In October 1998, Newell Company was considering a merger with Rubbermaid Incorporated to form a new company, Newell Rubbermaid Incorporated. The agreement would be through a tax-free exchange of shares valued at $5.8 billion. Newell had revenues of $3.7 billion in 1998 across three major product groupings: Hardware and Home Furnishings, Office Products, and Housewares. Rubbermaid is a renowned manufacturer of a wide range of plastic products ranging from children’s toys through housewares.
Once the transaction is completed, Newell will begin he process of assimilating Rubbermaid’s operations through a process called “Newellization.” The companies expect that the merger will create synergy through the leveraging of Newell Rubbermaid brands. By 2000, these efforts are expected to produce increases over anticipated 1998 results of $300 to $350 million in operating income for the combined company.
Reading the case analysis, there are many issues that I feel are concerning this merger and I feel that Newell should not process with this merger. First of all, this is a tough and alarming challenge to Newell’s capacity to integrate and strengthen acquisitions. How would Newell bring Rubbermaid into the newellization process since they have completely different products? Another question that comes to mind is how does Newell coordinate all its divisions and what changes will it have to make to create synergy with Rubbermaid? Does the newellization process fit for Rubbermaid? Lastly, are the risks acceptable for Newell to merge with Rubbermaid? Newell needs a very well thought out business plan and has to answer these questions before they proceed.
There are advantages and disadvantages in this merger. I will start with the advantages. If this merger goes through, it will be a quantum step in Newell’s growth. The merger will be uniting two companies that are leaders in their industries. Through the merger, Newell will gain the international presence that Rubbermaid has. Both companies can create synergy within their divisions and Newell can expand their product line internationally. There are certain products in Rubbermaid’s product line that Newell does not have. Another advantage the merger will create is increased operating income. Some disadvantages of the deal are that Newell would be exposed to a tough challenge to the company’s capacity to combine its acquisitions. One big disadvantage is the risk that is involved in the deal for Newell.
Newell is a very respectable company, and a company whose customers are very satisfied. They are very successful with their acquisitions due to their exemplary newellization process. Rubbermaid currently has many problems with their company such as bad customer relations, their operations are not lean, increases competition has taken away market share, and their financial targets seem unrealistic. Newell needs to understand these problems and realize what they will have to deal with if they join with Rubbermaid. Doing my research I have come up with many more disadvantages than advantages toward this merger and that is why I feel that these companies should not merge.
In today’s business world, companies change hands all the time through mergers and acquisitions. Most of the time, the security propositions of new ventures are disregarded. Company A may have the most secure network, but when they couple this network with Company B, you’re exposing your company to a whole new set of risks. The first step is that Newell needs to assess the business risk. Reputation loss is an issue, which Newell will be affected by. Rubbermaid has bad customer relations because it has angered its most important retail buyers with the heavy-handed way it has passed its rising costs. They have given their competitors a lot of shelf space.
A big question mark comes to my mind is when I think about how Newell will bring Rubbermaid into the Newellization process. Newellization is described as a “well established profit improvement and productivity enhancement process that is applied to integrate newly acquired product lines.” The newellization process includes the centralization of key administrative functions including data processing, accounting, and EDI, and inauguration of Newell’s rigorous, multi-measure, divisional operating control system. Reading the case analysis, Rubbermaid is extremely incompetent in these areas. Their operations are one of their biggest problems. According to the case, “although it excels in creativity, product quality, and merchandising, Rubbermaid is showing itself to be a laggard in more mundane areas such as modernizing machinery, eliminating unnecessary jobs, and making deliveries on time.” Looking at Rubbermaid and analyzing their problems, they have totally the opposite qualities of companies that Newell has acquired in the past.
Newell’s acquired companies were mature businesses with unrealized profit potential. Rubbermaid has had a mature business for quite a long time and I do not see any room for unrealized profit potential. They have a very big international presence and Newell will end up hurting themselves once they have to deal with Rubbermaid and their incompetence. I do not feel that the newellization process fits Rubbermaid because these are two companies that have been around for a while, and it is not like Rubbermaid is a start-up or a fairly recent company that can be changed around quickly and all of the sudden have lean operations, which newellization has proved it can do with previous acquisitions. Newell should stick to their business principle and do what they have done in the past, which is to acquire small to medium sized companies and integrate them into the newellization process and create an enormous amount of synergy. I always believe that one should do something that they know best or have experience in and not pursue a totally different market in which that have no experience in.
In this case, Newell does not have any experience with acquiring a company that is worth billions. A merger example that recently occurred which has turned into a blunder is the AOL Time Warner merger. These were two totally different companies in different industries that thought they could merge and be a giant in the Internet and Media/Entertainment industry. The outcome of this merger is that the CEO’s of both companies are being laughed at in the business world. AOL Time Warner stock price is in the dump and the company is in real trouble. Newell can avoid all this by again looking at their previous acquisitions and seeing what type of companies they acquired, which were companies with unrealized profit potential and who had the ability to create synergy in a short amount of time with Newell’s existing divisions.
In conclusion, the deal is attractive for Newell but is not worth the risk that is involved. The key to merger and acquisitions is to not jump on your first instinct and just merge or acquire a company that’s price looks cheap. You have to determine what the company will look like in the future. Lack of foresight will cause a huge problem. Rising raw material costs along with Rubbermaid’s operational problems will impair the whole newellization process. Rubbermaid has very sour relationships with their clients and Newell will have an extremely difficult time fixing those relationships. If the two companies merge, only investors or individuals who follow business news will know that these two companies are one. The average customer will still know of Rubbermaid as Rubbermaid. I feel that Rubbermaid brings a lot of heavy baggage to the table and will hurt the smooth and exemplary business that Newell has attained.