat as shown below, he would receive a one-time grant of stock options on 1.0 million of combined companys shares plus a special incentive payment based on the amount of annual cost savings achieved by the third anniversary following the merger. The incentive payment would be $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 the project annual saving of $350 million or more were achieved. He also agreed to forego a $20.5 million severance payment (golden parachute) in connection with the change in control. Nolan Archibald Compensation Current Contract Post-Merger Contract -------------$ millions ------------ Base Annual Salary Target Annual Bonus Maximum Annual Bonus Annual Equity Award Special One-Time Awards $1.5 $1.875 + $1.05a $3.750 + $1.575a $8.5 NA NA $1.5 $1.875 $6.65 Options on 1.0 million shares $15.0-$45.0 for cost savings Source: The Stanley Works, US SEC Filing Amendment No. 2 Form S-4, February 2, 2010, pp. 76-78. a Long-term incentive award Nineteen Black & Decker executives (not counting Nolan Archibald) had change of control agreements extending back to 1986 which would trigger payments if they were terminated or experienced a change in responsibilities or powers as a result of the merger. Payments which could be triggered under these agreements for severance (3 years pay), benefits (3 years) and income tax gross-ups totaled $92.3 million. Payments under the B&D long term incentive plan (that would be triggered without regard actual performance as a result of the merger) would amount to $13.2 million for these same 19 executives, and immediate vesting of all unvested restricted stock, restricted stock units and stock options would add $41.7 million to this total. Finally, additions to the B&D supplemental executive retirement plan for the benefit of five of these senior employees would total $22.7 million.

Questions:

1. a. Analyze the principle-agent problem between the shareholders of both companies and the companies CEOs John Lundgren and Nolan Archibald.

b. In how far is the compensation plan appropriate to solve the principleagent problem? HINT: More information on Principal Agency Theory see additional literature!

2. Evaluate the total present value of merger synergies assuming the following information: The weighted average cost of capital is 11%. The income tax rate is 40%. Table 1: Stanley/Black & Decker Implementation Costs and Synergy Savings: Pretax Implementation Costs Pretax Synergy Savings $ millions $ millions Year 1 2 3 4 $330 50 20 0 $125 250 350 350 Calculate the total present value of cash flows derived from the merger by

a) calculating the NPV of merger and synergy savings and implementation cost plus

b) the present value of the terminal value: with: r = discount rate, g = perpetuity growth rate in annual savings of 3%, P1 = after tax cash flow in t4 increased by the growth rate and discounted with discount factor. Assume growth in pretax synergy savings of 3%/year after year 4.