Some huge corporate tie-ups seem so ridiculously commonsense after the fact.
A couple years ago bitter rivals in the tools business -- Stanley Works and Black & Decker -- joined forces in a blockbuster deal. Since then, the incredibly thorough Stanley Works team has siphoned a ton of cost savings from the combination, quickened Black & Decker's product development and rewarded shareholders handsomely. (Stanley Black & Decker (SWK) is holding in Action Alerts PLUS.)
Late in 2015, Newell Rubbermaid (NWL) decided to gobble up fellow consumer products maker Jarden (JAH). While investors remain a little unsure on the combination's potential, I continue to believe it will drive meaningful value over the long-term through more insightful new products and cost savings.
Similar to the Stanley/Newell transactions, news that Sherwin-Williams (SHW) will plunk down more than $11 billion for Valspar (VAL) makes great sense. I am not sure how the deal came together, but I suspect it was something discussed more than once over the past several years. These companies will be able to combine and save money on everything from transportation to the oil and gas that gets put into their paints. Although I am not too sure how selling Valspar paint at 4,000-plus proud Sherwin-Williams dealers will go over, or if it will even happen, the benefits outweigh the negatives -- and warrant the hefty premium being paid.
Here is how you should be thinking through this monster of an industrial deal. If I have learned anything from prior transactions of this nature, it's that purchasing shares in the aggressor (in this case Sherwin-Williams) will pay off over time.
As has been the case with all multinationals, both Sherwin-Williams and Valspar have seen a negative impact from the strong dollar. I believe many executives at large companies are trying to unearth ways to save money to offset the effect of the greenback. And if they have to combine to find those savings, so be it. For example, Sherwin-Williams has been battered in Latin America due to currency and that country's slowdown, and investors aren't going to just sit back and accept those results forever.
In my view, seeing this deal come together before first-quarter earnings season underscores the likelihood of further pressured results from multinationals due to the dollar, which only until recently has begun to weaken.
Wal-Mart, Home Depot, Lowe's
Walk around any Wal-Mart (WMT) supercenter and you will see a fairly robust presentation in paints and other items sold by Valspar. Sherwin-Williams recently entered Lowe's (LOW). Valspar has long had a presence at both Lowe's and Home Depot (HD). With mass merchants no longer opening stores as aggressively as in the past, they have turned to suppliers to bring down prices in order to help pad their profits. Online shopping doesn't help the bargaining positions of suppliers such as Sherwin-Williams and Valspar.
I think the combination not only helps to save money internally throughout the supply chain, it boosts the barraging power against the mass merchants.
Valspar is a pretty innovative paint manufacturer. There is a great opportunity for teams at both companies to work together to develop exclusives that are only sold in Sherwin-Williams stores. Obviously, that is a negative for Home Depot, Lowe's and Wal-Mart.
Auto Manufacturers, Homebuilders
If I am a Ford (F) or a Toll Brothers (TOL), indeed this deal is a source of concern. A paint powerhouse will likely be created. Sure, it may lead to more innovative technologies, but will likely also cause pricing power to swing in favor of Sherwin-Williams. (Ford is a holding in TheStreet's Dividend Stock Advisor portfolio.)
- The deal is likely a longer-term wager on higher oil and gas prices (funny how it was announced just as oil prices have started to gain steam). It's good for the two companies to combine now when natural resource prices are low, drive maximum cost savings, and then be prepared for the inevitable higher prices in the future.
- The combination is likely an acknowledgement that industrial production in the U.S. will remain under pressure for the foreseeable future thanks to slowing emerging markets (and possibly, a Trump presidency).