Newell Case Essay example

Newell and Rubbermaid Corporation: The Critical Decisions That Make or Break the Deal

The top deal makers focus on four key imperatives that make or break the deal, and they are disciplined in their decision making. Kellogg's purchase of Keebler shows how discipline can put an acquisition on the right track and keep it there. Newell's 1999 acquisition of Rubbermaid Corporation reveals the high cost of weak discipline.

When Newell's top managers approached their counterparts at Rubbermaid in 1999 about the possibility of a merger, it looked like a deal from heaven. Newell had a 30-year track record of building shareholder value through successful acquisitions of companies like Levelor blinds, Sharpie pens, and Calphalon cookware. Rubbermaid, which had recently topped Fortune's list of the most admired U.S. companies, was a true blue-chip firm. With its long record of innovation and smart brand marketing, it was very profitable and growing quickly.

Because Newell and Rubbermaid both sold household products through essentially the same sales channels, the cost synergies from the combination loomed large. Newell expected to reap the benefits of Rubbermaid's high-margin branded products-a range of low-tech plastic items, from laundry baskets to Little Tikes toys-while fixing a number of weak links in its supply-chain management.

Rubbermaid's executives were encouraging: As long as the deal could be done quickly, they said, they'd give Newell an exclusive right to acquire their company. Eager to seize the opportunity, Newell rushed to complete the $5.8 billion megamerger-a deal ten times larger than any it had done before.

But the deal from heaven turned out, to use BusinessWeek's phrase, to be the "merger from hell." Instead of lifting Newell to a new level of growth, the acquisition dragged the company down. In 2002, Newell wrote off $500 million in goodwill, leading its former CEO and chairman Daniel Ferguson to admit, "We paid too much." By that time, Newell shareholders had lost 50% of their value; Rubbermaid shareholders had lost 35%.

The failure can be traced to errors at each of the key decisions:

How not to pick a target? Newell knew its growth strategy required a big acquisition-its prospects for organic growth from existing products were limited. With the Rubbermaid deal, it thought it was building scale and gaining a strong brand-just what it needed to go toe-to-toe with buyers at the big discount chains like Wal-Mart and Target. But at a deeper level, the deal did not fit. While Rubbermaid and Newell were both selling a lot of household basics to the same customers, the two companies had fundamentally different bases of competition. Rubbermaid competed on the basis of innovation and brand, whereas Newell competed on the basis of low-cost production. Their production processes and costs were different; their value propositions were different. They were actually in very different businesses, and Rubbermaid's strategy wasn't going to work for the markets that Newell was relying on.

Which deals smell bad? Although Newell had made many modest acquisitions over the years, the Rubbermaid deal was something entirely different. Neither minnow nor fish, Rubbermaid was a whale-ten times the size of the largest acquisition Newell had previously attempted. Rubbermaid had also worked hard, within legal bounds, to make its business look a whole lot prettier than it really was.

By agreeing to complete such a vast deal after only three weeks of due diligence, Newell doomed itself to a cursory examination of Rubbermaid, one that provided no time to ask, never mind answer, critical questions about the health of Rubbermaid's business. The reality was that beneath Rubbermaid's well-polished exterior, there was a raft of problems, from extensive price discounting for wholesalers to poor customer service to weak management. As a result, Newell never arrived at a clear sense of what the company was really worth.

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