If you see Bill Alldredge, CFO of Newell Co., in Wal-Mart, he’s more likely to be shopping for companies than for socks.
Newell, a Freeport, Illinois-based manufacturer and marketer with $2.9 billion in revenues, has acquired 16 businesses in the past five years, including 5 so far this year. Among those were Rolodex, the office-products maker; Kirsch, a manufacturer of drapery hardware and custom window coverings; and the office products business of Rubbermaid. What’s more, Newell buys only product lines that can be marketed to its current customers, the biggest of which is Wal-Mart.
Investors might wonder how much longer Newell can successfully pursue such a strategy, but Alldredge harbors no doubts. And neither do analysts.
Thirty years ago, Newell was a small manufacturer of drapery hardware with $15 million in sales. Since then, it has bought more than 50 businesses, making acquisitions the company’s primary growth vehicle. Newell has increased both sales and earnings approximately 20 percent per year during that time. Says Connie Maneaty of Bear, Stearns & Co., in New York: “None of the companies I follow has been as effective as Newell at integrating acquisitions. They have a very disciplined approach.”
Part of Newell’s advantage lies in having arrived very early to the party. As far back as the mid-1960s, when downtown variety stores predominated, Newell saw the writing on the wall. It began buying up suppliers, figuring that retailers would favor those that could achieve great economies of scale. Newell could position itself better by selling the expanding businesses more product.
“This company was ahead of many others in recognizing the increasing share of retail business being done by large, efficient mass merchants, and the challenges in doing business with such chains,” noted Marc Gerstein of Value Line, in New York, in a recent report. That vision still guides corporate strategy. “Few consumer products companies will be able to supply the sheer volume of goods these retailers require to keep their shelves filled,” states Newell’s latest annual report.
What’s more, Newell, for the most part, sticks to its knitting. Granted, its range of products is wide. It sells housewares, home furnishings, office products, and hardware and tools to volume purchasers ranging from Home Depot to Office Max and the warehouse clubs. But all acquisitions have been of branded, staple product lines– market leaders, such as Levolor window treatments, Anchor Hocking glassware, and Mirro cookware. Alldredge says that Newell rarely makes a purchase that doesn’t work.
“We stay pretty close to the stuff we know,” he explains. “It’s the same customers; the same kinds of products, all low-ticket, consumer durables; and the same low-tech manufacturing content.”
Newell’s minimum acquisition goal is to buy at least 10 percent of its prior year’s sales every year. Lately, it’s done more (see chart, below). Because of its discipline, Newell knows how to add value. For example, an acquiree may have been too small to compete successfully in a consolidating market. Perhaps it lacked the resources and expertise to track customer service levels. Newell’s systems can improve customer service and relationships substantially. Its advanced technology allows it to ship 98 percent of all orders within three days.
The company has also been among the pioneers in electronic data interchange (EDI), which links a retailer’s computer to its own. Purchase orders, invoices, and payments can then be transmitted–reducing errors, shipping lead times, and clerical processing. The system also enables Newell to check a customer’s supply of its products and to send additional goods as required, eliminating out- of-stocks while meeting just-in-time demands.
Acquisition candidates must have the potential to get to at least 15 percent operating margins within a couple of years. “Most acquisitions are a long way below that,” says Alldredge. “But Newell is very good at enhancing underperformers. We get a lot of improvement in earnings per share from doing that.”
Example: When Newell acquired Stuart Hall in 1992, the paper-based office-and- school- supplies maker operated in two antiquated buildings, with a distribution center and several warehouses located elsewhere. Newell consolidated Stuart Hall into one facility, cutting total space from 1 million to 500,000 square feet. Operating income more than doubled in a couple of years.
The company refers to its fix-up process as “Newellization.” But that’s really just its name for consolidation. Newell’s credit and accounts receivable operation, for example, serves all the businesses. Divisions don’t even have bank accounts. “We just plug new acquisitions into our system,” says Alldredge. “It gives us control advantages, because we are using a common language for all 20 operating businesses,” and the centralized structure is a “great advantage in achieving initial improvements in profitability.”
Centralization also leaves operating people free to focus on operating issues. In contrast to many companies, the acquisition team is made up of just two people, Alldredge and chief executive officer William P. Sovey. Incentives help, too. “At the divisional level, managers have a heavy financial incentive that’s based on only their performance– not that of other divisions or the company as a whole,” explains Alldredge.
The system is based on return on assets rather than sales, although ROA goals vary each year and by product line. Jim Lucas, an analyst for NatWest Securities Corp., in Baltimore, observes: “Newell uses return on assets and not return on sales to emphasize to managers: Play with the hand you are dealt. Manage your business with the assets you have today.”
There is a direct correlation with sales growth, however. If you manage the assets properly, Lucas notes, sales growth will come. Similarly, if your sales growth isn’t profitable, 9 times out of 10 you won’t achieve your return on assets, the analyst adds.
Not that every Newell purchase has met expectations. Maneaty of Bear, Stearns points out that the company made several acquisitions within a very short period, starting with the Levolor purchase in 1993. “There was a lot going on at once,” she explains. “Instead of getting to a 15 percent operating margin in two years, I think they’ll get to the full 15 in 1998.”
Still, Alldredge sees no end in sight for the winning formula. The company hopes to grow sales by at least 15 percent per year, with about two-thirds of that continuing to come from acquisitions and one-third from internal sources. It also projects 15 percent growth for earnings.
PAY AS THEY GO
To be sure, Newell has averaged 26 percent debt-to-total-capital over the past 10 years, and this year’s acquisitions have pushed leverage to 47 percent. Alldredge hopes to pull the average down to “around 40 percent” by the end of the year. But this won’t necessarily involve a shutdown of the acquisition pipeline. The company generates in excess of $200 million in free cash flow every year. “And that will support a lot of acquisitions,” notes the CFO. Lucas of NatWest agrees. “As they bring the operating margins up on newly acquired businesses, they generate a lot of excess cash,” he says. “This, in turn, makes the acquisitions pay for themselves in some cases.”
Eventually, Newell may range more widely than it usually does for acquisitions. “We have done that periodically, and it has been a very successful tactic for us,” says Alldredge, citing Newell’s 1993 purchase of Goody Products, which makes hair accessories. And he has no doubt that the company can effectively Newellize such newcomers. “We don’t see any limitations on our ability to do that,” he says.