A Merger Made in Maryland?

At long last, after several previous attempts, it's official: Stanley Works (NYSE: SWK  ) will buy Black & Decker (NYSE: BDK  ) . Now comes the hard part: Pinning a valuation tail on this new corporate donkey ... and deciding whether you should buy it.

Here's the tail ...
Here's what we know about the deal so far, based on public information about our two protagonists, and a few of their peers in the Tools & Accessories industry:

Stock

Annual Sales

Profit Margin

Annual profit

Stanley Works

$3.85 billion

4.5%

$181 million

Black & Decker

$4.85 billion

2.9%

$142 million

Danaher (NYSE: DHR  )

$11.2 billion

10.6%

$1.19 billion

Snap-On (NYSE: SNA  )

$2.48 billion

6.3%

$156 million

Lincoln Electric (Nasdaq: LECO  )

$1.98 billion

5.1%

$100 million

Toro

$1.58 billion

4%

$63 million

Simpson Manufacturing

$0.60 billion

2.8%

$17 million

Data from Yahoo! Finance based on trailing 12 months. Note that the numbers do not exactly match company estimates, presumably because the situation is in flux, and revenues are falling.

So as a result of this merger, the new "Stanley Black & Decker" (SBD) will boast about $8.7 billion in combined annual revenues, making it the second biggest player in this market. Profits-wise, too, SBD will play second fiddle to Danaher, netting about $323 million. However, if you ask the companies' management, merging the two shops should yield $350 million in annual cost savings, adding "approximately $1.00 per share" to the bottom line.

How long's the tail?
"$1 per share." That's an interesting number, and it deserves clarification. First, the anticipated bottom-line boost won't arrive in full until the third year post-merger. Second, the "per share" qualifier raises the question: Just how many shares are we talking about here?

Stanley has 80 million shares of its own. It's issuing 1.275 new Stanley shares to replace each of Black & Decker's 59.5 million. Result: 156 million shares total. A $1-a-share profit improvement therefore presumes roughly $156 million in extra profit dropping to the bottom line.

And does it wag?
Add this to the two firms' current earnings, and we're looking at perhaps $480 million in profits in three years' time. Matched against the combined firm's presumed market cap of roughly $7.75 billion based on yesterday's close, this works out to a valuation of 16 times future earnings.

Right off the bat, that seems a high price to pay for a couple of firms (or one coupled firm) with single-digit growth rates. All the more so given that even this valuation depends largely on the expected cost savings materializing. Is it worth the risk?

Take a look at past high-profile merger participants Time Warner (NYSE: TWX  ) and Ford (NYSE: F  ) , and how their tie-ups with AOL and Volvo worked out. Then get back to me.

Got a better reason to love it or hate it? Post that below.

Fool contributor Rich Smith doesn't own shares of the companies mentioned. The Fool owns shares of LincolnElectric Holdings, which is a Motley Fool Inside Value recommendation. Toro is a Motley Fool Hidden Gems recommendation. The Motley Fool's disclosure policy has the best tool kit ever.


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Related Tickers

10/1/2014 4:00 PM
SWK $87.50 Down -1.29 -1.45%
Stanley Black & De… CAPS Rating: ****
BDK.DL $74.05 Down +0.00 +0.00%
The Black & Decker… CAPS Rating: ***
DHR $74.58 Down -1.40 -1.84%
Danaher Corp CAPS Rating: *****
F $14.59 Down -0.20 -1.35%
Ford CAPS Rating: ****
LECO $67.88 Down -1.26 -1.82%
Lincoln Electric H… CAPS Rating: *****
SNA $118.53 Down -2.55 -2.11%
Snap-on, Inc. CAPS Rating: ****
TWX $73.71 Down -1.50 -1.99%
Time Warner CAPS Rating: ***

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