TOWSON -- Nolan D. Archibald is president and chief executive of Black & Decker Corp., the biggest power tool company in the world. Last year, he decided to make his company even bigger, not by taking bite-size chunks out of his competitors' market share, but by undertaking the single largest acquisition in the company's history: the purchase of Emhart Corp.
Like most other mergers that were undertaken then, Black & Decker borrowed heavily to finance its purchase of the consumer and industrial conglomerate -- about $3.8 billion in all. And at the time, it looked like an ideal way to double the company's size and increase its earnings.
But the grim reality is that what now is making life difficult for Towson-based Black & Decker is the same problem that has brought so many other debt-laden companies to their knees: Somehow, as if all at once, the economy shifted.
One day it was an economy in a growth mode, providing more jobs, more buildings, more bonuses and more BMWs than anyone thought possible. Plastic could buy anything, investment bankers could work miracles and no deal was too big to finance. Then times changed -- the thirst for acquisitions disappeared, capital dried up and the stock market turned its back on companies saddled with debt.
If junk bonds, leverage and megadeals were the story of the 1980s, then assuming the consequences of those strategies is the story of the 1990s.
In the last five years, the amount of debt carried by U.S. companies has almost doubled to about $2.1 trillion, according to figures compiled by the Federal Reserve Board.
"It's approaching a record relative to cash flow," said Nancy Lazar, senior vice president with C.J. Lawrence, Morgan Grenfell Inc. "Given the rise in bankruptcies, companies aren't handling it very well."
It's too early to tell whether the acquisitions made by companies like Black & Decker were brilliant bets on the future or serious miscalculations that will haunt them for years to come. Much depends on how the deals were financed, the industry in question and the nimbleness of management.
What is clear is that decision making and nearly every aspect of corporate life can change dramatically when huge sums of debt are thrown into the equation, as Black & Decker has discovered.
In one stroke, the power tool maker went from being fairly light on debt to a company with a big-time mortgage. This year, Black & Decker owes $350 million in interest expense -- about 70 percent of its operating income -- and almost $1 billion has to be paid off by June, money the company has to come up with by selling the parts of Emhart's business it doesn't want.
Unfortunately, that part of the plan hasn't gone as scheduled, making it impossible for Black & Decker to meet its timetable for selling assets. A soft market for defense-related companies has made it difficult to sell Emhart's Planning Research Corp. of McLean and Advanced Technology Inc. of Reston. Sales of those companies probably would have added up to at least $500 million that would have gone to paying off debt.
Disappointment has showed up in the company's stock price. In the past few weeks, Black & Decker's shares, which were trading in the mid-20s before the acquisition, thudded to about $11 a share, a drop some read as a signal that the company needs a lot more than a new line of Dustbusters to put it back on sound footing.
"Wall Street has not taken a lot of time to understand our leveraged situation," said Stephen F. Page, executive vice president and chief financial officer of Black & Decker. "When you get painted with a broad, highly leveraged brush, people don't take time to probe the nature of your debt."
So far, the difficulties haven't forced the company to miss any debt payments on the $2.7 billion deal. And Archibald remains the consummate optimist, convinced that his acquisition of Emhart was a smart one.
"I don't know of anyone who doesn't think this is good for Black & Decker in the long run," Archibald said. "We knew it would affect short-term profitability. We were willing to take a half-step backward to take two steps forward."
Part of Emhart's attractiveness to Archibald, who had unsuccessfully pursued two other major companies, was the prospect of adding nationally known brand names such as Kwikset locks and Price Pfister plumbing products to the Black & Decker line of tools. Archibald also believed that Emhart's products would cushion any sales downturns in the traditional Black & Decker small appliance and power tool lines.
"We had all our eggs in two baskets -- power tools and appliances," he said.
To cope with the ensuing debt, the company has put itself on a puritanical regimen of cost cutting, consolidations and penny-pinching.
By most management standards, Black & Decker already was considered lean. It had just completed a top-to-bottom restructuring prior to the Emhart acquisition. Because it worked before, Archibald again plans to "cut and build" his way out of debt -- reduce costs, but pay attention to essentials such as engineering, marketing and sales -- a delicate balancing act at best.
"Mostly it's cost reduction and management improvements," Archibald said.
First off, the goal is to cut expenses by $100 million by early next year, and the company is well on its way to doing just that. Almost immediately, the Emhart headquarters building in Farmington, Conn., was judged "redundant" -- a business euphemism for something no longer necessary. It was sold, 220 jobs were cut and some of Emhart's newer, nicer office furniture turned up in Towson. Annual savings: $35 million.
Black & Decker employees have not been laid off but they are doubling up on job titles and duties. Tax and trade counsel Natalie Shields used to handle the international tax planning for Black & Decker. Emhart had two people of its own working in the same area.
Now Shields does the work of three for a "company that is twice as large and has twice as many subsidiaries." That means her hours have increased by about 25 percent, but her pay has not. She has reset her priorities to deal with big cases, while less significant ones get farmed out to various divisions.
Between Black & Decker and Emhart, there used to be three plants in Canada. Now, there is one; Emhart's two operations were consolidated and moved into vacant space at Black & Decker's plant in Brockville, Ontario. In the end, 150 employees lost jobs in Canada. Annual savings: $5 million to $6 million. A similar consolidation is going on in Brazil.
Purchasing and transportation have also been targeted. Inventory levels are being watched more closely. Cash management has gotten tighter and managers have been told that their "incentive" pay will be based on how well they manage their working capital. Capital expenditures have been cut to 3 percent to 4 percent of sales, down from double that in the early 1980s, by making more use of automation.
For example, the company recently spent $1.4 million on a new assembly line for its Kwikset locks, a brand name Black & Decker inherited from Emhart. Return on that investment is expected to be $400,000 annually as the process of setting the tumblers on the locks becomes fully automated, significantly reducing the number of people needed to do the job.
Archibald has not cut research dollars but is redirecting the money to hit only those products with the highest potential return. A new sales force is being added in the power tool accessories division, an area of the business that is growing. Advertising dollars have not been trimmed, a decision that reflects Archibald's philosophy that Black & Decker must throw its support behind the products it brings out.
For all the difficulties the debt has presented, it could be worse.
The company did not use high-risk, high-yield bearing junk bonds to finance its purchase of Emhart. The interest rate on its bank loans is around 10 percent, far lower than many companies in similar positions.
Buyers, mostly foreign ones, have come forward to purchase a half dozen Emhart businesses. The company is ahead of its own schedule for cutting expenses and thus far it has met its bankers' schedule for repaying its debt.
The company is ready to make a $150 million cash payment by the end of December; another $250 million is due in March and by next June, another $50 million. In April, Black & Decker has to start making quarterly payments of $31 million from its cash, which will increase through July 1997, the target date for paying off the loan. The $31 million payment this spring is about as much as the company had in earnings last year.
Despite the rigorous repayment schedule, the company has managed to make progress on several important fronts.
"Their operating margins have been quite good, their earnings are over our projections and people are impressed with their ability to keep the lid on costs," said R. Bentley Offutt, an analyst with Offutt Securities in Baltimore.
There also is confidence among many employees and financial analysts that Archibald, 47, a former college all-America basketball player, will pull it off. A highly disciplined and energetic manager, he has a track record for making austerity measures work. His earlier turnaround at Black & Decker took the company from a loss of $160 million in 1985 to record profits of $97 million three years later.
"It's a much stronger Black & Decker," said Franklin Morton, an analyst with Alex. Brown Inc. in Baltimore. "It's a very different company. Manufacturing is more efficient. The product line is more competitive. They are better at marketing."
There are those who still pose the question of whether the investment in Emhart was worth it. Did the company bet too much on the future and take on too much debt to be a bigger player in the marketplace?
"They would have been better off not making the acquisition," Offutt said. "The company wouldn't be faced with selling off decent assets and it could focus its full attention on the Black & Decker name."
Anil K. Gupta, an associate professor at the University of Maryland College of Business and Management, said research shows that mergers do create value, but mostly for the shareholders of the company that is purchased. In this case, it netted a 25 percent premium for the old Emhart shareholders who got $40 a share.
"Is society better off because Black & Decker is stronger and Emhart is nonexistent?" said John F. Budd Jr., former senior vice president of public relations at Emhart. "Before you had two competitive, dynamic companies. Is less more? It's all part of this unreal world that goes on."
Archibald insists he wouldn't do anything differently, even knowing what he knows now about the state of the economy and the weak market for selling companies. To prove his point, he recently bought 20,000 shares of Black & Decker for his own portfolio.
Said Archibald, "I think it's the best buy around."