In 1998, Newell Company set out to expand its revenue base through strategic acquisition of two major companies. Newell's CEO at that time was John McDonough, who was in charge of positioning the publicly traded company to an improved revenue base through differential product mix. The idea to broaden Newell Company through acquisition was an energetic and very optimistic strategic initiative to increase shareholder value in a shortened period of time. Unfortunately, the company compromised its fundamental requirement for product quality while removing a once strong presence of an intangible human resource pool.
Newell Company chose to diversify their product line for the simple reason to improve shareholder value. This is always the priority for a publicly traded firm. However, through acquisitions, several careful considerations are required to ensure stability along several factors. These include tedious movement of manufacturing tools, capital equipment allocation, and the aforementioned intangibles that are built within an acquired company.
These intangibles are not otherwise quantified in the financial reporting mechanisms. As these resources move under the acquiring firm, there is potential for many long-lasting problems, which will grow exponentially over time, and pose serious ramifications for the company.
Below, the figure isolates the intent of Newell Company to add value of diversification through acquisition. These also isolate the failures of Newell Company by the lack of due diligence and decision making by the executive staff.
"Using a single or dominant business corporate level strategy may be preferable to seeking a more diversified strategy, unless a corporation can develop economies of scope or financial economies between businesses, or unless it can obtain market power through additional levels of diversification. These economies and market power are the main sources of value creation when the firm diversifies."
Edgar A. Newell purchased a bankrupt...