ANALYSIS

OF
NEWELL’S ACQUISITIONS

Justin Makil, Kenny Zee, Theresa Wu, Vaid Ramachandran

Strategy II - Seamans
Strategy II - Seamans Justin, Kenny, Theresa, Vaid

Current Boundaries of Newell

To evaluate Newell’s acquisitions of Calphalon and Rubbermaid, one must first
understand the boundaries of the company and determine if there were external or internal
factors that may have motivated Newell to extend its boundaries. Next, a detailed analysis of the
costs and benefits of each acquisition must be completed. If Newell can realize benefits from the
acquisition that outweigh the costs, then the acquisition will be a good decision.
Newell is a broad-range manufacturer of basic home and hardware products. The primary
buyers of Newell’s products are large retailers such as Wal-Mart and Kmart. Therefore, Newell’s
focus is to manufacture high volume, low cost products that provide the company significant
economies of scale. Newell acquires companies (Exhibit 3) with a similar product profile to
their own: low-technology, non-seasonal, non-cyclical, non-fashionable products that volume
retailers can sell throughout the year.
External Inducements
Beginning in the 1970s, the emergence of large-scale mass retailers changed the nature of
the US retail history. This resulted in considerable power over suppliers in pricing and
scheduling, which pushed the suppliers to respond with greater efficiencies. All aspects of the
supply chain had to be optimized, which motivated Newell to develop its EDI system for
transmitting purchase order, invoices, and payments directly to retailers. This allowed retailers to
maintain minimal stock levels in line with actual sales and compete with competitors on shelf
space. Moreover, Newell supplied 5 of the top 10 US retailers (Exhibits 5 and 7). Newell’s
established relationships and distribution channels will allow the company to leverage new
acquisitions to sell more products and gain market share. Additionally, research showed that
companies with over $10B market cap commanded higher price and earnings multiples.
McDonough thought it was critical for Newell to reach this level of capitalization, which may
have influenced his decision on acquisitions.
Globalization was always part of the company’s vision, and Newell was committed to
follow its customers overseas, especially when large retailers such as Wal-Mart became more
global. By 1997 non-US sales made up 17% of Newell’s total revenue. Newell wanted to
continue expanding internationally in order to serve its suppliers from a global perspective.
Feeling the urge to expand internationally, Newell actively acquired companies that allowed it to
enter into foreign markets starting in the mid 1990s.

Internal Inducements
Facing an increase in power of its primary customers, Newell felt the need to develop and
buy stronger brand names to make the company “visible,” which would attract more attention
and protect the company’s shelf space at different price points for each product category. As a
result, the company targeted companies that manufactured brand-name staple products that
ranked first or second in market share.
Recent organizational changes within Newell have helped to facilitate integration of
acquired companies. Over time, Newell has split the organization into separate divisions. Instead
of operating through a fully centralized system, each division was responsible for its own
manufacturing and marketing while administrative, legal, and treasury systems were centrally
controlled. Newell’s standard system consisted of three subsystems: an integrated financial

Newell Analysis 2
Strategy II - Seamans Justin, Kenny, Theresa, Vaid

system, a sales order and processing system and a flexible manufacturing system. Company
executives were able to centralize and consolidate information from each division into one single
corporate system.
Through acquisitions, Newell will not only be able to create value by leveraging its
strength in streamlining operations but also improve cost savings through economies of scale and
improve profitability. The company’s objective was to redirect acquired businesses to focus on
their core product while aligning their systems and processes with Newell’s. The acquired
company would become a more efficient supplier within 6 to 18 months and begin to generate
more profit for Newell. Additionally, Newell could gain negotiation power over its suppliers
because of its product line expansion and possibly new distribution channels.

Calphalon
Cost Savings:
Newell had great success with their “Newellization” process, which included an
integrated financial system, sales/order processing system, and flexible manufacturing system.
From Calphalon’s financial statement (Exhibit 11), net sales increased from $35.7 million to
$101.9 million between 1992 and 1997, an increase of 185% while cost of goods sold increased
by 306% during the same period. Newell had a strategy of acquiring firms that had operating
margins of less than 10% and by calculating the operating margin for Calphalon (Exhibit A),
Calphalon had an operating margin 4.42% around 1997. Acquiring Calphalon which had such
low operating margin, enables Newell to achieve substantial cost savings by using its expertise to
bring discipline to Calphalon’s financial, organization and manufacturing businesses. Newell is
one of the leaders in the houseware industry and owns cookware brands such as WearEver,
Panex, and Mirro. In acquiring Calphalon, another cookware company, Newell could create
synergies by eliminating duplicate activities and improving economies of scale in purchasing,
resulting in additional cost savings. With their end goal of efficiencies, Newell’s focus was on
profit growth or profitability rather than sales growth and Calphalon with their low operating
margins and high cost of products sold, would be a good candidate for cost savings.
However, Calphalon had an upper-end cookware product line that required a different
sales strategy from Newell’s other products. From Exhibit 11, SG&A expenses comprised 25%
of sales for Calphalon, which was significantly higher than Newell’s other products because of
the specialized sales and marketing strategy that consisted of store demonstrations and book
signings. As a result, there may not be significant savings in SG&A through this acquisition.

Revenue Enhancements:
Shelf space was considered one of the most important assets in an acquisition by Newell.
The addition of Calphalon broadens Newell’s access to additional market segments. In the
cookware industry, Newell had products like Mirro which catered low-mid end customers and
WearEver which catered mid-upper end customers. The addition of Calphalon, which catered to
upper end customers, allows Newell to provide a complete range of offering at all price points
helping them protect it from new entrants and providing them an ability to achieve “critical
mass”. Their recent purchase of a high end frame manufacturer in Holson-Burnes indicated that
by reaching critical mass, significant revenue enhancements can be obtained through greater
operating margins and managing product flows.

Newell Analysis 3
Strategy II - Seamans Justin, Kenny, Theresa, Vaid

Looking at the top customers of Newell (Exhibit 5) and comparing with the top
customers of Calphalon ( Exhibit 12), the stores that Newell and Calphalon currently supply are
complementary to one another. Thus, the acquisition of Calphalon broadens Newell’s access to
department stores and specialty store markets providing additional distribution channels. For
example, Calphalon already had a “Kitchen Essentials” line specifically for Target. Target was
one of the top customers for Newell and by acquiring Calphalon, Newell would be able to build
its presence in Target’s circulars as well as their gift registry program(Club Wedd) that had
excess of 400,000 members. In addition, Calphalon provides Newell with a strong brand name
that could help counter the increasing market power of Newell’s primary customers extend
Newell’s cookware product line to the top of the market. Newell could then compete
“WearEver” as the best brand among mass merchandisers.

Process Improvements:
The significant process improvement that Calphalon could bring into Newell would be to
share its pull strategies. Newell was already moving in the direction of high-end frames and
office products, which required strong connections to the end customer. In addition, Calphalon
was strong in building brand equity with customer relationships and this could help Newell with
its relationships with mass retailers as well.

Risks:
There is a greater risk possible that Newell may not be able to successfully implement its
“Newellization” process in Calphalon due to the fact that Calphalon runs its business
substantially different than Newell. SG&A expense is significantly different for Calphalon than
for Newell due to the way Calphalon markets its products with in store demonstrations, book
signings, and managed events. Also Calphalon is a much bigger company compared to other
previous Newell’s acquisitions and has been in the industry a longer time, and hence there is a
risk that a change of culture during the integration could damage the company synergy leading to
further fall back.
From Exhibit 6, Cookware and bakeware represented Newell’s top product categories,
and by adding Calphalon in the same category, there is a possibility that Newell could
cannibalize its own products. Although variety is always good, customers would not buy a set of
products of the same category such as cooking pots. Cannibalization would lead to Newell’s
overall earnings in the long run to be stagnant even though they acquire better known brands
Finally, Newell’s strategy is to manufacture high volume products that appeal to mass
retailers, whereas Calphalon does not offer high volume products that are priced at a level that
would appeal mass-retailers and hence this shift in Strategy could be another risk.

Fit with Corporate Strategy:

Newell’s strategy was to manufacture high volume products that appeal to mass retailers.
They pursued a clear cost-advantage strategy through economies of scale and also placed a
premium on their reliability and service quality. Calphalon does not offer high volume products
that are priced at a level that would appeal mass-retailers. Newell’s strategy with Calphalon was
to grow through profits rather than sales and focusing on operating efficiencies. In contrast,
Calphalon catered to an upper-end market where brand name and customer relationships were
the primary focus. Acquiring Calphalon would result in a significant shift in Newell’s corporate
strategy for its cookware product line.

Newell Analysis 4
Strategy II - Seamans Justin, Kenny, Theresa, Vaid

Rubbermaid
Cost Savings/Process Improvements:
Newell’s key strength was its ability to acquire undervalued companies, optimize their
inefficiencies and integrate them into Newell’s operations. This allowed the company to add
product and service value to its customers and greatly reducing its own productions costs.
Purchasing Rubbermaid would provide Newell with substantial cost saving potential. Similar to
Newell, Rubbermaid manufactured high-volume products. As result, Newell will be able to
leverage its current resources and infrastructure to integrate with Rubbermaid. Consequently,
eliminating duplicate manufacturing and shipping to its clients. This will provide Newell with
the opportunity to further produce with economies of scale, therefore, reducing the firm’s
production and marginal costs. Newell targeted companies that had less than 10% operating
margin for acquisition with the objective of increasing it to 15%. Rubbermaid’s operating
Margin in 1997 was 9.75% as a result; this purchase was directly in line with Newell’s approach.

Revenue Enhancements:
The purchase of Rubbermaid would provide Newell with several revenue enhancements.
First, it would eliminate a key competitor. Second, it would allow Newell to increase its market
capitalization to over $10 billion. Based on market research, this would allow Newell to
command a higher price to earning multiple, which would garner more attention to Newell and
its products make the company more competitive within the industry. Plastics were not a part of
Newell’s product offerings (Exhibit 10) prior to purchasing Rubbermaid. The integration of
Rubbermaid would allow Newell to enter into additional foreign markets and broaden its product
scope, which would provide the firm more leverage when marketing products to their retail
customers. Acquiring a strong brand name in Rubbermaid would allow Newell to occupy more
shelf space from some of the company’s existing top customers and provide Newell with more
marketing and sales opportunities. In 1993, Fortune magazine stated that Rubbermaid was the
most admired company in America. This is testament of the company’s brand recognition as it is
a nationally recognized company. Consequently, the purchase of Rubbermaid, can allow Newell
to expand its brand recognition, which can further lead to more sales and profit growth. In
addition, with Newell’s current reputation as one of the most efficient shippers in the market,
with the acquisition of Rubbermaid, many retailers can begin to regain its confidence in the
service of Rubbermaid products since its operations and shipment of products will become more
streamlined and efficient.

Risks:
When Newell purchased Rubbermaid, Rubbermaid’s performance had been declining.
Yet, Rubbermaid’s stock price increased between the spring of 1997, when merger talks first
began, until fall of 1998 (Exhibit 14), when Newell announced its purchase of Rubbermaid. As a
result, Newell purchased the company at a premium of 49% above the market price. The sale
price of $38.55 per share was higher than its stock price in 1992, when Rubbermaid was
performing at its peak under CEO Stanley Gult. Its Net Income in 1997 was $18.9m less than its
average net income from 1992 to 1997 (Exhibit 13). Rubbermaid’s management and operations
were not streamlined and the company had gone through a two iterations of restructuring and

Newell Analysis 5
Strategy II - Seamans Justin, Kenny, Theresa, Vaid

cost cutting. Clients were complaining about its poor service, particularly with its manufacturing
and shipping. Rubbermaid was also losing clients to smaller more efficient companies that were
able to sell at lower prices even with an increase in the cost of resin. Additionally, Rubbermaid
was Newell’s largest acquisition ever and it was surprising that McDonough “jumped at the
opportunity” and closed the deal in a matter of two weeks. This could imply that McDonough’s
decision to purchase Rubbermaid was based on emotion rather than properly evaluating the
company’s financials and making a more objective decision.

Fit with Corporate Strategy:

  Newell’s purchase of Rubbermaid in 1998 was in line with the company’s strategy to
broaden its product line, increase its brand recognition, improve its global presence from a
customer perspective, and boost its market cap over $10B. Most of the issues that Rubbermaid
faced such as slow shipping, weak customer service, and inefficient operations were areas that
Newell excelled in and turned around for other acquired companies. From its past acquisitions,
Newell demonstrated its ability to strip inefficiencies from acquired companies and successfully
integrate them as profitable businesses within the firm.

Conclusion

Newell Analysis 6
Strategy II - Seamans Justin, Kenny, Theresa, Vaid

Exhibit A

Calphalon 1997 1996 1995

Net Sales $101.90 $100.00 $81.90
COGS $71.10 $54.60 $44.30
S, G&A $26.30 $41.70 $31.20
Operating Margin ** Expression ** Expression ** Expression
is faulty ** is faulty ** is faulty **

Rubbermaid 1997 1996 1995

Net Sales $2,399.70 $2,355.00 $2,344.20
COGS $1,748.40 $1,649.50 $1,673.20
S, G&A $416.70 $432.10 $402.60
Other $0.70 $28.40 $172.70
Operating Margin ** Expression ** Expression ** Expression
is faulty ** is faulty ** is faulty **

Operating Margin = (Net Sales - COGS - S, G&A - Other) / Net Sales

Newell Analysis 7