Acquisitions as a Growth Strategy

Introduction

This paper examines acquisition as a growth strategy. Based on a case study of Newell Rubbermaid’s consistent, acquisition-led, growth strategy, the paper goes on to show with other examples how inorganic growth strategy is increasingly emerging as an imperative for achieving rapid growth in the new millennium. According to Sherman and Hart (2006), inorganic growth strategy refers to growth of a company via the route of acquisition of another company or takeover of another company done more often than not with the objective of leveraging the benefits arising from a new product line, penetrating into a new segment of customers or entering a new geographic frontier. According to Daniel and Metcalf (2001), companies of the new millennium have many reasons to get into mergers and acquisitions (M&A) and to make it successful. Two of the primary reasons are growth acceleration and/or sustainability or protection of current market share. Secondary reasons are acquisition of new technology, new market entry, business expansion, diversification, bringing down the competition, better utilisation of current resources and accessibility to a larger resource pool, global product presence and better use of personnel. Starbuck (2006) stated that massive business expansion can be one of the many methods of progressive growth and it is also a motive for organisational growth.

Newell Rubbermaid’s acquisition-led growth strategy: A critical analysis

Newell Rubbermaid (Newell) is a Fortune 500 marketer of a wide range of consumer products. Its compelling range of high-power brands touches almost all aspects of one’s life, at work and at home. Newell has thrived in a highly competitive industry through a stated strategy of acquiring companies and quickly integrating them into its corporate fold. In the past 15 years, Newell acquired nearly 100 companies – in an inorganic growth strategy that has led to a fourfold increase in revenue. Newell’s strategy started with a clear vision of how it would compete. To implement that vision, the company built the requisite resources, tailored its organisation to the strategy, and entered a set of synergistic businesses that had remarkably similar key success factors. As Daniel Ferguson said in an interview in the 1990s: “we are only in one business”. The products were different, to be sure, but the logic and the resources that were critical to competitive advantage were the same. Externally, the strategy positioned the firm to take advantage of the development of discount retailing. The company was prescient in identifying the trend and in developing a strategy that was consistent with those opportunities. The strategy paid off in most cases, barring the acquisition of Rubbermaid which almost seemed to punctuate Newell’s growth strategy. However, lessons learnt, Newell weathered this phase and was back once again with its acquire-and-grow strategy. (Source: Report in ‘What works 2003’ in www.atg.com)

Some of the features of the acquisition strategies employed by Newell are:

Using acquisition as a way to scale up a new business model: Acquisitions have helped Newell in establishing a new way of doing business. In the early Seventies, Newell was still a relatively small company. It observed that the big retailers were selling products worth billions of dollars supplied by numerous small producers. However, these suppliers often were not able to improve their offerings due to lack of resources. Newell reasoned that the big retailers will accept low-cost suppliers who are able to provide simple logistic processes, low prices, and consistent, high-quality products. Thus, Newell took a call to become a one-stop shop to big retailers. The initial acquisitions that started in the Seventies were quite small; Newell acquired suppliers of hardware and household products such as door handles, paint rollers and brushes, and metal cookware, with revenue ranging from $5 million to $15 million. However, as Newell started growing, its acquisitions also grew dramatically with larger deals like the $340 million acquisition of Anchor Hocking. The company enhanced its acquisition procedures by deriving economies of scale in logistics and the sales force, concentrating on development of new products lines and introducing common systems and infrastructure. This led to the company becoming an integrated low-cost supplier. Newell turned into a veteran buyer, building aggressively on shareholder value in the past three decades, by acquiring businesses like Sharpie pens, Levelor blinds, and Calphalon cookware. These companies sold household products through essentially the same channels as Newell. Thus, Newell reaped considerable cost savings by combining operations. (Source: Article in www.bcg.com)

Newellization: Soon after it acquired a company, Newell’s immediate post-acquisition strategy was to put the company through a process of streamlining, focusing on operational efficiency, and profitability. Through this strategy, which was labelled ‘Newellization’, Newell aimed to boost profitability of the acquired companies by reducing overhead costs, centralising administrative functions, jettisoning underperforming product lines, and reducing inventory.

‘Newellization’ involved a quick streamlining of the newly acquired firm in terms of integrating the:
(a) Financial system,
(b) Sales and order processing system, and
(c) Flexible manufacturing system.
Typically, within six months, the new firm was streamlined.
The legendary CEO of GE, Jack Welch had earned the moniker ‘Neutron Jack’, for retaining the bare essentials in a new business removing people. Newell too pursued this strategy. Newell’s post-acquisition strategy also entailed paring payrolls and cutting the flab, to preserve those aspects that found a strategic fit with the company. For instance, Newell dismissed 110 Anchor employees and shut down Anchor’s West Virginia plant soon after it acquired Anchor.
(Source: Article in www.harvardbusinessonline.hbsp.harvard.edu)

Integrating technology with acquisitions: One of the company’s strengths has been its ability to quickly integrate new companies into the Newell business. With each acquisition, however, the IT and business teams were left struggling to manage additional independent brands with a very divergent set of technologies. With the emergence of e-business as an increasingly important opportunity for driving down costs and providing better service online, Newell recognised the importance of finding a new, centralised platform to support its divisions. The value proposition during the acquisition process was the speed and accuracy with which Newell converted and integrated the acquired companies onto its core technology platforms. It developed a strategy to centralise development efforts on an enterprise commerce platform to make its online initiatives more cost effective and reduce development cycle time.

(Source: Article in www.atg.com)

Integrating brands, extending product portfolios, and leveraging innovative capabilities with new acquisitions:

Yet another feature of Newellization was assimilating and integrating companies, products, and brands. For instance, when Newell acquired Rotring, it also got the Cosmolab pencil operation. The three US pencil plants excluding Cosmolab were consolidated and the numerous brands disappeared from the market. As a result of ‘Newellization’ the Eberhard Faber, Berol and Empire pencil brands were replaced by Sanford and later by Papermate. Mongol was phased out in favour of the Mirado brand which found a better fit with Sanford’s key distribution channels in the mass market.
Newell also leveraged the innovative capabilities of the acquired entity. For instance, with the acquisition of Dymo, Newell strengthened its global leadership position in the office products market. Dymo was a strategic extension of Newell’s Office Products portfolio and added depth to its product offerings.
(Source: Article in ir.newellrubbermaid.com)

Strategy in Transition: The acquisition of Rubbermaid and the transformation in the company’s acquisition strategy:

Newell’s highly integrated, internally consistent strategy was tailored for manufacturing and selling a particular genre of products to a particular kind of customer. Newell created a pattern of acquiring companies that were fairly well managed, having good relations with big retailers and still having the scope to allow Newell to interfere in order to get the desired performance. However, Newell digressed from this pattern when it set out to acquire Rubbermaid. This was one instance where Newell’s strategy of acquiring companies that fit its business strategy ran into troubled weather. Rubbermaid was quite profitable and growing quickly. It was a blue-chip company with a long-standing history of innovation and a good reputation as a smart brand marketer. Newell reasoned that it could derive benefits from some of Rubbermaid’s high-margin branded products like low-tech plastic items ranging from laundry baskets to toys; at the same time Newell decided to strengthen some of the weak links in the supply chain of Rubbermaid. However, it took a long time to integrate Rubbermaid into its fold and turn it into a profitable deal. Thus, Newell shareholders lost 50% of their value in the two years and Rubbermaid shareholders lost 35%.

Newell knew that it had to make a big acquisition, to continue with its growth strategy. This is largely because its prospects for organic growth from existing products lines were limited. With Rubbermaid, Newell thought it was building scale and gaining a strong brand – just what it needed to go head-to-head with buyers at big discount chains like Wal-Mart and Target. However, at a deeper level, the deal did not fit. Newell and Rubbermaid were both selling household basics to the same customers. Yet the two companies had fundamentally different bases of competition. Rubbermaid competed on innovation and brand while Newell emphasised low-cost production. Their production processes and costs were different, as were their value propositions. They were actually in very different businesses, and Rubbermaid’s strategy was not going to work for the markets that Newell was relying on.

Although Newell had made many modest acquisitions in the past, Rubbermaid was something entirely different – ten times the size of the largest acquisition it had ever attempted. Rubbermaid also had worked hard, within legal bounds, to make its business look a lot prettier than it really was. By agreeing to complete such a huge deal after only three weeks of due diligence, Newell limited itself to a cursory examination of Rubbermaid – one that provided no time to ask critical questions about the health of the business. Beneath Rubbermaid’s well-polished exterior, there was a raft of problems, from extensive price discounting for wholesalers to poor customer service and weak management. Newell took an undisciplined, broad-brush approach of combining Rubbermaid’s complex operations into its own. This acquisition should have called for selective integration. Instead, Newell attempted to ‘Newellize’ Rubbermaid. It took years for Newell to fix the problems.

There is a silver lining to the story. Ultimately Newell learnt important lessons, although getting the acquisition on track entailed jarring disruptions to the business and major restructuring. The company had to replace a lot of people, understand brand power and how to market it, and acquire a different mind-set and a different group of people. In the process, the company was exposed to the pains and struggles of changing a deeply ingrained and long-lived strategy.
(Source: Article in www.harvardbusinessonline.hbsp.harvard.edu)

The above case clearly shows how a company can use inorganic growth strategy to create synergies and get the best out of its business environment. For a detailed history of the company please see Appendix 1.

Some successful and unsuccessful mergers and acquisitions:

Daimler-Benz and Chrysler Corporation announced one of the largest M&As in 1998. The resultant company DaimlerChrysler became the world’s largest car manufacturer with revenue of $130 billion and operating profit of $7 billion. Daimler-Benz had a very strong presence in the Western European market, while Chrysler had a strong presence in the North American market. The idea behind the merger was that the merged company DaimlerChrysler would penetrate into new markets, especially Asia, South America and Eastern Europe. The result was that in July 2002, despite the stock market turbulences and economic instability, DaimlerChrysler announced profits. (Source: Kourdi (2003))

Glaxo Wellcome is one of Britain’s most profitable companies in the business of Pharmaceutical Manufacturing. It was in search of a bestselling drug for some time because Glaxo desperately wanted to recreate the magical success of the ulcer treatment drug Zantac. SmithKline Beecham is one of the world’s top manufacturers and makers of prescribed drugs. The problem it faced was that, despite being one of the top manufacturers of prescribed medicine a large percentage of its revenue came from non-medicinal products such as toothpaste and nutritional drinks. Both of them decided to join hands in such a way that Glaxo would now get the expertise of SmithKline Beecham in prescribed drugs that would help them in their quest for their next superstar drug, and SmithKline Beecham would enjoy the name of Glaxo in pharmaceutical products and boost its pharmaceutical products or medicinal products revenue. Other than these benefits, both would derive other synergies that would prove lucrative. (Source: Article ‘The Glaxo SmithKline Merger’ in news.bbc.co.uk)

According to Daniel and Metcalf (2001) one of the main reasons for failure of M&A deals is that the buyer might have paid too high a purchase consideration to the seller. Quaker Oats’ acquisition of Snapple is a good example. Quaker Oats acquired Snapple for a purchase consideration of $1.7 billion. Numerous business analysts believed that the consideration to be paid was higher by at least $1 billion. Share prices of both companies dropped considerably on the very day they announced the merger. Both companies started facing implementation problems. Further, the new age drinks market downturn did not help the deal at all. In fact it created lots of difficulties for Snapple to live up to the expectation of Quaker through the M&A. Consequently, the acquisition failed.

The major reason for the deal failing was that Quaker ignored the fact that it had paid a high price as consideration to Snapple, side-tracking other issues. They also did not factor in the downturn in the new age drinks market. Ideally speaking, their objectives from the merger were more individualistic than synergistic, as a result of which the deal failed.

The Amazon.com and Toys ‘R’ Us M&A deal. Toys ‘R’ Us is a famous toy company and is one of Britain’s and one of the world’s largest and leading manufacturer and retailer of toys. Amazon.com is a world renowned e-commerce portal and also a Fortune 500 company. Amazon.com has very strong network for the purpose of delivery in conjunction with a trusted portal. The e-commerce company enjoyed expertise in orders construction and then filling. On the other hand Toys ‘R’ Us would bring to the table its expertise in toy manufacturing. This was precisely the reason these companies would want to lock hands. However, the execution of the deal panned out totally contrary to expectations. The main problem was that both companies misunderstood each other’s objectives and roles. Amazon expected to use the Toys ‘R’ Us warehouse for the purpose of stocking of toys. Toys ‘R’ Us, on the other hand, expected Amazon to buy out the stock outright to reach out through its world class delivery network to end customers. As a result the M&A deal failed. (Source: Article ‘Amazon, Toys ‘R’ Us split’, by Mr Bolt in www.seattlepi.com)

The successful cases and unsuccessful cases of M&As clearly illustrate that if minds meet, visions meet, and deliver success.

References:

Books:
Bruner, F.R. (2004) Applied Mergers & Acquisitions. 1st Edition, John Wiley & Sons, Inc, New Jersey. pp (3).
Daniel, T.A. and Metcalf, G.S. (2001) The Management of People in Mergers & Acquisitions. 1st Edition, Quorum Books, West Port. pp (3-4, 6-7).
DePamphilis, M.D. (2010) Mergers, Acquisitions, and Other Restructuring Activities. 5th Edition, Elsevier Inc., Burlington. pp (3-4).
Kourdi, J. (2003) Business Strategy – A Guide to Effective Decision-Making. 1st Edition, Profile Books Ltd., London. pp (120)
Lipton, M. (2003) Guiding Growth – How Vision Keeps Companies on Course. 1st Edition, Harvard Business School Publishing Corporation, Boston. pp (18)
Porter, M.E. (1980) Competitive Strategies – Techniques for Analysing Industry and Competitors. 1st Edition, Free Press, New York. pp (4-5, 34-37)
Ray, G.K. (2010) Mergers and Acquisitions – Strategy, Valuation and Integration. 1st Edition, PHI Learning Private Limited, Kolkatta. pp (1-2, 310-311)
Richards, J.A. (2007) The Principles of Synergism. 1st Edition, Trafford Publishing, Oxford. pp (11)
Sherman, A.J. and Hart, M.A. (2006) Mergers and Acquisitions from A to Z. 2nd Edition, Amacom Books, New York. pp (10, 16-17)
Starbuck, H. W. (2006) Organisational Realities – Studies of Strategising and Organising. 1st Edition, Oxford University Press, Oxford. pp (4-6)
Viser, W. (2005) Business Frontiers – Social Responsibility, Sustainable development, and Economic Justice. 1st Edition, ICFAI University Press, Hyderabad. pp (23)
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