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Harvard Business Review

Building deals on bedrock

Don't use deals to change your company's foundation. Use them to do what you do better.

  • September 01, 2004
  • min read


Building deals on bedrock

The full version of this article is available on Harvard Business Online (subscription required).

The Idea in Brief

Whether they like it or not, most CEOs recognize that their companies can’t succeed without making acquisitions. It has become virtually impossible, in fact, to create a world-class company through organic growth alone. Most industries grow at a relatively slow pace, but investors expect companies to grow quickly. Not everyone can steal market share, particularly in mature industries. Sooner or later, companies must turn to acquisitions to help fill the gap.

Yet acquisitions can be a treacherous way to grow. In their bids for new opportunities, many companies lose sight of the fundamental rules for making money in their industries. Look at what happened to manufacturing giant Newell. When Newell’s top managers approached their counterparts at Rubbermaid in 1999 about the possibility of a merger, it looked like a deal from heaven. Newell had a 30-year track record of building shareholder value through successful acquisitions of companies like Levolor, Calphalon, and Sanford, maker of Sharpie pens. Rubbermaid had recently topped Fortune ’s list of the most admired U.S. companies and was a true blue-chip firm. With its long record of innovation, it was very profitable and growing quickly.

Because Newell and Rubbermaid both sold household products through essentially the same sales channels, the cost synergies from the combination loomed large. Newell expected to reap the benefits of Rubbermaid’s high-margin branded products—a range of low-tech plastic items, from laundry baskets to Little Tikes toys—while fixing a number of weak links in its supply chain.

Partner David Harding explains why major deals make sense only when they reinforce a company's existing basis of competition or when they help a company make the shift, as the industry's competitive base changes.

Rubbermaid’s executives were encouraging: As long as the deal could be done quickly, they said, they’d give Newell an exclusive right to acquire their company. Eager to seize the opportunity, Newell rushed to close the $5.8 billion megamerger—a deal ten times larger than any it had done before.

But the deal from heaven turned out, to use BusinessWeek’s phrase, to be the “merger from hell.” Instead of lifting Newell to a new level of growth, the acquisition dragged the company down. In 2002, Newell wrote off $500 million in goodwill, leading its former CEO and chairman, Daniel Ferguson, to admit, “We paid too much.” By that time, Newell shareholders had lost 50% of the value of their investment; Rubbermaid shareholders had lost 35%.

What went wrong? It’s tempting to brush off the failure as a lack of due diligence or an error in execution. Admittedly, when Newell looked beneath Rubbermaid’s well-polished exterior after the deal closed, it discovered a raft of problems, from extensive price discounting for wholesalers to poor customer service to weak management. And Newell’s management team, accustomed to integrating small “tuck in” deals, greatly underestimated the challenge of choreographing a merger of equals.

Read the full article on Harvard Business Online.


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