Sometimes the market doesn't get its initial assessment of large mergers and acquisitions correct.
And when it blatantly gets it wrong, it's time for investors to swoop in and act decisively to profit from the mistake. Case in point is the 8% drubbing shares of Newell Rubbermaid (NWL) took on news that it was acquiring Jarden (JAH) for over $13 billion.
Here is what the stock market saw:
- Newell Rubbermaid was giving up its stock to acquire Jarden, suggesting its stock may have topped out ¿ for any number of fundamental reasons.
- These are two businesses that on the surface are very different in their approaches. Newell Rubbermaid's top and bottom lines have been fueled by product innovation. Jarden's entire history has mostly centered on acquiring companies. As a result of their different processes, the market read this deal as having significant integration risk that would lead to less than projected overall synergies.
- The combined company might be too big to manage for the solid growth needed to justify Newell's purchase price for Jarden. This is one significant product portfolio to oversee.
Fortunately for opportunistic investors, the market was dead wrong. Newell Rubbermaid's deal will clear antitrust hurdles (which is a major win in this backdrop -- where deals are becoming more deeply scrutinized by regulators) and close in the first half of 2016. Now is the time to buy Newell's stock -- nd I would point to the outcome of a very similar transaction as added support.
In November 2009, Stanley Black & Decker (SWK) stunned everyone by announcing a bid for rival Black & Decker. Like Newell and Jarden, on the surface it appeared that Stanley and Black and Decker sold the exact same products at major home centers, such as Home Depot and Lowe's, and it would be difficult to integrate businesses with sizeable portfolios. But over time, the market realized the two businesses would be better together than apart. For example, Black & Decker's tools were mostly focused on consumers too cheap to pay a contractor, whereas Stanley sold some of its products to industrial customers.
Ever since the deal closed, the company has realized upside to its revenue and cost synergy targets. Its products are displayed better in stores. Innovations on both brands have arguably picked up. Strong managers at legacy Stanley Work have learned a great deal, which sets the stage for other acquisitions, that are likely within the next five years. And, the stock market has responded positively to the value creation: shares of Stanley Black & Decker have surged about 140% from the time of the deal announcement.
Deal Checklist: Why to Like the Newell Rubbermaid --Jarden Deal
- It will give leverage over Wal-Mart (WMT) and other big box retailers that other consumer product makers will not have. As an investor, you would want to assign a higher multiple to Newell Brands for such a competitive advantage.
- Over time (say within the next 5 years), businesses will be divested ¿ raising money for the parent company to invest in new, more profitable areas, and in more-aggressive marketing that is key to driving sales for consumer products companies. Furthermore, it will help bolster the company's cost structure, just as it's deal-related debt is on the decline and it has been driving costs out of its processes.
- Newell Brands will become a more-attractive place for a private business owner with a proven idea to cash out. The owner would get paid nicely and know full well the company is in good hands, with the team of folks that helped integrate Newell and Jarden.
- More innovative products from Jarden are waiting in the wings, as Newell has done phenomenal work in bolstering its product development capabilities.
- The combination puts the company in a far-better position to capitalize on e-commerce shopping: Jarden has done a good job developing its tech infrastructure, and will share best practices with Newell.
- Despite the current pressure on commodities markets, the reality is that ultimately, commodities are scarce resources that will be in increasingly short supply due to global population growth. I am keen on being involved in companies that are clear leaders in their segment ¿ and could negotiate lower commodities costs from all sorts of suppliers.
- Massive structural costs will be removed from the business within the first two years after the deal closes. For example, Newell Rubbermaid will likely not need to operate 58 North American warehouses: it could consolidate centers, and expand them, to drive maximum productivity. As the integration work is underway, I would expect investors to be surprised by the earnings and cash-flow-generating power (similar to what happened with Stanley and Black & Decker).