Quest Begins for Immaculate M&A Conception

If an instrument existed to measure the direction of political winds, it would be in Stanley Black & Decker’s tool kit. The $18 billion maker of circular saws, screwdrivers and corded garden cultivators kicked off the year by drafting a blueprint for deals in the Donald Trump epoch with its purchase of the Craftsman brand from Sears.

Consider the press release for the transaction, announced five days into 2017. The word “jobs” appears three times, as in: “We intend to expand our manufacturing footprint in the United States. This will add jobs in the United States, where we have increased our manufacturing headcount by 40 percent in the past three years.” Absent are the words: savings or cuts.

This is the dawning of the era of the immaculate M&A conception. To keep corporate matchmaking booming, companies will have to avoid running afoul of Trump’s obsession with preserving and creating American employment. That means “synergies” are out and woollier justifications like “transformation” and “adjacencies” will be in. Shareholders may pay the price.

The $900 million Craftsman deal may prove an exception, in that it manages to stack up financially for investors without having to fire workers. The company’s market value has increased by some $425 million since announcing the agreement with Sears Holdings, which allows Stanley Black & Decker to pay much of the consideration in increments, and mitigates exposure to the struggling retailer.

Indeed, the Craftsman deal is like a mirror image of the 2009 merger that created the New Britain, Connecticut-based tool giant. In announcing that $8.4 billion union, the companies bent over backwards to highlight the tangible financial benefits that would accrue to shareholders.

For instance, the word synergy, both singular and plural, appeared seven times in the press release. In one instance, Stanley Black & Decker said: “The transaction is expected to create tremendous value for shareholders of both companies through the realization of significant cost synergies, operating margin expansion and enhanced growth opportunities.” Costs – as in those to be cut – popped up eight times.

In the end, Big Tool squeezed out $500 million of savings, well above the $350 million the companies pledged on the day they consummated the act. In a column at the time, I called it “something like the perfect deal.” Investors agreed: the company’s stock price has quadrupled since then. To achieve those savings, Stanley Black & Decker shoved some 4,000 of a combined 38,000-person workforce the door.

All that occurred before Trump was elected on a pledge to keep and attract good manufacturing jobs, like the ones Stanley Black & Decker is promising with Craftsman, in the United States. It’s not a stretch to predict the former reality-TV star will keep using the bully pulpit of the White House to name and shame companies that cut jobs for the sake of the bottom line.

Even before occupying the Oval Office, Trump has been using Twitter to bludgeon the likes of United Technologies, Ford Motor and other enterprises to sustain employment in the United States. Every board of directors and chief executive will now have to plan for the possibility of a brand-bashing barrage, or worse, from the commander in chief.

That may not necessarily kill the mergers business, but will make it tougher. Speaking at a Breakingviews Predictions Panel event last week, Peter Weinberg, co-founder of the boutique advisory firm Perella Weinberg Partners, said job-crunching deals will be “challenging.” He cited the attempted union of Office Depot and Staples, which envisioned massive cost cuts.

Trump’s laser focus on employment – arguably the message that got him elected – means acquirers will be on a quest for other justifications. “You don’t need to have a lot of imagination to assume cost synergies,” Weinberg said. At the same time, shareholders generally don’t give credit to companies proffering enhanced future sales from a merger. “These issues are fighting one another a little bit,” Weinberg added.

The anti-synergies zeitgeist may offer AT&T some hope that its $85 billion acquisition of entertainment conglomerate Time Warner has a chance. One reason the telephone company’s shares took a beating before U.S. voters elected Trump into office was the absence of any overlap from which to harvest cuts and enrich the bottom line.

Trump has cast doubt on the deal, but AT&T boss Randall Stephenson met with the president-elect last week in Trump Tower. A spokesman for the president-in-waiting said the talks focused on job creation, not Time Warner. The lack of any cuts from the deal may now prove a blessing for Stephenson, if not his shareholders.

Expect more transactions to be pitched as transformational, though that is often a reflection of the deteriorating state of the acquirer’s business, as in the AT&T-Time Warner example. Similarly, purchases of companies focused on specific manufacturers, such as pharmaceutical compounds or consumer products, by larger entities with strong sales and marketing machines, will persist. And there may be more buying of so-called “adjacencies,” or tangential businesses, as when retailer Urban Outfitters bought a pizza chain.

Lastly, there may be more takeovers of American companies by foreign rivals eager to build beachheads in the world’s richest market. That’s what Japan’s Takeda Pharmaceutical did a few days into the year with the $5.2 billion purchase of Ariad, a biotechnology firm. Takeda spent 75 percent more than Ariad’s investors thought it was worth and Takeda’s owners are about 4 percent poorer for it. That will hardly be the worst outcome in the no-synergies age.

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