Question

Read the following mini case on Newell Brands taken from the textbook and answer the question at the bottom that immediately follow the case.

Learning From Mistakes

The merger of Newell and Jarden seemed to make perfect sense. Newell, the maker of a range of household and office products including Graco strollers, Sharpie markers, Calphalon cookware, and Rubbermaid containers, had for years grown through the acquisition of other manufacturers. The firm had a long success of improving the operational efficiency of firms it acquired and dominating product segments. Jarden looked like a great target for Rubbermaid to continue this pattern. It made a range of similar household products, including Ball glass jars, First Alert fire detectors, and Sunbeam small appliances.

Michael Polk, the CEO of Newell, saw great value potential in the combination of the two firms. Jarden had allowed its business units to run autonomously. Newell could gain efficiencies by integrating the Jarden businesses into Newell’s business model. By combining research and development, supply chains, and back office operations, the firm could reap $500M in savings annually. Newell could also leverage the power of some businesses to help others. For example, in the infant business, Newell’s Graco was a major player. Newell could leverage the relationships Graco has built with major retailers to convince them to carry Jarden’s Nuk line of pacifiers and bottles.

It all seemed rational with strong potential for clear value creation. The stock of Newell was trading at $45 a share when it announced the $15B acquisition of Jarden in late 2015. The deal closed in April 2016, and the stock of Newell continued to rise as investors expected to see the success of the merger. The stock hit a peak of nearly $54 a share in June 2017, but then the tide turned dramatically. The firm reported disappointing sales and earnings. In early 2018, Newell managers decided to cancel paying $35M in employee bonuses. Activist investor funds pressured the firm for governance changes, including changing the makeup of the firm’s board of directors, giving the activist investors majority control of the board. But the bad news kept coming for Newell. Sales declined by over 40 percent in 2018, and operating income dropped by over 50 percent. As of early 2019, the stock was down to $17 a share. At the time of the merger announcement, Newell and Jarden were worth $12B and $10B, respectively. As of February 2019, the combined firm was worth $8B. Thus, the acquisition arguably destroyed $14B of shareholder value.

Why did this merger fail? Problems arose both inside and outside the firm. The integration of Jarden into the Newell way of operating was not smooth. There were culture clashes and fights over the future structure of the firm. When Newell tried to combine units and centralize staff, many of Jarden’s product experts were either shifted to support products they didn’t know well or were laid off. For example, salespeople who specialized in a single product, such as fishing equipment, were forced into a generalist sales team for outdoor equipment in general. The combined sales teams generated disappointing sales with major retailers in 2017. In response, Newell undid many of these organizational changes. As a result, the firm found it had overstated the cost efficiencies that would come from the combination.

There were also difficult strategic differences. For example, Newell’s sales tactics appeared out of place for some of Jarden’s products that were more highly differentiated than most of Newell’s products. Newell responded to sales shortfalls at Yankee Candle by ramping up sales of the candles at discount retailers, such as Walmart, at dramatically reduced prices. Martin Franklin, the former CEO of Jarden, complained this cheapened the brand image of Yankee Candle, which had been positioned as a premium brand.

The firm also faced external challenges. Hurricanes in the southeast in 2017 shut down a number of Newell’s suppliers of resin, the core material used to make plastics. This resulted in an increase in cost for the firm as it had to seek out new suppliers. Also, the struggles of key retailers, most notably with the bankruptcy of Toys R Us, reduced demand for Newell’s products. The firm also found itself relying more on retailers, such as Amazon and Walmart, who regularly pressure the firm on product pricing.

Newell has responded to these pressures by announcing that the firm would sell off a number of its businesses, accounting for over 30 percent of the firm’s sales, and focus on nine core consumer product areas. But it is fairly clear that the combination of Newell and Jarden has failed to generate and will likely never generate any of the shareholder value projected when the deal was conceived.

QUESTION - Why was Newell so overly optimistic about the value it could generate?

Answer 1

Newell was overly optimistic about its merger with Jarden due to its past success in acquisitions, confidence in operational integration, and potential for cost savings and market leverage, which were overshadowed by cultural clashes, strategic issues, and external challenges leading to the merger's failure.

Step-by-step explanation:

Newell was overly optimistic about the value it could generate from merging with Jarden due to a combination of factors. They believed in their proven track record of improving operational efficiencies in acquired firms, as well as dominating product segments.

Their past success made them confident in integrating Jarden's business units and achieving significant cost savings by combining research and development, supply chains, and back-office operations to the tune of $500 million annually.

Moreover, they envisioned leveraging existing relationships in certain business areas, like the infant products market, to boost sales of newly acquired lines.

However, a clash of corporate cultures, strategic misalignment, and external challenges such as supply chain disruptions and problems with retailers, particularly the bankruptcy of Toys R Us, led to unanticipated difficulties and ultimately financial losses.