Estimate how much to be paid to the executives of both companies and to the executives of Black & Decker. You can use the information below when evaluating stock options to be paid to management
- The value of stock options is estimated to be about 30% of the value of the underlying stock.
- Stanley's share price has risen 17% since the announcement of the merger.
Stanley Black 8.: Decker, Inc. On November 2, 2009, the boards of directors of The Stanley Works, Inc. and Black :5: Decker Corp. agreed to a merger in which The Stanley Works would combine with Black S: Decker through an exchange of stock giving Black IS: Becker's shareholders a 21.6% premium. Stanley would pay $3.6 billion in its stock {valued at Stanley's pare-announcement price of $45.23fsha1e) for all of Black &' Decker's stock. The merger would leave Stanley shareholders with 50.5% of the stock in the combined enterprise. Black 8: Decker shareholders would receive 49.5% of the stock of the combined enterprise. John F. Lundgren, age 5?, the CEO of Stanley since 2004 would become CEO of the combined company while Nolan Archibald, age 66, and CEO of Black Biz 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 8: 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 1930s and again in the early 1990s. These talks \"typically stalled over who would be in charge.\"1 The Transaction Economics Cost savings associated with the combination were a strong motivating factor in the proposed merger. The combined 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.\"2 This level of savings would be achieved over three years at a cumulative one-time restructuring cost of $400 million [Exhibit 1). Stanley's 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 Ofcer Incentives Shareholders would not be the only winners in the transaction. As part of the merger contract Iohn 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."3 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 the combined company's 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 armual savings of $300 million were achieved, or a total of $45 million if the projected 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 Post-Merger Contract Contract $ millions Base Annual Salary $1.5 $1.5 Target Annual Bonus $1.875 + $1.053 $1.875 Maximum Annual Bonus $3.750 + $1.531"?Bl Annual Equity Award $8.5 $6.65 Special One-Time Awards NA Options on 1.0 million shares NA $150-$450 for cost savings Source: The Stanley Works, US SEC Filing Amendment No. 2 to Form 54, February 2, 2010, pp. HHS. a Longterm incentive award Nineteen Black 6: 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 to actual performance as a result of the merger) would amount to $13.2 million for these same 19 executives, and inunediate vesting of all unvested restricted stock, restricted stock units and stock options would add $41.? million to this total. Finally, additions to the B&D supplemental executive retirement plan for the benefit of ve of these senior employees would total $22.7 million. This document Exhibit 1 Amounts and Sources of Cost Synergies in the Proposed Stanley Black & Decker Merger $350 Million Of Cost Synergies Identified (4% Of Pro Forma Sales) Cost Synergies ($M) Manufacturing and Distribution . Plant Footprint Consolidation $400 $350M . Distribution Network Consolidation Manufacturing & Purchasing $45M Distribution $300 . Direct And Indirect Materials ~$75M Purchasing . Freight Corporate Overhead s authorized for use only by Jinsu Park in FMB816 #2 taught by HYUN SEUNG NA, City University of Hong Kong from Jun 2021 to Jun 2021. $200 . Public Company Costs ~$95M Corporate Overhead . Management, Facility And IT Integration Business Unit & Regional Integration $100 . Management And Sales Force Integration $135M Business Unit & Regional Consolidation . Regional Shared Service Consolidation One Time Cost To Achieve $0 . $400M Over Three Years One Time Cost Of $400 Million To Achieve Source: The Stanley Works, "A Powerful Legacy, a Future of Growth," US SEC Form 8-K Filing, November 3, 2009, p. 17.Exhibit 2 Timing of Cost Synergy Benefits and EPS Impact from Proposed Merger This docume Pro Forma Financial Impact To Stanley authorized for Year 1 Year 2 Year 3 Creates A Global Leader With Pro Forma 2009E Annual Cost Revenues Of $8.4B $125 $250 $350 Synergies (SM) GAAP EPS - Adjusted EPS Pro Forma GAAP y Jinsu Park in FMB816 #2 taug EPS Accretion . Costs To Achieve Synergies $400M EBITDA Of $1.3B ($3.25) - ($3.00) $0.25 - $0.35 $0.95 - $1.05 (Yr 1- $330M, Yr2 - $50M, Yr3 - $20M) ($ per Fully Including Full Run- . Non-Cash Inventory Charge $200M Diluted Share) (Yr 1 Only) Rate Synergies in 2009 . Transaction/Other Expense $70M Pro Forma (Yr 1 Only) Adjusted EPS Accretion ($0.45) - ($0.20) $0.50 - $0.60 $1.05 - $1.15 Free Cash Flow In ($ per Fully Year 3 To Be ~$1B Diluted Share) Adjusted EPS Cash EPS Pro Forma Cash EPS Accretion . Annual Additional $80-90M y HYUN SEUNG NA, City University of Hong Kong from Jun 2021 to Jun 2021. ($0.05) - $0.20 $0.90 - $1.00 ; $1.40 - $1.50 Pre-Tax Intangible Amortization ($ per Fully Diluted Share) Highly Accretive Transaction Results In Approximately $5.00 Of EPS In Year 3 Source: The Stanley Works, "A Powerful Legacy, a Future of Growth," US SEC Form 8-K Filing, November 3, 2009, p. 19
