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Chapter 7 Mergers & Acquisitions 1 Mergers, Acquisitions, and Takeovers Merger Two firms agree to integrate their operations on a relatively co-equal basis Chrysler and Daimler (1998) Chrysler and Fiat (2014) JP Morgan Chase (2000) Acquisition Controlling interest to make acquired firm a subsidiary business within its portfolio Cisco Chase (Chemical Bank 1996, Banc One 1998) (Hostile)Takeover Target firm did not solicit the acquiring firm’s bid AOL and Time Warner 2 Acquiring firms About zero return on the average Too high premium (bidding war, overconfidence) Acquired firms(被兼并) Often earn above-average returns Why? Do They Work? So Why Are Acquisitions Done? Bigger firms with more resources and capabilities may achieve increased market power Can sell goods or services above competitive levels Can drive costs below those of competitors Horizontal and Vertical Acquisitions 4 市场势力是指卖方(seller)或买方(buyer)不适当地影响商品价格的能力。对于卖方来说，市场势力也就是卖方的垄断倾向。 Horizontal Acquisitions Increase Market Power Acquisition of a firm in the same industry (bigger, more resources): Cost-based synergies Buyer power Economies of scale Revenue-based synergies Supplier Power Monopoly-like advantages Airlines (US Airways/American) Cable (Comcast/AT&T Broadband, Charter Communications wants Time Warner and Brighthouse) Horizontal Acquisitions 5 Acquisition of a supplier or distributor to the firm Increases a firm’s market power by controlling additional parts of the value chain How does this work? Horizontal Acquisitions Vertical Acquisitions Vertical Acquisitions Also Increase Market Power Oil firms: Drilling, refining, distribution (BP) Alibaba (China, internet shopping: Acquired firms doing payments and delivery Apple(stores) 6 Acquisitions To Overcome Entry Barriers Entry Barriers Factors associated with making it expensive and difficult for new firms to gain market access Economies of scale Cost leadership (buy competitor, larger firm) Differentiated products Differentiation (VW bought Bugatti, Bentley, Porsche, Ducati) Also often the reason behind cross-border acquisitions Cultural and political differences (need local knowledge and initial foothold in new market) PepsiCo and Wimm-Bill-Dann Foods OAO (2011) Santander and Polish Bank Zachodni WBK SA (2011) ChemChina and Pirelli (2015) 7 Acquisitions To Substitute For New Product & Capability Development Gain access to new products Increase speed to market (Cisco, ChemChina/Pirelli) Lower risk Internal development of new products is often perceived as a high-risk activity New firm with market-tested products Gain access to new capabilities Special technological capability (Cisco, ChemChina/Pirelli) A broader knowledge base But may reduce innovation/product development skills over the long run 8 Acquisitions To Change Portfolio of Businesses Both related and unrelated diversification strategies can be implemented through acquisitions Related tends to work ...

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Chapter 7 Mergers & Acquisitions 1 Mergers, Acquisitions, and Takeovers Merger Two firms agree to integrate their operations on a relatively co-equal basis Chrysler and Daimler (1998) Chrysler and Fiat (2014) JP Morgan Chase (2000) Acquisition Controlling interest to make acquired firm a subsidiary business within its portfolio Cisco Chase (Chemical Bank 1996, Banc One 1998) (Hostile)Takeover Target firm did not solicit the acquiring firm’s bid AOL and Time Warner
2 Acquiring firms About zero return on the average Too high premium (bidding war, overconfidence) Acquired firms(被兼并) Often earn above-average returns Why? Do They Work? So Why Are Acquisitions Done? Bigger firms with more resources and capabilities may achieve increased market power Can sell goods or services above competitive levels Can drive costs below those of competitors Horizontal and Vertical Acquisitions 4 市场势力是指卖方(seller)或买方(buyer)不适当地影响商品价格的能力。对于 卖方来说，市场势力也就是卖方的垄断倾向。 Horizontal Acquisitions Increase Market Power Acquisition of a firm in the same industry (bigger, more
resources): Cost-based synergies Buyer power Economies of scale Revenue-based synergies Supplier Power Monopoly-like advantages Airlines (US Airways/American) Cable (Comcast/AT&T Broadband, Charter Communications wants Time Warner and Brighthouse) Horizontal Acquisitions 5 Acquisition of a supplier or distributor to the firm Increases a firm’s market power by controlling additional parts of the value chain How does this work? Horizontal Acquisitions Vertical Acquisitions Vertical Acquisitions Also Increase Market Power Oil firms: Drilling, refining, distribution (BP)
Alibaba (China, internet shopping: Acquired firms doing payments and delivery Apple(stores) 6 Acquisitions To Overcome Entry Barriers Entry Barriers Factors associated with making it expensive and difficult for new firms to gain market access Economies of scale Cost leadership (buy competitor, larger firm) Differentiated products Differentiation (VW bought Bugatti, Bentley, Porsche, Ducati) Also often the reason behind cross-border acquisitions Cultural and political differences (need local knowledge and initial foothold in new market) PepsiCo and Wimm-Bill-Dann Foods OAO (2011) Santander and Polish Bank Zachodni WBK SA (2011) ChemChina and Pirelli (2015) 7 Acquisitions To Substitute For New Product & Capability Development
Gain access to new products Increase speed to market (Cisco, ChemChina/Pirelli) Lower risk Internal development of new products is often perceived as a high-risk activity New firm with market-tested products Gain access to new capabilities Special technological capability (Cisco, ChemChina/Pirelli) A broader knowledge base But may reduce innovation/product development skills over the long run 8 Acquisitions To Change Portfolio of Businesses Both related and unrelated diversification strategies can be implemented through acquisitions Related tends to work better Change firm scope Reduce a firm’s dependence on one or more products or markets Unattractive industries, mature products 9
Other Reasons for Acquisitions Managerial Opportunism Size drives TMT pay Size and complexity reduces employment risk Overconfidence Acquisitions Jaguar (1990) Aston Martin (1993) Land Rover (2000) Also transferred Lincoln and Mercury Ford: Acquisitions Premier Automotive Group Why Did Ford Make Those Acquisitions? Market power (cost or revenue based)? Synergies? To overcome entry barriers? To substitute for new product/capability development? To reduce dependence on one or more products or markets? Managerial opportunism (size drives pay, size and complexity lowers employment risk)? Overconfidence?
12 Problems in Achieving Acquisition Success Too large Managers overly focused on acquisitions Extraordinary debt Inadequate target evaluation Too much diversification Inability to achieve synergy Integration difficulties Problems with Acquisitions 13
Problems: Integration Difficulties Integration challenges include: Melding two disparate corporate cultures Building effective working relationships (getting along) Resolving problems regarding the status of the newly acquired firm’s executives Loss of key personnel weakens the acquired firm’s capabilities and reduces its value 14 Problems: Inability to Achieve Synergy Synergy (2+2>4) When assets are worth more when used in conjunction with each other than separately What about premiums paid? Synergy (2+2>(4 + premium paid)) Synergies for bank mergers? Synergies for manufacturing (car) firms? 15 Problems: Firm Too Large and Too Diversified https://www.ge.com/pdf/company/ge_organization_chart.pdf http://www.tata.com/pdf/Tata_Group_presentation.pdf
Competitive advantage in all industries Competing against focused single-business firms TMT must understand all businesses Capital allocation Need to be at least some sharing/leveraging Larger size requires more formalization and standardization Larger bureaucracy, less innovation May mean more focus on short-term performance 16 Problems: Inadequate Evaluation of Target Due Diligence（尽职调查） The process of evaluating a target firm Ineffective due diligence may result in paying an excessive premium for the target company Requires examining Potential synergies and complementarities Differences in culture Actions necessary to meld the two workforces Tax consequences of the transaction 17 Problems: Too Much Debt High debt can Increase the likelihood of bankruptcy
Lead to a downgrade of the firm’s credit rating Constrain investment in activities that contribute to the firm’s long-term success Research and development Capital expenditures Marketing 18 Problems: Managers Overly Focused on Acquisitions Managers invest substantial time and energy in Searching for viable acquisition candidates Doing due-diligence Preparing for negotiations Managing the integration process after acquisition Need to be substantial synergies to compensate Daimler/Chrysler Video 19 Why Did the Daimler/Chrysler Merger Fail? Integration difficulties? Inability to achieve synergy? Firm too large and too diversified? Lack of due diligence? Too much debt and managers overly focused on acquisitions?
External environment? 20 Reversing Acquisitions: Restructuring A strategy through which a firm changes its set of businesses Failure of an acquisition strategy often precedes a restructuring strategy Restructuring may also occur because of changes in the external environment Downscoping Downsizing Leveraged buy-out 21 Types of Restructuring: Downscoping A divestiture, spin-off or other means of eliminating businesses unrelated to a firm’s core business Causes firm to refocus on its core business May be accompanied by downsizing Results in a smaller firm that can be more effectively managed
22 Acquisitions Divestitures Jaguar (1990) sold to TATA (2008) Aston Martin (1993) sold (2007) Land Rover (2000) sold to TATA (2008) Mercury was discontinued Lincoln back to Ford Ford Downscoping Premier Automotive Group Types of Restructuring: Downsizing A reduction in the number of a firm’s employees and sometimes in the number of its operating units. May or may not change the composition of businesses in the firm’s portfolio. Typical reasons for downsizing: Expectation of improved profitability from cost reductions Desire or necessity for more efficient operations 24
Ford Downsizing The Way Forward restructuring plan (2006) Focus on Ford (sold Hertz and Mahindra venture) Cut plant capacity and reduced work force by 30K (about 25 %) Probably planned to sell premium brands as well 25 Restructuring: Leveraged Buyout (LBO) Party buys all of a firm’s assets in order to take the firm private Lots of debt Sale of non-core assets to pare down debt Michael Dell and venture partner Silver Lake took Dell private (2013) Focus on restructuring to cope with new computing landscape (fewer PCs, focus on cloud, big data - IBM) Avoid quarterly earnings pressure Ultimately about control 26 Why Did Ford’s Acquisitions Fail? Integration difficulties? Inability to achieve synergy? Firm too large and too diversified? Lack of due diligence?
Too much debt and managers overly focused on acquisitions? External environment? 27 Chapter 6 Corporate-Level Strategy 1 Corporate-Level Strategy What businesses should the firm be in? How should the corporate office manage those businesses? Units should be worth more under the firm umbrella Synergies
Unit 1 Unit 2 Unit 3 Unit 4 2 Two Levels of Strategy Business-level Strategy Selecting strategy (e.g., cost leadership and differentiation) to compete in individual markets Could be different for each business unit Corporate-level Strategy (Companywide) Selecting and managing a group of different businesses
competing in different product markets Improve performance of business units in the aggregate Diversification Mergers & Acquisitions (Chapter 7) 3 Diversification What is diversification? Do something different Expand outside of main business How is it related to firm size and risk? Leads to bigger firms (additional businesses) May reduce risk (less related to main business) May increase risk (competencies may not travel) Corporate Strategy: Low Level of Diversification Dominant Business Between 70% and 95% of revenue comes from a single business Examples? Black & Decker (power tools) Harley Davidson (10 % apparel, licensing) A
A B Single Business More than 95% of revenue comes from a single business Examples? Whirlpool (appliances) Wm. Wrigley Jr. (chewing gum) 5 Related Constrained Less than 70% of revenue comes from a single business Businesses share product, technological and distribution linkages Related Linked (mixed related and unrelated) Less than 70% of revenue comes from a single business Less direct links between businesses Moderate to High Level of Diversification C A B
C A B PepsiCo (Frito L, Quaker, Tropicana, Aquafina) Campbell (Prego, Goldfish, V8, Pepperidge Farms) Merck (50 prescription products plus Merck Animal Health) 6 High Level of Diversification Unrelated Diversification Less than 70% of revenue comes from the dominant business, and there are few common links between businesses Examples? GE 3M Tata Group https://www.ge.com/pdf/company/ge_organization_chart.pdf http://www.tata.com/pdf/Tata_Group_presentation.pdf C
B A 7 Reasons for DiversificationValue-Creating DiversificationValue-Neutral DiversificationValue-Reducing DiversificationEconomies of scope (related diversification) Sharing activities Transferring core comp. Market power (related diversification) Blocking competitors through multipoint competition Vertical integration Financial economies (related & unrelated diversification) Efficient internal capital allocation Business restructuringAntitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Excess resources Diversifying managerial employment risk Increasing managerial compensation 8 Value-Creation: Economies of Scope
Firms create value by sharing (transferring) across business units: Resources Capabilities Core competencies Creates value by: Better use of existing resources Eliminates resource duplication No need to develop competencies that already exist Difficult for competitors to understand and imitate “Fluid value-creation” 9 Economies of Scope – Two Ways to Share Operational relatedness in sharing activities Sharing resources or simpler activities (e.g., inventory delivery, purchasing systems, warehousing) Corporate relatedness sharing corporate core competencies Sharing more complex sets of capabilities and core competencies that have already been developed Marketing, design, technological capabilities Apple economies of scope? Innovation Design Customer Service Marketing
Management (strategic decision making) Corporate Relatedness 10 Economies of Scope? - operational relatedness 11 Reasons for DiversificationValue-Creating DiversificationValue-Neutral DiversificationValue-Reducing DiversificationEconomies of scope (related diversification) Sharing activities Transferring core competencies Market power (related diversification) Multipoint competition Vertical integration Size Financial economies (related & unrelated diversification) Efficient internal capital allocation
Business restructuringAntitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Excess resources Diversifying managerial employment risk Increasing managerial compensation 12 Value-Creation: Market Power Market power exists when a firm can: Reduce cost of its primary and support activities below the competitive level Sell products at prices above the existing competitive level How do firms do this? Through multipoint Competition Two or more diversified firms simultaneously compete in the same product areas or geographic markets Coke and Pepsi Airlines 13
Vertical Integration Backward integration—a firm produces its own inputs Tesla battery factory, DeBeers Forward integration—a firm operates its own distribution system for delivering its outputs Tesla, Apple stores What about size? Size drives market power (e.g., Porter’s 5 forces) Second Way To Achieve Market Power 14 Reasons for DiversificationValue-Creating DiversificationValue-Neutral DiversificationValue-Reducing DiversificationEconomies of scope (related diversification) Sharing activities Transferring core competencies Market power (related diversification) Blocking competitors through multipoint competition Vertical integration Financial economies (related & unrelated diversification) Efficient internal capital allocation Business restructuringAntitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Excess resources Diversifying managerial employment risk Increasing managerial compensation
15 Value-Creation: Financial Economies Unrelated diversification: Not about sharing but about investment and allocation Buying assets and restructuring them CEMEX 3 step process Find high growth market Find take over target (due diligence) Improve performance (PMI) Allocation of resources Efficient internal capital allocation Restructuring assets and capital allocation applies to related diversification as well 16 Capital Allocation
Firm Business Unit Business Unit Business Unit Business Unit “The most critical choices top management makes are those that allocate resources among competing strategic investment opportunities” (Donaldson, 1984: 95) Strategic decision making process performed by corporate office (Stein, 1997) 17 --For fiscal 2006, Newell Rubbermaids total capital budget of 76MIO was allocated in the following manner: STATE THEM. ---Those allocations, in turn, hold the key to the problem or question underlying this dissertation: is this allocation efficient??, or could the available capital have been allocated in a better way? For example, is too much capital going to Office Products and not enough to Home and Family?? Or it may be that Tools & hardware have the very best potential, and should
have received the most capital instead of office products? ---Those are all questions I investigate by looking at capital allocation errors which I define conceptually as too much or too little investment in segments with relatively worse or better growth prospects, respectively. Decision Making Decision making process of identifying and choosing one course of actions from alternative courses of action Rational Decision Making Rational model of decision making explains how managers should make decisions assumes managers will make logical decisions that will maximize the organization’s interests also called the classical model Successful Implementation - Plan carefully Be sensitive to those affected Evaluation - What should you do if action is not working? Give it more time Change it slightly Try another alternative Start over
Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-19 Assumptions of the Rational Model Do We Make Rational Decisions? In Simple Terms: It’s Hard to Make Rational Decisions There’s too much information/evidence or not enough The information doesn’t quite apply People are trying to mislead you You are trying to mislead you (biases) The side effects outweigh the cure Competitors may respond in ways that you may not have anticipated (game theory) Rational Decision Making Rational decisions are rare, for some very good reasons Bounded rationality Biases
Successful Implementation - Plan carefully Be sensitive to those affected Evaluation - What should you do if action is not working? Give it more time Change it slightly Try another alternative Start over Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-22 Bounded Rationality Bounded Rationality suggests that the ability of decision makers to be rational is limited by numerous constraints Complexity (cognitive capacity), time and money Example: Buying a house Did you look at all cities/communities in your targeted area? Did you collect all information (schools, tax bill, HOA information, historical price appreciation, crime rates, flood plains etc.) Did you check out all houses that were for sale meeting your requirements? How many real estate agents did you interview? Did you make a buy/rent analysis? Satisficing Model Satisficing Model
managers seek alternatives until they find one that is satisfactory, not optimal We tend to satisfice Biases Affecting Rational Decision-Making Common decision-making biases (systematic errors) Availability Bias Readily available information (latest) Confirmation Bias Discount information that does not confirm Representativeness Bias Small sample problem (winning the lottery, shark attacks) Sunk Cost Bias/Escalation of Commitment Bias Anchoring/Adjustment Bias Framing Bias 25 Sunk Cost & Escalation of Commitment Bias Sunk cost-old investments of time/money that can’t be recovered. Escalation of Commitment Bias-Continuing to invest and increase commitment, even when it is evident that there is no justification; too costly or painful to abandon Organizations that penalize failed decisions heavily are more
likely to create conditions that lead to these biases Anchoring/Adjustment Bias Divide into two groups and ask…. Is the population of Turkey greater than 35 million? What is the population of Turkey? Or Is the population of Turkey greater than 100 million? What is the population of Turkey? The answer to the second question (What is the population of Turkey?) increases by millions if anchored by higher amount 27 Framing Bias Gains vs. Losses (Prospect Theory, Kahneman & Tversky, 1979) Marine property adjuster: Charged with minimizing the loss of cargo on three insured barges that sank yesterday off the coast of Alaska. Each barge holds $200,000 worth of cargo, which will be lost if not salvaged within 72 hours. Two options
Framing Bias A. This plan will save the cargo of one of the three barges worth $200,000 B. This plan has a 1/3 probability of saving the cargo on all three barges, worth $600,000, but has a 2/3 probability of saving nothing. Which plan would you choose? Framing Bias C. This plan will result in the loss of two of the three cargoes, worth $400,000. D. This plan has a 2/3 probability of resulting in the loss of all three cargoes and the entire $600,000 but has a 1/3 probability of losing no cargo. Which plan would you choose? Framing Bias A. This plan will save the cargo of one of the three barges worth $200,000 B. This plan has a 1/3 probability of saving the cargo on all three barges, worth $600,000, but has a 2/3 probability of saving nothing.
70 % 30 % Framing Bias C. This plan will result in the loss of two of the three cargoes, worth $400,000. D. This plan has a 2/3 probability of resulting in the loss of all three cargoes and the entire $600,000 but has a 1/3 probability of losing no cargo. 30 % 70 % Framing Bias The difference was framing. People are risk averse when a problem is posed in terms of gains (barges saved) But risk seeking when a problem is posed in terms of avoiding losses (barges lost). Framing Bias A. This plan will save the cargo of one of the three barges worth $200,000
B. This plan has a 1/3 probability of saving the cargo on all three barges, worth $600,000, but has a 2/3 probability of saving nothing. Which plan would you choose? Risk Averse when facing gain (barges saved) Will choose sure thing (A) 71 % 29 % 34 Framing Bias C. This plan will result in the loss of two of the three cargoes, worth $400,000. D. This plan has a 2/3 probability of resulting in the loss of all three cargoes and the entire $600,000 but has a 1/3 probability of losing no cargo. Which plan would you choose? Risk Seeking when facing loss (barges lost) Will choose the riskier option (D) 30 % 70 % But we are missing something… Biggest bias of all?
When we are evaluating alternatives, there is often one alternative that we are overlooking… It’s a given and therefore not considered an alternative… It happens if we don’t make a choice… Status quo is also a choice Much more likely to pick even if expected outcomes are way lower Fear of the unknown Leads people to overvalue what they have Overcoming Biases 1) Understand your Biases! 2) Look at a situation from a different perspective or from a different decision-making styles…what would a Rational/Guardian/Idealist Person do? 3) Our “gut” draws from patterns/rules that we may or may not see. Practice seeing patterns—data isn’t just data—there’s a message. 4) Don’t fall in love with your decisions. Everything is fluid. “Think Harder” & Repetition Products and structure
Home & Family Graco Goody Tools & Hardware Irwin Lenox Cleaning-Org Levolor Rubbermaid Office Products Sharpie Paper Mate Rolodex 38
--Newell-Rubbermaid is a well-performing diversified firm with a number of products, some of which may be familiar to most of us. They have structured these products in 4 business segments (click) --For example, The sell paper-mate and sharpie pens and highlighters as well as rolodex filing systems within the business segment of Office Products. --The also make industrial tools including Lenox handtorches within their Tools & Hardware segment. --Finally, they market Graco baby and young child stuff like car seats and strollers, and Goody combs and brushes through their home and family segment.. ---So, although the segments are fairly diverse in the products they market and sell, those segments have one thing in common in that they all need capital to grow and create future wealth with. Capital that gets allocated to them from the corporate office. Capital Allocation process Newell Rubbermaid Office Products 30mio Home & Family 8mio Cleaning-Org. 22mio
Tools & Hardware 16mio How should this be done? Based on expected future business unit performance (prospects) Figure out prospect, then allocate in accordance with them Rational perspective of capital allocation 39 --For fiscal 2006, Newell Rubbermaids total capital budget of 76MIO was allocated in the following manner: STATE THEM. ---Those allocations, in turn, hold the key to the problem or question underlying this dissertation: is this allocation efficient??, or could the available capital have been allocated in a better way? For example, is too much capital going to Office Products and not enough to Home and Family?? Or it may be that Tools & hardware have the very best potential, and should have received the most capital instead of office products? ---Those are all questions I investigate by looking at capital allocation errors which I define conceptually as too much or too little investment in segments with relatively worse or better growth prospects, respectively. Capital Allocation process
Newell Rubbermaid Office Products 30mio Home & Family 8mio Cleaning-Org. 22mio Tools & Hardware 16mio What are some impediments to rational allocation ? Prospects (future performance) hard to estimate (bounded rationality) Escalating commitments Tendency to be affected by gain/loss contexts (e.g., investment portfolio) Too much to poor performers to turn them around (risk seeking) Not enough capital to better units (risk aversion) Use previous year allocations as starting point Availability, confirmation Bounded rationality Escalating commitments Contexts (gain/loss) Status quo 40 --For fiscal 2006, Newell Rubbermaids total capital budget of
76MIO was allocated in the following manner: STATE THEM. ---Those allocations, in turn, hold the key to the problem or question underlying this dissertation: is this allocation efficient??, or could the available capital have been allocated in a better way? For example, is too much capital going to Office Products and not enough to Home and Family?? Or it may be that Tools & hardware have the very best potential, and should have received the most capital instead of office products? ---Those are all questions I investigate by looking at capital allocation errors which I define conceptually as too much or too little investment in segments with relatively worse or better growth prospects, respectively. Reasons for DiversificationValue-Creating DiversificationValue-Neutral DiversificationValue-Reducing DiversificationEconomies of scope (related diversification) Sharing activities Transferring core competencies Market power (related diversification) Blocking competitors through multipoint competition Vertical integration Financial economies (related & unrelated diversification) Efficient internal capital allocation Business restructuringAntitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Excess resources Diversifying managerial employment risk Increasing managerial compensation
41 Value-Neutral: Antitrust Laws Laws in 1960s and 1970s discouraged mergers that created increased market power (vertical or horizontal integration) Mergers tended to be unrelated Relaxation of antitrust enforcement results in more and larger horizontal mergers (80’s and 90’s) Concerns emerging and mergers now more closely scrutinized (2000’s and on) AT&T and T-Mobile, Nasdaq and New York Stock Exchange (2011) Economist article Anti-trust Legislation 42 High tax rates on dividends Firms shift from dividends to acquiring firms and expanding internally 1986 Tax Reform Act Reduced individual ordinary income tax rate from 50 to 28 percent Now treats capital gains as ordinary income Created incentive for firms to favor dividends Lately also buy-backs of firm stock
Anti-trust Legislation Tax Laws Value-Neutral: Tax Rates What does high dividends and buy-backs say about a firm? 43 Reasons for DiversificationValue-Creating DiversificationValue-Neutral DiversificationValue-Reducing DiversificationEconomies of scope (related diversification) Sharing activities Transferring core competencies Market power (related diversification) Blocking competitors through multipoint competition Vertical integration Financial economies (related & unrelated diversification) Efficient internal capital allocation Business restructuringAntitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Excess resourcesDiversifying managerial employment risk Increasing managerial compensation 44
Low performance makes diversification more likely Turn performance around Change focus to new business Makes sense: firms in loss context take more risks (diversification is risky) High performance eliminates the need for diversification Low Performance Value-Neutral: Firm Performance 45 Does Diversification Work? Only Up To a Certain Point 46 Diversification may be a good strategy if Industry segment is becoming unattractive Product line is mature or threatened Low Performance
Poor Prospects Value-Neutral: Poor Prospects Uncertain Future Cash Flows 47 “Eggs in more baskets” Business unit returns are never 100 % correlated Returns from unrelated units have low correlations Excess resources invites diversification Original theoretical argument for diversification Many large US firms have sizable cash (Microsoft, Apple) Low Performance Uncertain Future Cash Flows Risk Reduction Value-Neutral: Risk Reduction & Excess Resources Excess Resources 48 Reasons for DiversificationValue-Creating DiversificationValue-Neutral DiversificationValue-Reducing DiversificationEconomies of scope (related diversification)
Sharing activities Transferring core competencies Market power (related diversification) Blocking competitors through multipoint competition Vertical integration Financial economies (related & unrelated diversification) Efficient internal capital allocation Business restructuringAntitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Excess resourcesDiversifying managerial employment risk Increasing managerial compensation 49 Managers like diversification – why? Risk reduction Increased compensation from running bigger, more complex firms Shareholders don’t – why? They can do their own diversification Diversification discount (beyond a certain level of diversification) How is this dealt with? Corporate governance No duality Incentive compensation
Outside directors Market for corporate control What happens to firms that do not maximize share holder wealth? Self-disciplining (takeover, reputation) Value-Reducing: Managerial 50 Al Dunlap at Sunbeam – Case Analysis Questions (100 points) 1. What were some big problems Sunbeam was facing around the time Dunlap was hired? Please do not comment on their low stock price when answering this question. 2. Based on your answer above, discuss whether the strategic actions Dunlap took to turn Sunbeam around were appropriate (e.g., did they fit). 3. Boards have a fiduciary duty to look after shareholder interests. With that in mind, please comment on the board of directors at Sunbeam – did they do a good job of looking after their shareholders?
9-899-218 R E V : D E C E M B E R 1 5 , 2 0 0 3 _____________________________________________________ _____________________________________________________ ______ Professors Brian J. Hall and Rakesh Khurana and Research Associate Carleen Madigan prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 1999 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. B R I A N J . H A L L R A K E S H K H U R A N A
Al Dunlap at Sunbeam Dunlap v. [after Albert J. Dunlap (1937- )] 1. To turn a company around at lightning speed. 2. To focus on the best: to eliminate what is not the best. 3. To protect and enhance shareholder value. — Al Dunlap, Mean Business For much of his career before coming to Sunbeam, Al Dunlap was known as the poster child of corporate restructuring. Coming off a highly successful turnaround at Scott Paper, he had recently published a best-selling book, which detailed his career success at his previous jobs and celebrated his latest accomplishment, “rightsizing” the appliance-maker Sunbeam. Dunlap was both famous and infamous for his hard-nosed approach to turnarounds, which typically involved radical restructuring and downsizing. Although he was often criticized in the press, Dunlap was not shy about his “take-no-prisoners” managerial style, which he documented in his aptly titled book, Mean Business.1 His declared victory at Sunbeam (see Exhibit 1), however, may have been premature. Two months after increasing Sunbeam’s stock price to its all-time high of $53 per share, and only two weeks after Sunbeam’s largest shareholder Michael Price stated that Al Dunlap “is an outstanding executive and Sunbeam is fortunate to have him,” Dunlap was fired.2 Sunbeam’s board had hired Dunlap to turn around the company
in 1996, in hopes that he could effect the same increase in shareholder value he had at Scott Paper from 1994 to 1995. As his tenure at Sunbeam carried into the second year, board members watched their stock price fall from a high of $53 to less than $16 the day his firing was announced. His cost-cuttings hadn’t panned out, and the companies acquired under his leadership had been much more trouble than the board had anticipated. Given his widely acclaimed history of turning around ailing companies, and the rapidity of his fall, many wondered what had happened. Was he really just a “one trick pony,”3 overrated and overpaid, or would his restructuring of Sunbeam have worked if he had only been given more time? 1 Dunlap, Albert J. Mean Business: How I Save Bad Companies and Make Good Companies Great. (New York: Simon & Schuster, 1996). 2 Business Wire. May 26, 1998. 3 “Al Dunlap: Exit Bad Guy.” Daniel Kadlec. Time, June 29, 1998. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016.
899-218 Al Dunlap at Sunbeam 2 “Rambo in Pinstripes” The day Sunbeam announced to Wall Street that shareholder- focused Al Dunlap would be its next CEO, the company’s stock price jumped 49%, creating almost $500 million of value for the shareholders, including Michael Price and Michael Steinhardt, the two men who controlled almost 42% of Sunbeam’s shares.4 Price and Steinhardt had pulled the appliance maker out of bankruptcy in 1990 when they bought the company from Allegheny International, a corporation that had acquired Sunbeam in 1981 and had done little to improve it. By the time Dunlap was hired in July of 1996, Sunbeam had been through two other CEOs, an intensive restructuring and a long period of instability.5 (See Exhibit 2 for a history of Sunbeam.) Paul Kazarian, one of the partners in the buyout from Allegheny, and the CEO who took Sunbeam public, was fired in 1993 for his highly volatile leadership style. The CEO that followed, Roger Schipke, was a former GE executive focused on growing Sunbeam slowly, over the long term. He resigned in early 1996, noting a change in strategy, dictated by Price and Steinhardt, from long term to short term. The controlling directors wanted to cash out, and had retained Merrill Lynch to shop the company in late 1995. There had not been any takers. Sunbeam, many believed, was a dying brand. It had failed to keep up the pace with competitors
like Black & Decker, and had not succeeded in attracting new customers. Most of the consumers who bought Sunbeam products were older, and had been buying Sunbeam since its heyday in the 1950s and 1960s. Its factories were also aging, as were its machinery and tooling. There were no information systems to connect one department or factory to another. Turnover was high; among factory workers, it was well over 50%. Its board of directors was voted one of the worst boards of 1994 by Chief Executive magazine.6 By the middle of 1996, the stock price had hovered in the teens for close to a year and a half. Sunbeam needed a savior. Dunlap had a well-established track record for “rescuing” ailing companies. His list of accomplishments ranged from implementing operational improvements in the factory he supervised at Kimberley-Clark (his first civilian job after graduating from West Point), to putting Lily Tulip back in the black for Kohlberg Kravis Roberts & Co. (See Exhibit 3 for Dunlap’s employment history.) A man from the “slums of Hoboken”7 who worked the factory floor before becoming an executive, Dunlap attributed many of a company’s ailments to “ivory tower disease”: the inability of business school-educated managers to make decisions about processes occurring layers of management below them.8 In later years, his restructuring plans carried the trademark of firing from the top down, and he earned a reputation for attacking corporate culture as the source of a company’s problems. He was perhaps hired as much for his reputation as for his skills. His aggressive style offered fodder to those he fired, and to the media, who portrayed him
as, in his words, “some kind of serial killer.”9 His nicknames (“Chainsaw Al” and “Rambo in Pinstripes” among the most used) were not self-appointed, but Dunlap acted the part, at one point even dressing up as Rambo and posing on the 4 “Chainsaw Al to the Rescue?” Matthew Schifrin. Forbes, August 26, 1996. 5 OneSource Corporate Overview. August 10, 1998. 6 “America’s Best and Worst Boards,” April 1994. 7 Mean Business, 107. 8 Ibid., 113. 9 Ibid., 132. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. Al Dunlap at Sunbeam 899-218 3 cover of USA Today (see Exhibit 4).10 Although his nicknames were originally meant to be compliments (John Aspinall, a friend of Sir James Goldsmith, said, “Al is like a chainsaw. He goes in
and cuts away all the fat and leaves a great sculpture.”11), they more typically provoked comments like those of Thomas Petzinger, Jr. of the Wall Street Journal, who described Dunlap as, “an 80s style liquidator dressed up for the 90s as an angry white guy.”12 His tough-guy image and record for rapidly increasing his company’s share price, however, appealed to an important audience—shareholders. At his first major turnaround, Lily Tulip, Dunlap oversaw a $176 million increase in the company’s market value, while firing workers and closing factories. Working for Sir James Goldsmith and Kerry Packer in the late 1980s and early 1990s, he trimmed down large corporations, selling extraneous companies and saving billions of dollars. At Consolidated Press Holdings in Australia, he pared off 273 unrelated companies, generated a $623 million profit from a $25 million loss, and liquidated assets worth over $800 million.13 At his most famous turnaround, Scott Paper, Dunlap fired 10,500 people— 35% of all the employees and 71% of the corporate staff.14 During his tenure at Scott, he also raised the stock price from $38 a share (pre- split) to $120 (pre-split), and sold the company to Kimberley- Clark for more than a $6 billion shareholder gain (see Exhibit 5). 15 At Scott Paper, as with most of his other companies, the turnaround was executed in rapid fashion. From the day of his arrival at the company to the day the merger closed with Kimberley- Clark, Dunlap’s tenure at Scott lasted only 20 months. The merger, which was announced just a year after he signed on, marked the end of the official restructuring in typical Dunlap style. “You look at
some of these brand name companies where someone has been there a year and a half or two years and they haven’t turned it around,” he said. “If you are there that long, you’ve missed the window. The window shuts and you are trapped in the building.”16 In addition to downsizing quickly, Dunlap also strongly believed that layoffs should only be done once, in order to avoid creating a culture of paranoia among employees. “Do it once, do it severe, and get it over with. If you have to go back a second time, you’ve made a mistake.”17 Stakeholder vs. Shareholder The ultimate goal of Dunlap’s restructuring plans was always to create value for the shareholders of the company. He championed himself as the shareholders’ savior, likening them to hostages held for ransom. “Sir James and I coined the phrase ‘corpocracy’— companies run for the benefit of 10 USA Today, August 30, 1996. 11 Ibid. 12 “Does Al Dunlap Mean Business, or Is He Just Plain Mean?” Thomas Petzinger, Jr. Wall Street Journal, August 30, 1996. 13 “CPH Shedding Done About As Pens Poise for Chemplex Deal.” Australian Financial Review, October 23, 1992. 14 “Can Al Dunlap Do It Again At Sunbeam?” Matt Krantz. Investor’s Business Daily, July 22, 1996. 15 Mean Business, 21.
16 “Who’s Chainsawed Now? Dunlap Out As Sunbeam’s Losses Mount.” Martha M. Hamilton. Washington Post, June 16, 1998. 17 Investment Dealers’ Digest, Inc. January, 1995. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. 899-218 Al Dunlap at Sunbeam 4 bureaucrats rather than the shareholders,” he said. “Scott was a microcosm of that. Its shareholders would have been better off captured by terrorists. They’d have been treated better.”18 Dunlap was no fan of the stakeholder model of corporate governance, which emphasized a manager’s accountability to multiple constituencies besides the shareholder (e.g., the employees, the community). “If you see an annual report with the term ‘stakeholders,’” Dunlap wrote, “put it down and run, don’t walk, away from the company. It means the company has its priorities upside down.”19 Dunlap argued that shareholders were the only ones in a company who had any kind of stake to claim, and that the company should be run for their profit alone. “Stakeholders! Every time I hear the word, I ask, ‘How much did they pay for their stake?’
Stakeholders don’t pay a penny for their stake. There is only one constituency I am concerned about and that is the shareholders.”20 Dunlap’s invocation of the rights of shareholders caused Peter Cappelli, chairman of the management department at Wharton Business School, to comment. “He is persuading others that shareholder value is the be-all and end-all. But Dunlap didn’t create value. He redistributed income from the employees and the community to the shareholders.”21 Marjorie Kelly, a co-founder of the publication Business Ethics, agreed. “So much for the theory popular among business ethicists that ‘In order to serve stockholders well, you have to serve all other stakeholders first,’” she said, in reference to Dunlap’s turnarounds. “The theorem at work goes more like this: ‘In order to serve stockholders well, you have to squeeze the living daylights out of employees.’”22 Dunlap, however, accepted responsibility for his management decisions, including their effect on his employees. “I accept the heat because I am my own biggest critic. Every day I’ll ask myself, ‘Did I really do a good job?’ So long as the answer is yes, somebody else’s criticism doesn’t bother me much.”23 One of Sunbeam’s employees at the company’s electric hair clipper manufacturing plant in McMinnville, Tennessee, was Marsha Dunlap (no relation to Al). She was fired in 1997, after having worked at the plant for 34 years. She made $9.30 an hour and provided her family’s only form of health insurance. By transferring the hair clipper production to Mexico, Sunbeam would save on wages, insurance and pensions. “They say the wages in Mexico
is (sic) a lot less than what they pay us, so that’s where their profit is,” she said. When she received her termination letter, the effective date for the end of her employment with Sunbeam read ‘July 4, 1997.’ “It was very devastating to find out that you’re going to lose your job. People don’t understand, not unless you’ve been there. And it affects everyone—the whole community: the car dealership, the real estate, discount stores, everyone.”24 At Scott Paper, it was more than just the car dealerships and the discount stores that were affected. In Scott’s hometown of Philadelphia, Dunlap shuttered the company’s 750,000 square-foot headquarters, fired 70% of the headquarters’ staff, and moved the operation to a more modest setting in Boca Raton, Florida. He reneged on all of Scott’s charitable donations, including the last $50,000 of a $250,000 pledge to the Philadelphia Museum of Art. Just after Dunlap’s appointment as CEO, Scott 18 “Scott’s Clean Sheet: Tony Jackson Speaks to Al Dunlap.” Tony Jackson. Financial Times, October 27, 1994. 19 Mean Business, 197. 20 Ibid. 21 “Dunlap: I Saved Scott Paper.” Marcia H. Pounds. Sun- Sentinel (Ft. Lauderdale), January 14, 1996. 22 Marjorie Kelly, Minneapolis Star Tribune, December 2, 1996.
23 Mean Business, 23. 24 Ibid. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. Al Dunlap at Sunbeam 899-218 5 also began breaking off ties with suppliers, in an effort to bring the total number down from 20,000 to 1,000.25 Al and others argued that his controversial layoffs were necessary to save the company. When I become ‘Rambo in Pinstripes’ or ‘Chainsaw Al,’ who sells assets and fires people, I have empathy for those let go. But what I keep uppermost in my mind is not that I cut away 35%, but that I saved 65%. I think that’s terribly important. If I don’t take action—if I back off as most chief executives do, and fire a nominal 10% of the workforce—that’s nothing. It’s a tease. I could do less and avoid the criticism. But then I’ll have to go back and slash again and again. That is a fraud imposed on employees.26 He also remarked that benevolence isn’t what gets a company
back on track, saying “the harshest critics call me a bastard and say I have no heart. I’m probably a much nicer guy than most people think, but who’s going to hire a nice guy to turn around a failing conglomerate?”27 For all of the controversy he created, however, one undisputed fact was that shareholders greatly profited while Dunlap was at the helm. And Dunlap was always one of those shareholders. Indeed, one of his core beliefs was that managers should have their compensation linked to shareholder wealth creation. At both Scott and Sunbeam, his compensation was directly tied to the stock performance of the company, in the form of options and grants. As a result of the rise in stock price during his 20-month tenure at Scott Paper, Dunlap increased his own wealth substantially—by almost $100 million, according to his calculations. “Did I earn that? Damn right I did. I’m a superstar in my field, much like Michael Jordan in basketball and Bruce Springsteen in rock ‘n’ roll. My pay should be compared to other superstars in other fields, not to the average CEO. Only a handful of chief executives are worth the big bucks they are paid. Many are grossly overpaid and should be fired and then replaced by CEOs whose pay is strictly performance-based.”28 Sunbeam Because of his apparent success at Scott Paper, Dunlap received a large compensation package upon his arrival at Sunbeam (see Table 1A and 1B). True to his philosophy of aligning compensation with company performance, Dunlap took no
bonus, but received a substantial package of stock options and awards. Also believing that CEOs should put their own money into the company they work for, he invested $5 million in Sunbeam stock the first year of his tenure. As Nell Minow, an institutional investor known for her shareholder advocacy, said of Dunlap, “He puts his money where his mouth is.”29 His initial purchase of 244,898 shares from the company came at a price of only $12.25 per share; he bought them just 48 hours before it was announced that he would be the next CEO of Sunbeam.30 From those shares alone, Dunlap made more than $1.5 million in two days. 25 “The Shredder: Did CEO Dunlap Save Scott Paper, or Just Pretty It Up?” John A. Byrne. Business Week, January 15, 1996. 26 Mean Business, 23. 27 Ibid. 28 Ibid., 22. 29 “Corporate Blitzkrieg Brings a Rapid Turnaround.” James Flanigan. Los Angeles Times, March 19, 1995. 30 Sunbeam Shareholder Proxies 1997 and 1998. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016.
899-218 Al Dunlap at Sunbeam 6 Table 1A Al Dunlap’s Compensation at Sunbeam 1996 1997 Dunlap’s New Contract for 1998 Salary $507,054a $1,115,385 $2,000,000b Bonus 0 0 0 Other Compensation $68,600 $287,638 N/A Options (number) 2,500,000c 0 3,750,000d Black-Scholes Value on grant date $16,621,000 0 $75,000,000 Value at peak stock pricee $110,724,000 0 $127,406,000 Restricted Stock Awardsf (number of shares) 1,000,000 0 0 Value on grant date $12,500,000 0 0 Value at peak stock priceg $31,200,000 0 0 Stock Grants (number of shares) 0 0 300,000 Value on grant date 0 0 $11,055,000 Value at peak stock price 0 0 $15,600,000 Stock Purchased (number of shares) 244,898 77,669 0 Value on date of purchase $3,000,000 $2,000,000 0 Value at peak stock price $12,734,696 $4,038,788 0 Source: SEC Filings. a Dunlap became CEO of Sunbeam on July 19, and therefore did not receive his full salary for 1996. b Dunlap’s contract was renegotiated in February of 1998, but terminated on June 15, when Dunlap was fired.
c These options were granted with an exercise price of $12.25. A third of the options were immediately vested, and the remaining two-thirds would vest over two years. The term of the options was ten years. d Under Dunlap’s new contract, the options granted in 1996 were fully vested, and Dunlap received 3,750,000 new options (with the same vesting restrictions as his previous agreement) at an exercise price of $36.85. e Sunbeam stock reached a record high of $53 per share in March 1998. f One third of these shares were immediately vested on the grant date, with the remainder vesting in two equal installments on the first and second anniversaries of the grant date. g As per Dunlap’s new contract, 40% of his original restricted stock award was cancelled, and the remainder became fully vested. Table 1B Value of Dunlap’s Stocks and Options Upon Departure Unvested Vested Options held at the time of departure 2,500,000 3,750,000 Black-Scholes value at the time of departure $7,450,000 $21,225,000 Shares held at the time of departure 1,491,564 Value on date of departure $23,492,133 Company shares outstanding 100,811,194 Source: SEC Filings.
Upon his arrival at Sunbeam, Dunlap made the board of directors take similar action. He ended monetary compensation for all outside directors, and severely reduced the size of stock grants they received. Previously, board members had received $20,000 annually, in addition to $1,000 for each meeting they attended in person. They had also received 5,000 shares of stock, and options to buy 1,000 shares upon each re-election. Under Dunlap’s plan, members of the board of directors were each granted 1,500 shares of stock upon their election to the board, and upon each subsequent For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. Al Dunlap at Sunbeam 899-218 7 election. They were also required to buy and maintain ownership of at least 2,000 shares of Sunbeam stock31 (see Exhibit 6). Charles Elson, a law professor from Stetson University, was one of the first people Dunlap asked to join the board. The two first met when Dunlap was still at Scott Paper, and Elson had just published a study linking executive overcompensation to a low
level of stock ownership by the board. In an article he wrote for the Wall Street Journal, Elson proposed that board members be paid only in stock, indicating the findings of his study. The article caught Dunlap’s attention, and he asked to meet with Elson, saying that he wanted to institute a similar plan for board members at Scott Paper. When Dunlap then went to Sunbeam, he called Elson and said that he’d like to put a shareholder advocate on the board. “I said, ‘great!’—thinking he meant someone like Nell Minow, or another well-known person,” said Elson. Dunlap asked Elson if he’d consider becoming a board member, provided he would be willing to buy stock in Sunbeam—$100,000 worth. “That’s a lot of money for a law professor,” said Elson. “Dunlap said, ‘I wanted to make you sweat a little.’ I said, ‘It worked—I’m drenched!’” He agreed to join the board. Although applauded by shareholder activists, Dunlap’s appointment of a close friend to the board of directors also drew criticism from some in the investment community. Sarah Teslik, executive director of the Council of Institutional Investors maintained that, “(Mr. Dunlap) is closer to Elson than he is to his wife. Mr. Elson is not just a ‘yes’ man, he’s a ‘yes’ lapdog.”32 Despite some initial criticisms, the first months of Dunlap’s turnaround of Sunbeam were quite successful. By November of 1996, the company’s stock was up to $25.37 and Dunlap had announced the first phase of the company’s restructuring. It was reminiscent of his previous work—he had plans to cut the 12,000-person workforce in half, reduce the product lines by 87%, close 18 of the
company’s 26 factories, consolidate the administration, and sell off several divisions. He planned to cut $225 million a year from operating expenses. He also announced that he would double Sunbeam’s sales over the next three years, primarily through introducing new products and expanding overseas markets.33 The market, however, was already crowded with competitors, and shelf space at retailers was limited. Another problem, thought Ron Graber, a former executive at Black & Decker, was Sunbeam’s product development. Dunlap’s plan called for a lead time of six months for new products—about a third of the usual 16 to 18 months, and operating with a severely reduced research and development staff. Graber offered the comparison of Black & Decker’s “Snakelight” product, which took 22 months to develop, and which had brought in $100 million in sales by 1995. “Sunbeam needs four Snakelight-caliber products each year to double sales by 1999. I doubt those guys have one.”34 By October of 1997, Sunbeam had hired Morgan Stanley to investigate the possibility of either selling the company or making an acquisition. At first, Black & Decker, Sunbeam’s top competitor, was rumored to be targeted. Months of decision-making, however, ended in March 1998 with 31 Sunbeam Shareholder Proxy, 1997. 32 “Sunbeam’s Chief Picks Holder Activist and Close Friend as Outside Director.” Joann S. Lublin. Wall Street Journal,
September 26, 1996. 33 “Dunlap Puts Sunbeam On a Reducing Plan.” Steven Pearlstein. Washington Post, November 11, 1996. 34 “Forget About Sunbeam: You Should Invest Instead In Rival Black & Decker.” Junius Ellis. Money, January, 1997. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. 899-218 Al Dunlap at Sunbeam 8 Sunbeam’s $2.5 billion purchase of three other appliance companies: Coleman, First Alert and Signature Brands (the makers of “Mr. Coffee”).35 Immediately after signing on Sunbeam’s new acquisitions, Dunlap got a bonus—a three-year contract extension that doubled his salary from $1 million a year to $2 million, and a grant of 300,000 Sunbeam shares.36 “You can’t overpay a great executive,” he said. “I’m in the business of creating shareholder value. I intend to create a lot of value for me and for everybody else. Don’t you think I’m a bargain?”37 Not everyone was convinced that Dunlap’s compensation package was in the shareholders’ best
interest. CEO pay gadfly and compensation consultant Graef “Bud” Crystal led the chorus of those criticizing Dunlap’s pay package. “He likes to portray himself as a swashbuckling CEO, but real men don’t take $2 million salaries and lots of free stock. He’s a pay wimp, when it comes down to it.”38 “Chainsaw Al Gets the Chop”39 Although it was difficult to identify any single move that might have caused Dunlap’s downfall at Sunbeam, many pointed to two events in particular: the acquisition of three new, troubled companies, and the institution of a marketing strategy called the “early buy” or “bill and hold” program for gas grills and other seasonal products. The program worked by offering retailers substantially reduced prices on gas grills during the winter months, when grill sales were slow. Sunbeam then stored the grills in warehouses until retailers put them on the shelves. The result was that stores stocked up on grills off-season, and didn’t reorder any in the spring.40 The ordered items were accounted for as sales, even though they had not been shipped or paid for, a practice commonly used by many companies. One article in Fortune noted the increased sales as a sign that Dunlap was making the turnaround work, and that he was succeeding in being more than just a cost- cutter. “Al Dunlap wants to be known as Mr. Growth. It’s hard to imagine. Yet when Sunbeam announces year-end results in January, people will see that sales, not just profits, are rising dramatically.”41 However, Andrew Shore, an analyst with Paine Webber who had followed
Sunbeam’s stock for more than a decade, noticed that with the increased sales, Sunbeam was also building up what he considered an abnormally large inventory. Shore decided to alert his clients, but continued to recommend the stock, as he felt it would continue to be bid up. In March, it reached an all-time high of $53 (see Exhibit 7).42 By April, however, Sunbeam had begun to search for Dunlap’s replacement, someone to take over the CEO position after a year of understudy.43 The company’s stock price had also started to slide— 35 “Sunbeam Buys 3 Appliance Companies.” Steven Pearlstein. Washington Post, March 3, 1998. 36 “Sunbeam Doubles Dunlap Pay: ‘Bargain’ CEO Gets $70M Deal.” Bloomberg. Sun-Sentinel, March 10, 1998. 37 Ibid. 38 Ibid. 39 “Chainsaw Al Gets the Chop.” Daniel Kadlec. Time, June 29, 1998. 40 “The Unkindest Cuts.” Matthew Schifrin. Forbes, May 4, 1998. 41 “Can Chainsaw Al Really Be A Builder?” Patricia Sellers. Fortune, January 12, 1998. 42 Ibid. 43 “Exit For Chainsaw? Sunbeam’s Investors Draw Their Knives.” Patricia Sellers. Fortune, June 8, 1998.
For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. Al Dunlap at Sunbeam 899-218 9 partially due to the admission by Sunbeam that its first quarter earnings for 1998 would be below company estimations. On April 3, it was announced that Donald Uzzi, Sunbeam’s executive vice- president for consumer products and one of Dunlap’s favored employees, had been fired. By the end of the day, Sunbeam had announced a loss for the quarter, and the stock price had fallen 25%.44 As stock prices continued to slide, Dunlap announced a new round of layoffs—40% of the workforce. The day the cuts were announced, Sunbeam stock fell an additional 7.5% from $27.81 to $25.75.45 The increasing pressure from Wall Street and the media was “enough to keep (Dunlap) looking over his shoulder.”46 At a meeting with analysts in New York in late May, he blew up at Andrew Shore for suggesting that he should give back his stocks and options, and work for a dollar. Dunlap confronted Shore after the meeting and warned, “You son of a bitch. If you want to come after me, I’ll
come back at you twice as hard.”47 Media attention on Sunbeam’s troubles sharpened when the June 8 edition of Fortune was released with the following quote from Michael Price: “Look, this is an interesting stock at $25. It’s down in an up market. The company’s got a great mix of products. It has two guys who control 30% of the shares. And we’re not going to sit around and let Al wreck the company. We’re paying a lot of attention.”48 Although Price claimed the quote had been taken out of context, many in the press interpreted it to mean that Price had lost confidence in Dunlap. Dunlap had further reason for concern on June 8, when Barron’s published a scathing denouncement of Sunbeam’s accounting tactics. The article, which generated enormous publicity, discussed Sunbeam’s “inventory stuffing,” the bill and hold program, and other, what Barron’s called, “mother’s little helpers” to make the company look more profitable.49 Perhaps spurred both by Price’s statement and by the Barron’s article, Dunlap called a board meeting for two days later. Charles Elson received a phone call asking him to attend the board meeting while he and his wife were on a trip to New York. On their way to the airport, Elson stopped by a newsstand to buy a paper and noticed that a few papers had printed stories about his as yet unpublished study on CEO succession. Elson and his co-authors had found a strong correlation between director stock ownership and corporate performance. Perhaps more strikingly, the authors also found that
directors with significant stock holdings were more likely to fire a CEO for poor performance. “Little did I know,” Elson said, “that I was about to become a guinea pig for my own study.” In the board meeting, Dunlap and Russ Kersh (the CFO) went through the Barron’s accusations one by one, offering thorough explanations for each and defending their positions. When they were finished, the board members felt assured that the accusations were false. Elson then turned to Dunlap and asked, “So, how’s the second quarter shaping up?” Dunlap deferred to Kersh, who said, 44 “How Al Dunlap Self-Destructed: The Inside Story of What Drove Sunbeam’s Board to Act.” John A. Byrne. Business Week, July 7, 1998. 45 “Sunbeam Shares Fall On Restructuring Plan.” James McNair. Miami Herald, May 12, 1998. 46 “Exit for Chainsaw,” Fortune, 1998. 47 Ibid. 48 Ibid. 49 “Dangerous Games: Did ‘Chainsaw Al’ Dunlap Manufacture Sunbeam’s Earnings Last Year?” Jonathan R. Laing. Barron’s, June 8, 1998. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in
Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. 899-218 Al Dunlap at Sunbeam 10 “Well, sales are a little soft.” Elson, not feeling that his question had been answered, asked again, “That’s not what I asked. How is the second quarter shaping up? Are we going to make five to ten cents a share, like we said we would?” Dunlap retorted that the board couldn’t judge their performance based on one quarter, that it was a turnaround situation and would take a long time to carry through. For such an innocuous question, the board was surprised by Dunlap’s response.50 Dunlap then issued an ultimatum to the board: “Either we get the support we should have, or (CFO) Russ and I are prepared to go . . . Just pay us.”51 “We were shocked. No one had even hinted that he should resign,” said Elson. The directors agreed that they needed to investigate the matter, to find out why Dunlap was so eager to leave. Peter Langerman (Michael Price’s representative on the board) and general counsel David Fannin did some research on their own, and spoke with several people who worked closely with Dunlap about the financial situation of the company. They found that Dunlap and Kersh had underestimated the extent of the damage. They believed that
Sunbeam was in serious financial trouble.52 The board planned to reconvene on Saturday, June 13. On his way to the board meeting, Elson re- read parts of Dunlap’s bestseller, Mean Business—a book Elson himself had written an endorsement for. He felt that there was a disconnect between the lessons of Dunlap’s book and what was happening at Sunbeam. At the meeting, Langerman presented what he had found, and the board elected unanimously to fire Dunlap. Russ Kersh was fired just a few days later. Peter Langerman, in an official press release, stated that: The outside directors have unanimously taken this decisive action because we have lost confidence in Mr. Dunlap’s leadership. This action did not result from any concern about the Company’s 1997 audited financial statements. Arthur Andersen LLP, Sunbeam’s auditor, has assured the Board that Sunbeam’s audited financial statements are accurate in all material respects. However, Sunbeam has continued to incur operating losses in the second quarter of 1998 and the Board no longer expects the Company to achieve the earnings and other forecasts announced on May 11, 1998. The Board continues to believe Sunbeam’s businesses are fundamentally sound and expects the Company will be successful under new leadership.53 Throughout his career, Dunlap had been alternately portrayed in the press as a shareholder savior
and the enemy of the working man. The day of his termination was cause for his critics to celebrate, and journalists who had long followed Dunlap’s pursuits with distaste opened a forum for those who had ended up at the wrong end of Dunlap’s restructurings. “I’m happy the son of a bitch is fired. I was so happy—I was watching CNBC at 8 o’clock, and I’ve just been happy all day,” said Emery Michael Cole, who lost his job under Dunlap’s reign at Scott Paper in 1994.54 “Somebody at that 50 Business Week, July 6, 1998 51 Ibid. 52 Ibid. 53 Business Wire, June 15, 1998. 54 “A Veteran Perelman Fireman Sets Out to Resuscitate Sunbeam.” James R. Hagerty and Tara Parker-Pope. Wall Street Journal, June 6, 1998. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. Al Dunlap at Sunbeam 899-218 11
company finally got some sense,” commented Archie Worsham, mayor of Coushatta, Louisiana, which lost its Sunbeam factory in 1996.55 Despite the accusations and widespread criticism he faced in the media, Dunlap defended his leadership of Sunbeam and the financial statements released by Arthur Andersen. “Everyone said they were correct. I am not an accountant. Why wouldn’t I rely on the outside auditors and the audit committee? …I had no involvement with the audits…and I have zero reason to not believe (the numbers), because that’s what the accountant said. That’s what the outside auditor said. That’s what the… directors on the audit committee said.”56 Dunlap also believed that he was fired too quickly, and that he should have been given more time to make the turnaround work. “I passionately believed in Sunbeam. I believed that we had accomplished the first phase of the turnaround. I believed we’d positioned ourselves for the future… I signed a new three-year contract at the pinnacle of my career… The contract I signed was heavily incentivised with stock. Obviously, if I didn’t believe in the ability to do this, I wouldn’t have accepted a contract that was so heavily incentivised with stock… I have never sold a share, never exercised an option, and I have taken horrific losses along with other shareholders.”57 55 Ibid. 56 CNN “Moneyline with Lou Dobbs” July 8, 1998.
57 Ibid. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. 899-218 Al Dunlap at Sunbeam 12 Exhibit 1 Sunbeam Corporation 1996 Annual Report To Our Shareholders � A new Sunbeam is shining—and with it a major American company is being rescued. Your new management team has laid out a rescue plan, we are implementing that plan and it is working—all in record time. In July 1996, Sunbeam was flat on its back. Earnings had plunged 83% since July of 1994. Excluding acquisitions, sales were down 4%. The operating margin had shrunk to an almost invisible 2%. The stock price had plummeted 52% since its high in 1994. And even as this once great company headed towards possible bankruptcy, Sunbeam had no strategic plan.
That is why, when your Board asked me to rescue Sunbeam, we had to move fast. I made it clear that creating the levels of return our shareholders have the right to expect was our top priority. I have always believed that if you focus on maximizing shareholder value, you will have the very best people, the very best products and the very best facilities. The rescue plan for Sunbeam was simple: 1) Recruit a top management team; 2) eliminate waste and make Sunbeam cost competitive again; 3) focus on core businesses, divesting everything else; 4) implement an aggressive strategy for global growth. With rapid action, the first three steps are complete: Step 1. An outstanding new management team is in place. Call it the Sunbeam Dream Team. The recipe was simple. We started with talented outsiders who have helped me rescue companies before; experts in areas like finance, international expansion, purchasing and logistics. We added newcomers with great track records, experts in manufacturing, marketing and product development. And we retained the best people from the old Sunbeam. This is a powerful combination: the best insiders, the best outsiders, and the best leaders from my past teamed together to give Sunbeam great leadership for a great future. Everyone in your company is committed to building that future. As part of its commitment, your Board of Directors has agreed to be compensated solely in Sunbeam stock. Meanwhile, senior executives have invested substantially in Sunbeam stock as well. On my first day on the job, I set the pace with a $3 million
purchase and I followed that up with a $2 million open market purchase in February of 1997. And because membership in this—or any—corporate rescue team must include everyone in the company, we have instituted a highly innovative employee stock option plan, giving all domestic Sunbeam employees a stake in their Company’s growth. From this day forward, everyone on the Sunbeam team—the shareholders, your Board, your senior management and all your Company’s workers—are joined together in a common mission: to restore Sunbeam’s profitability and deliver the maximum return to the shareholder. Step 2. We’ve attacked excessive costs. Our cost saving measures are projected to save Sunbeam $225 million a year. For example: six separate headquarters are now one; a 12,000 employee workforce is now 6,000; 26 production facilities—some operating at 30% to 50% of capacity—are down to nine (soon to be eight); 61 warehouses have been reduced to 18. Step 3. We have focused on our core businesses. Companies succeed by achieving excellence in a core business, not mediocrity everywhere. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016.
Al Dunlap at Sunbeam 899-218 13 We have redefined Sunbeam’s core product categories: Kitchen Appliances, Health Care Products, Personal Care and Comfort, Outdoor Cooking, and Away From Home. We are eliminating product lines that do not fit these categories. For example, since December we have sold our outdoor furniture division, our time and temperature product line and our decorative bedding line. We have also signed an agreement to sell our Biddeford textile factory to an investment group which includes the employees of that facility. All this has been substantially completed in just six months. But the final step is the most important of all, and it’s just getting started: Step 4. Execute an aggressive growth plan, making Sunbeam a global leader once again. Our goals for the next three years are: double annual revenues to $2 billion; raise operating margins to 20% of sales; triple international sales to $600 million; realize a 25% return on equity; and generate approximately $600 million of free cash flow. How? 1) Strong advertising support. We will rebuild consumer awareness of our powerful Sunbeam® and Oster® brands behind unprecedented levels of media advertising. The advertising program started
in the fourth quarter of 1996 with a $12 million campaign that has already increased Sunbeam’s brand relevance by 25%. In connection with our new advertising campaign, we are introducing new packaging to make our brands more attractive, distinctive and appealing. 2) Fast product development. We are committed to becoming the industry leader in new product development. To introduce 30 new domestic products a year, we have cut new product development time from two-and-a-half years to six months. We are bringing out innovative products that will satisfy the wants and needs of our consumers and that are truly differentiated from any products in the marketplace today. 3) Go global. Soon, Sunbeam products will be reaching consumers throughout the world. In December 1996, we completed the successful launch of 42 new 220-volt products into 10 international regions. Additionally, in late 1996, we set a goal of signing 15 new international distribution and licensing agreements by April 15th of this year and many more throughout the year. Through mid- March, 13 such agreements were in place, giving Sunbeam access to fast-growing markets in Asia, Latin America an Africa. 4) New channels of distribution. We are expanding our distribution into new channels that offer tremendous new opportunities for Sunbeam. We have a focused “Away From Home” team dedicated to broadening Sunbeam’s presence with commercial customers such as hotels, motels, restaurants and universities. We also have a team dedicated to
exploring new opportunities in other non-traditional channels of distribution such as catalogs, the Internet and our own Sunbeam factory outlet stores. We have already opened six factory outlet stores since November and plan to open 18 more this year. This is the Sunbeam growth plan. It is simple. It is powerful. And it is working, after just six months. A talented, innovative new management team transforming a leaner, more competitive, more focused Sunbeam into the dominant global leader in the industry. Yes, a new Sunbeam is shining—and the best is yet to come. Albert J. Dunlap Chairman and Chief Executive Officer For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. 899-218 Al Dunlap at Sunbeam 14 Exhibit 2 Sunbeam Company History 1897 John Stewart and Thomas Clark found the Chicago Flexible Shaft Company. Early
products include agricultural tools, sheep-shearing machines and hand clippers, and the flexible shafts used to balance or propel them 1910 The original company moves into production of electrical appliances, like the Princess iron. Stewart and Clark adopt the Sunbeam name in advertising. 1930-1946 The Sunbeam Mixmaster, the first automatic coffeemaker and the first pop-up electric toaster give Sunbeam widespread household recognition, and in 1946, the company officially changes its name to Sunbeam Corporation. 1960 After a decade of innovating new products and increasing growth, Sunbeam acquires rival appliance-maker Oster. 1981 Sunbeam is acquired by Allegheny International. Product development expands to include two of Allegheny’s divisions, John Zink (air-pollution control devices) and Hanson Scale (maker of bathroom scales). 1988 Decreased revenues in other divisions forces Allegheny into bankruptcy. 1990 Michael Price, Michael Steinhardt and Paul Kazarian buy Sunbeam from Allegheny’s creditors, re-naming it the Sunbeam-Oster Company. Kazarian becomes Chairman and CEO. 1992 Sunbeam-Oster goes public. 1993 Kazarian is forced out, and Roger Schipke replaces him as
CEO. Sunbeam relocates to Florida, acquires the consumer products division of DeVilbiss Health Care. 1994 Sunbeam board of directors is voted one of the top five worst boards in America by Chief Executive magazine. Among Sunbeam’s negative aspects listed were its lack of independent directors, and excessive control by Price and Steinhardt. 1994-1995 Sunbeam acquires Rubbermaid’s outdoor furniture business. The company changes its name back to Sunbeam Corporation. 1996-1997 Al Dunlap replaces Schipke as CEO, lays off half the workforce and closes or sells 80 of the company’s 114 factories. 1998 The stock price reaches an all-time high of $53 per share. Sunbeam acquires First Alert, Signature Brands and Coleman. The stock price falls dramatically, and Dunlap is fired after disappointing first quarter results and growing concern about his leadership. Source: Compiled by case-writer. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016.
Al Dunlap at Sunbeam 899-218 15 Exhibit 3 Employment History of Al Dunlap 1963-1967 Kimberley-Clark (factory superintendent) 1967-1977 Sterling Pulp and Paper (general superintendent of a manufacturing plant in Eau Claire, Wisconsin) 1977-1982 American Can (executive vice-president of Performance Plastics division) 1982 (March) - 1982 (November) Manville Forest Products Corporation Dunlap became president of Manville in early 1982, presumably to attempt a restructuring. He left the company only months later, after Manville Corporation filed for Chapter 11 bankruptcy (as a result of asbestos-related lawsuits). 1983-1986 Lily Tulip (CEO) Dunlap’s first turnaround of an entire company. In late 1982, he was recruited by KKR, which had bought Lily-Tulip for $150 million in an LBO in 1981. When Dunlap was hired, Lily-Tulip was near bankruptcy, with a debt-to-equity ratio of 9-to-1. Dunlap fired 20% of the salaried workers, 50% of the headquarters staff, sold two plants, consolidated manufacturing facilities, and grounded the company airplane.
Lily Tulip went public in 1984 with an IPO of $9.50 per share (with 17,572,800 shares outstanding by year-end). It was sold to Fort Howard Paper Company in 1986 for $18.50 a share. 1986-1989 General Oriental Securities Limited Acquisition Group (CEO) Working with Sir James Goldsmith, Dunlap had some part in restructuring Diamond International and Cavenham Forest Industries (previously part of Crown-Zellerbach). During this time period, he also worked with Kerry Packer, an Australian billionaire and owner of ConsPress, to help restructure Australian National Industries (1989). 1989-1990 Anglo Group, PLC. (CEO) 1991 Greystar, Inc. (CEO) 1991-1993 Consolidated Press Holdings Limited (CEO) After helping Packer restructure ANI, Dunlap became managing director of ConsPress in September of 1991. Dunlap’s mission was to slim down ConsPress from a corporation of unrelated businesses (ranging from chemical manufacturing to ski resorts) to its core of media-related industries. By the end of 1992, he had reduced ConsPress holdings from 413 business to just 140. He left ConsPress in February of 1993. 1994-1996 Scott Paper, Inc. (CEO)
1996-1998 Sunbeam (CEO) Source: Compiled by case-writer. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. 899-218 Al Dunlap at Sunbeam 16 Exhibit 4 Rambo in Pinstripes Photo by Andrew Itkoff “The meek will not inherit the earth, and for sure they won’t get the mineral rights.” —Al Dunlap, Washington Post, June16, 1995 For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016.
899-218 -17- Exhibit 5 Scott Paper Stock Performance, Relative to the S&P 500 SCOTT PAPER RELATIVE STOCK PRICE PERFORMANCE 0 50 100 150 200 250 300 350 400 31 -D ec -8 9 28
-F eb -9 0 30 -A pr -9 0 30 -J un -9 0 31 -A ug -9 0 31 -O ct -9
0 31 -D ec -9 0 28 -F eb -9 1 30 -A pr -9 1 30 -J un -9 1 31
-A ug -9 1 31 -O ct -9 1 31 -D ec -9 1 29 -F eb -9 2 30 -A pr -9
2 30 -J un -9 2 31 -A ug -9 2 31 -O ct -9 2 31 -D ec -9 2 28
-F eb -9 3 30 -A pr -9 3 30 -J un -9 3 31 -A ug -9 3 31 -O ct -9
3 31 -D ec -9 3 28 -F eb -9 4 30 -A pr -9 4 30 -J un -9 4 31
-A ug -9 4 31 -O ct -9 4 31 -D ec -9 4 28 -F eb -9 5 30 -A pr -9
5 30 -J un -9 5 31 -A ug -9 5 31 -O ct -9 5 Dunla p b eco m es CEO M erge r with Kimb e rle y-Cla rk Scott Paper S&P 500 Source: Datastream
For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. 899-218 Al Dunlap at Sunbeam 18 Exhibit 6 Directors of the Sunbeam Board: Before, During and Following Dunlap’s Tenure Sunbeam Board of Directors, 1995 � Roderick M. Hills, age 64, has been a Director of the Company since 1990. Mr. Hills is currently a partner in the Washington office of Mudge, Rose, Guthrie, Alexander & Ferdon, a law firm, and Counselor, Hills & Company, international consultants. Amount of Ownership: 8,000 shares. Peter A. Langerman, age 39, has been a Director of the Company since 1990. Mr. Langerman has been Executive Vice President and a Director of Mutual Series Fund Inc., a no-load, diversified, open- end management investment company, since 1988. He has been a Director of Hexcel Corporation, a manufacturing company, since 1995. Mr. Langerman has been a
Financial Analyst for Heine Securities Corporation, an investment advisory service company, since 1986. Amount of Ownership: 0 shares. Daniel J. Meyer, age 58, was nominated to become a Director of the Company at the February 1995 meeting of the Board of Directors. He has been the Chairman of the Board and Chief Executive Officer, of Cincinnati Milacron Inc., a manufacturer of processing equipment and systems for the metal working and plastic industries, since 1991. Amount of Ownership: 0 shares. Roger W. Schipke, age 58, has been Chairman of the Board, a Director, and Chief Executive Officer (“CEO”) of Sunbeam-Oster since August 1993. From December 1990 to August 1993, he was Chairman, Chief Executive Officer and President of Ryland Group, Inc., a mortgage banking and home building company. Prior to joining Ryland, Mr. Schipke spent 29 years with General Electric Corporation, most recently as Senior Vice President in charge of the Appliances Division. Mr. Schipke is a member of the Boards of Directors of each of the Brunswick Corporation, Legg Mason Inc., Mohawk Industries, Inc. and The Rouse Company. Amount of Ownership: 479, 337shares. Charles J. Thayer, age 51, has been a Director of the Company since 1990. He served as Chairman of the Board of Directors from January 1993 until August 1993. Mr. Thayer also served as Interim Chief Executive Officer of the Company from June 1993 until August 1993 and as Vice Chairman from August 1993 until December 1993. He has been Managing
Director of Chartwell Capital, Ltd., a financial advisory services company, since 1989. Mr. Thayer was Executive Vice President of PNC Financial Corp., a multi-bank holding company, from 1987 until 1989. Amount of Ownership: 42,000 shares. Shimon Topor, age 51, was appointed by the Board of Directors to fill a vacancy on the Board in February 1995. He has been a General Partner of Steinhardt Management Co., Inc., an investment partnership, since 1985 and is currently a General Partner of several other investment partnerships. Amount of Ownership: 0 shares. Paul W. Van Orden, age 68, has been a Director of the Company since 1993. He is Executive Director of each of the Chazen Institute of International Business at Columbia University Business School and the Columbia University Center for International Business Education. Amount of Ownership: 6,000 shares. Source: Sunbeam Proxy, April 7, 1995. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. Al Dunlap at Sunbeam 899-218 19
Exhibit 6 (continued) Sunbeam Board of Directors, 1997 Albert J. Dunlap, age 59, has been Chairman of the Board of Directors and Chief Executive Officer of Sunbeam Corporation since July 18, 1996. From April 1994 to December 1995 he was Chairman and Chief Executive Officer of Scott Paper Company. From 1991 to 1993, Mr. Dunlap was the Managing Director and Chief Executive Officer of Consolidated Press Holdings Limited (an Australian media, chemicals and agricultural operation). Mr. Dunlap is a Director of General Oriental Investments Limited. Amount of Ownership: 1,324,898 shares. Charles M. Elson, age 37, has been a Director since his appointment to the Board on September 25, 1996. Mr. Elson has been a Professor of Law at Stetson University College of Law since 1990 and serves as Of Counsel to the law firm of Holland & Knight (since May 1995). He is also a member of the American Law Institute and the Advisory Council and Commissions on Director Compensation and Director Professionalism of the National Association of Corporate Directors. Mr. Elson is Trustee of Talledega College and a Salvatori Fellow of the Heritage Foundation. Amount of Ownership: 7,500 shares. Russell A. Kersh, age 43, has been Executive Vice President, Finance and Administration of Sunbeam Corporation since July 22, 1996, and has been a Director since August 6, 1996. From June 1994 to December 1995 he was Executive Vice President,
Finance and Administration of Scott Paper Company. Amount of Ownership: 140,817 shares. Howard G. Kristol, age 59, has been a Director since his appointment on August 6, 1996. He has been a partner in the law firm of Reboul, MacMurray, Hewitt, Maynard & Kristol since 1976. Amount of Ownership: 7,500 shares. Peter A. Langerman, age 41, has been a Director of the Company since 1990 and served as Chairman of the Board from May 22, 1996 until July 18, 1996. Amount of Ownership: 0 shares. William T. Rutter, age 66, has been a Director since his appointment on April 8, 1997. He is a Senior Vice President/Managing Director, Private Banking, First Union National Bank of Florida, a position he has held since 1986. Amount of Ownership: 2,000 shares. Faith Whittlesley, age 58, has been a member of the Board of Directors since her appointment in December 1996. Mrs. Whittlesey has served as the Chief Executive Officer of the American Swiss Foundation, a charitable and educational foundation, since 1991. She is a member of the Board of Directors of Valassis Communications, Inc. Amount of Ownership: 3,500 shares. Source: Sunbeam Proxy, June 11, 1997. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE
OTHER from August 2016 to December 2016. 899-218 Al Dunlap at Sunbeam 20 Exhibit 6 (continued) Sunbeam Board of Directors, 1999 Jerry W. Levin, age 55, was appointed Chief Executive Officer, President and a Director of Sunbeam in June 1998 and was elected as Chairman of the Board of Directors in March 1999. Mr. Levin was also appointed to serve as Chief Executive Officer and a Director of The Coleman Company, Inc. (“Coleman”) and Camper Acquisition Corp. (“CAC”), a wholly-owned subsidiary of Sunbeam, in June 1998. Coleman is a publicly held company of which approximately 79% of its stock is owned by the Company. Mr. Levin previously held the position of Chairman and Chief Executive Officer of Coleman from February 1997 until its acquisition by Sunbeam in March 1998. Mr. Levin was also the Chairman of Coleman from 1989 to 1991. Mr. Levin was Chairman of the Board of Revlon, Inc. from November 1995 until June 1998, Chief Executive Officer of Revlon, Inc. from 1992 until January 1997, and President of Revlon, Inc. from 1992 to 1995. Mr. Levin has been Executive Vice President of MacAndrews & Forbes Holdings, Inc. since March 1989. Amount of Ownership: 0 shares.
Philip E. Beekman, age 67, is a nominee for election as a Director of Sunbeam. Mr. Beekman is President of Owl Hollow Enterprises Inc., a position he has held since July 1994. From December 1986 to July 1994, he was Chairman and Chief Executive Officer of Hook SUPERX, a retail drug store chain. Amount of Ownership: 5,000 shares. Charles M. Elson, age 39, has been a Director of Sunbeam since his appointment to the Board of Directors in September 1996. Mr. Elson was a Director of Coleman from March 30, 1998 until June 24, 1998. Amount of Ownership: 10,500 shares. Howard Gittis, age 65, was appointed to the Board of Directors of Sunbeam in June 1998. Mr. Gittis has been a Director, Vice Chairman and Chief Administrative Officer of MacAndrews & Forbes and certain of its affiliates since 1985. Mr. Gittis also is a member of the Boards of Directors of Golden State Bancorp Inc., Golden State Holdings Inc., Jones Apparel Group, Inc., Loral Space & Communications Ltd., M & F Worldwide Corp., Panavision Inc., Revlon Consumer Products Corporation, Revlon, Inc., REV Holdings Inc. and Rutherford- Moran Oil Corporation. Amount of Ownership: 0 shares. John H. Klein, age 53, was appointed to the Board of Directors in February 1999. Mr. Klein is Chairman and Chief Executive Officer of BiLogix, Inc. and Strategic Business and Technology
Solution s LLC and Chairman of CyBear, positions he has held since mid-1998. From April 1996 to May 1998, he was Chairman and Chief Executive Officer of MIM Corporation, a provider of pharmacy benefit services to medical groups. Amount of Ownership: 415 shares. Howard G. Kristol, age 61, has been a Director of Sunbeam since his appointment to the Board of Directors in August 1996. Mr. Kristol has been a partner in the law firm of Reboul, MacMurray, Hewitt, Maynard & Kristol since 1976. Amount of Ownership: 10,500 shares. Peter A. Langerman, age 45, has been a Director of Sunbeam since 1990 and served as the Chairman of the Board of Directors from May 1996 until July 1996 and from June 1998 until March 1999. Amount of Ownership: 0 shares. Faith Whittlesley, age 60, has been a Director of Sunbeam since
her appointment to the Board of Directors in December 1996. Amount of Ownership: 6,890 shares. Source: Sunbeam Proxy, May 11, 1999. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. 899-218 -21- Exhibit 7 Sunbeam Stock Performance Relative to the S&P 500 SUNBEAM RELATIVE STOCK PRICE PERFORMANCE 0 50
100 150 200 250 300 350 400 31 -A ug -9 2 31 -O
ct -9 2 31 -D ec -9 2 28 -F eb -9 3 30 -A pr
-9 3 30 -J un -9 3 31 -A ug -9 3 31 -O ct -9
3 31 -D ec -9 3 28 -F eb -9 4 30 -A pr -9
4 30 -J un -9 4 31 -A ug -9 4 31 -O ct -9 4
31 -D ec -9 4 28 -F eb -9 5 30 -A pr -9 5
30 -J un -9 5 31 -A ug -9 5 31 -O ct -9 5 31
-D ec -9 5 29 -F eb -9 6 30 -A pr -9 6 30 -J
un -9 6 31 -A ug -9 6 31 -O ct -9 6 31 -D
ec -9 6 28 -F eb -9 7 30 -A pr -9 7 30 -J un
-9 7 31 -A ug -9 7 31 -O ct -9 7 31 -D ec -9
7 28 -F eb -9 8 30 -A pr -9 8 30 -J un -9
8 Sunbeam S&P 500 Dunlap becomes CEO Dunlap is fired Source: Datastream For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016.

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Chapter 7Mergers & Acquisitions1Merger.docx

  • 1. Chapter 7 Mergers & Acquisitions 1 Mergers, Acquisitions, and Takeovers Merger Two firms agree to integrate their operations on a relatively co-equal basis Chrysler and Daimler (1998) Chrysler and Fiat (2014) JP Morgan Chase (2000) Acquisition Controlling interest to make acquired firm a subsidiary business within its portfolio Cisco Chase (Chemical Bank 1996, Banc One 1998) (Hostile)Takeover Target firm did not solicit the acquiring firm’s bid AOL and Time Warner
  • 2. 2 Acquiring firms About zero return on the average Too high premium (bidding war, overconfidence) Acquired firms(被兼并) Often earn above-average returns Why? Do They Work? So Why Are Acquisitions Done? Bigger firms with more resources and capabilities may achieve increased market power Can sell goods or services above competitive levels Can drive costs below those of competitors Horizontal and Vertical Acquisitions 4 市场势力是指卖方(seller)或买方(buyer)不适当地影响商品价格的能力。对于 卖方来说，市场势力也就是卖方的垄断倾向。 Horizontal Acquisitions Increase Market Power Acquisition of a firm in the same industry (bigger, more
  • 3. resources): Cost-based synergies Buyer power Economies of scale Revenue-based synergies Supplier Power Monopoly-like advantages Airlines (US Airways/American) Cable (Comcast/AT&T Broadband, Charter Communications wants Time Warner and Brighthouse) Horizontal Acquisitions 5 Acquisition of a supplier or distributor to the firm Increases a firm’s market power by controlling additional parts of the value chain How does this work? Horizontal Acquisitions Vertical Acquisitions Vertical Acquisitions Also Increase Market Power Oil firms: Drilling, refining, distribution (BP)
  • 4. Alibaba (China, internet shopping: Acquired firms doing payments and delivery Apple(stores) 6 Acquisitions To Overcome Entry Barriers Entry Barriers Factors associated with making it expensive and difficult for new firms to gain market access Economies of scale Cost leadership (buy competitor, larger firm) Differentiated products Differentiation (VW bought Bugatti, Bentley, Porsche, Ducati) Also often the reason behind cross-border acquisitions Cultural and political differences (need local knowledge and initial foothold in new market) PepsiCo and Wimm-Bill-Dann Foods OAO (2011) Santander and Polish Bank Zachodni WBK SA (2011) ChemChina and Pirelli (2015) 7 Acquisitions To Substitute For New Product & Capability Development
  • 5. Gain access to new products Increase speed to market (Cisco, ChemChina/Pirelli) Lower risk Internal development of new products is often perceived as a high-risk activity New firm with market-tested products Gain access to new capabilities Special technological capability (Cisco, ChemChina/Pirelli) A broader knowledge base But may reduce innovation/product development skills over the long run 8 Acquisitions To Change Portfolio of Businesses Both related and unrelated diversification strategies can be implemented through acquisitions Related tends to work better Change firm scope Reduce a firm’s dependence on one or more products or markets Unattractive industries, mature products 9
  • 6. Other Reasons for Acquisitions Managerial Opportunism Size drives TMT pay Size and complexity reduces employment risk Overconfidence Acquisitions Jaguar (1990) Aston Martin (1993) Land Rover (2000) Also transferred Lincoln and Mercury Ford: Acquisitions Premier Automotive Group Why Did Ford Make Those Acquisitions? Market power (cost or revenue based)? Synergies? To overcome entry barriers? To substitute for new product/capability development? To reduce dependence on one or more products or markets? Managerial opportunism (size drives pay, size and complexity lowers employment risk)? Overconfidence?
  • 7. 12 Problems in Achieving Acquisition Success Too large Managers overly focused on acquisitions Extraordinary debt Inadequate target evaluation Too much diversification Inability to achieve synergy Integration difficulties Problems with Acquisitions 13
  • 8. Problems: Integration Difficulties Integration challenges include: Melding two disparate corporate cultures Building effective working relationships (getting along) Resolving problems regarding the status of the newly acquired firm’s executives Loss of key personnel weakens the acquired firm’s capabilities and reduces its value 14 Problems: Inability to Achieve Synergy Synergy (2+2>4) When assets are worth more when used in conjunction with each other than separately What about premiums paid? Synergy (2+2>(4 + premium paid)) Synergies for bank mergers? Synergies for manufacturing (car) firms? 15 Problems: Firm Too Large and Too Diversified https://www.ge.com/pdf/company/ge_organization_chart.pdf http://www.tata.com/pdf/Tata_Group_presentation.pdf
  • 9. Competitive advantage in all industries Competing against focused single-business firms TMT must understand all businesses Capital allocation Need to be at least some sharing/leveraging Larger size requires more formalization and standardization Larger bureaucracy, less innovation May mean more focus on short-term performance 16 Problems: Inadequate Evaluation of Target Due Diligence（尽职调查） The process of evaluating a target firm Ineffective due diligence may result in paying an excessive premium for the target company Requires examining Potential synergies and complementarities Differences in culture Actions necessary to meld the two workforces Tax consequences of the transaction 17 Problems: Too Much Debt High debt can Increase the likelihood of bankruptcy
  • 10. Lead to a downgrade of the firm’s credit rating Constrain investment in activities that contribute to the firm’s long-term success Research and development Capital expenditures Marketing 18 Problems: Managers Overly Focused on Acquisitions Managers invest substantial time and energy in Searching for viable acquisition candidates Doing due-diligence Preparing for negotiations Managing the integration process after acquisition Need to be substantial synergies to compensate Daimler/Chrysler Video 19 Why Did the Daimler/Chrysler Merger Fail? Integration difficulties? Inability to achieve synergy? Firm too large and too diversified? Lack of due diligence? Too much debt and managers overly focused on acquisitions?
  • 11. External environment? 20 Reversing Acquisitions: Restructuring A strategy through which a firm changes its set of businesses Failure of an acquisition strategy often precedes a restructuring strategy Restructuring may also occur because of changes in the external environment Downscoping Downsizing Leveraged buy-out 21 Types of Restructuring: Downscoping A divestiture, spin-off or other means of eliminating businesses unrelated to a firm’s core business Causes firm to refocus on its core business May be accompanied by downsizing Results in a smaller firm that can be more effectively managed
  • 12. 22 Acquisitions Divestitures Jaguar (1990) sold to TATA (2008) Aston Martin (1993) sold (2007) Land Rover (2000) sold to TATA (2008) Mercury was discontinued Lincoln back to Ford Ford Downscoping Premier Automotive Group Types of Restructuring: Downsizing A reduction in the number of a firm’s employees and sometimes in the number of its operating units. May or may not change the composition of businesses in the firm’s portfolio. Typical reasons for downsizing: Expectation of improved profitability from cost reductions Desire or necessity for more efficient operations 24
  • 13. Ford Downsizing The Way Forward restructuring plan (2006) Focus on Ford (sold Hertz and Mahindra venture) Cut plant capacity and reduced work force by 30K (about 25 %) Probably planned to sell premium brands as well 25 Restructuring: Leveraged Buyout (LBO) Party buys all of a firm’s assets in order to take the firm private Lots of debt Sale of non-core assets to pare down debt Michael Dell and venture partner Silver Lake took Dell private (2013) Focus on restructuring to cope with new computing landscape (fewer PCs, focus on cloud, big data - IBM) Avoid quarterly earnings pressure Ultimately about control 26 Why Did Ford’s Acquisitions Fail? Integration difficulties? Inability to achieve synergy? Firm too large and too diversified? Lack of due diligence?
  • 14. Too much debt and managers overly focused on acquisitions? External environment? 27 Chapter 6 Corporate-Level Strategy 1 Corporate-Level Strategy What businesses should the firm be in? How should the corporate office manage those businesses? Units should be worth more under the firm umbrella Synergies
  • 15. Unit 1 Unit 2 Unit 3 Unit 4 2 Two Levels of Strategy Business-level Strategy Selecting strategy (e.g., cost leadership and differentiation) to compete in individual markets Could be different for each business unit Corporate-level Strategy (Companywide) Selecting and managing a group of different businesses
  • 16. competing in different product markets Improve performance of business units in the aggregate Diversification Mergers & Acquisitions (Chapter 7) 3 Diversification What is diversification? Do something different Expand outside of main business How is it related to firm size and risk? Leads to bigger firms (additional businesses) May reduce risk (less related to main business) May increase risk (competencies may not travel) Corporate Strategy: Low Level of Diversification Dominant Business Between 70% and 95% of revenue comes from a single business Examples? Black & Decker (power tools) Harley Davidson (10 % apparel, licensing) A
  • 17. A B Single Business More than 95% of revenue comes from a single business Examples? Whirlpool (appliances) Wm. Wrigley Jr. (chewing gum) 5 Related Constrained Less than 70% of revenue comes from a single business Businesses share product, technological and distribution linkages Related Linked (mixed related and unrelated) Less than 70% of revenue comes from a single business Less direct links between businesses Moderate to High Level of Diversification C A B
  • 18. C A B PepsiCo (Frito L, Quaker, Tropicana, Aquafina) Campbell (Prego, Goldfish, V8, Pepperidge Farms) Merck (50 prescription products plus Merck Animal Health) 6 High Level of Diversification Unrelated Diversification Less than 70% of revenue comes from the dominant business, and there are few common links between businesses Examples? GE 3M Tata Group https://www.ge.com/pdf/company/ge_organization_chart.pdf http://www.tata.com/pdf/Tata_Group_presentation.pdf C
  • 19. B A 7 Reasons for DiversificationValue-Creating DiversificationValue-Neutral DiversificationValue-Reducing DiversificationEconomies of scope (related diversification) Sharing activities Transferring core comp. Market power (related diversification) Blocking competitors through multipoint competition Vertical integration Financial economies (related & unrelated diversification) Efficient internal capital allocation Business restructuringAntitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Excess resources Diversifying managerial employment risk Increasing managerial compensation 8 Value-Creation: Economies of Scope
  • 20. Firms create value by sharing (transferring) across business units: Resources Capabilities Core competencies Creates value by: Better use of existing resources Eliminates resource duplication No need to develop competencies that already exist Difficult for competitors to understand and imitate “Fluid value-creation” 9 Economies of Scope – Two Ways to Share Operational relatedness in sharing activities Sharing resources or simpler activities (e.g., inventory delivery, purchasing systems, warehousing) Corporate relatedness sharing corporate core competencies Sharing more complex sets of capabilities and core competencies that have already been developed Marketing, design, technological capabilities Apple economies of scope? Innovation Design Customer Service Marketing
  • 21. Management (strategic decision making) Corporate Relatedness 10 Economies of Scope? - operational relatedness 11 Reasons for DiversificationValue-Creating DiversificationValue-Neutral DiversificationValue-Reducing DiversificationEconomies of scope (related diversification) Sharing activities Transferring core competencies Market power (related diversification) Multipoint competition Vertical integration Size Financial economies (related & unrelated diversification) Efficient internal capital allocation
  • 22. Business restructuringAntitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Excess resources Diversifying managerial employment risk Increasing managerial compensation 12 Value-Creation: Market Power Market power exists when a firm can: Reduce cost of its primary and support activities below the competitive level Sell products at prices above the existing competitive level How do firms do this? Through multipoint Competition Two or more diversified firms simultaneously compete in the same product areas or geographic markets Coke and Pepsi Airlines 13
  • 23. Vertical Integration Backward integration—a firm produces its own inputs Tesla battery factory, DeBeers Forward integration—a firm operates its own distribution system for delivering its outputs Tesla, Apple stores What about size? Size drives market power (e.g., Porter’s 5 forces) Second Way To Achieve Market Power 14 Reasons for DiversificationValue-Creating DiversificationValue-Neutral DiversificationValue-Reducing DiversificationEconomies of scope (related diversification) Sharing activities Transferring core competencies Market power (related diversification) Blocking competitors through multipoint competition Vertical integration Financial economies (related & unrelated diversification) Efficient internal capital allocation Business restructuringAntitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Excess resources Diversifying managerial employment risk Increasing managerial compensation
  • 24. 15 Value-Creation: Financial Economies Unrelated diversification: Not about sharing but about investment and allocation Buying assets and restructuring them CEMEX 3 step process Find high growth market Find take over target (due diligence) Improve performance (PMI) Allocation of resources Efficient internal capital allocation Restructuring assets and capital allocation applies to related diversification as well 16 Capital Allocation
  • 25. Firm Business Unit Business Unit Business Unit Business Unit “The most critical choices top management makes are those that allocate resources among competing strategic investment opportunities” (Donaldson, 1984: 95) Strategic decision making process performed by corporate office (Stein, 1997) 17 --For fiscal 2006, Newell Rubbermaids total capital budget of 76MIO was allocated in the following manner: STATE THEM. ---Those allocations, in turn, hold the key to the problem or question underlying this dissertation: is this allocation efficient??, or could the available capital have been allocated in a better way? For example, is too much capital going to Office Products and not enough to Home and Family?? Or it may be that Tools & hardware have the very best potential, and should
  • 26. have received the most capital instead of office products? ---Those are all questions I investigate by looking at capital allocation errors which I define conceptually as too much or too little investment in segments with relatively worse or better growth prospects, respectively. Decision Making Decision making process of identifying and choosing one course of actions from alternative courses of action Rational Decision Making Rational model of decision making explains how managers should make decisions assumes managers will make logical decisions that will maximize the organization’s interests also called the classical model Successful Implementation - Plan carefully Be sensitive to those affected Evaluation - What should you do if action is not working? Give it more time Change it slightly Try another alternative Start over
  • 27. Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-19 Assumptions of the Rational Model Do We Make Rational Decisions? In Simple Terms: It’s Hard to Make Rational Decisions There’s too much information/evidence or not enough The information doesn’t quite apply People are trying to mislead you You are trying to mislead you (biases) The side effects outweigh the cure Competitors may respond in ways that you may not have anticipated (game theory) Rational Decision Making Rational decisions are rare, for some very good reasons Bounded rationality Biases
  • 28. Successful Implementation - Plan carefully Be sensitive to those affected Evaluation - What should you do if action is not working? Give it more time Change it slightly Try another alternative Start over Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-22 Bounded Rationality Bounded Rationality suggests that the ability of decision makers to be rational is limited by numerous constraints Complexity (cognitive capacity), time and money Example: Buying a house Did you look at all cities/communities in your targeted area? Did you collect all information (schools, tax bill, HOA information, historical price appreciation, crime rates, flood plains etc.) Did you check out all houses that were for sale meeting your requirements? How many real estate agents did you interview? Did you make a buy/rent analysis? Satisficing Model Satisficing Model
  • 29. managers seek alternatives until they find one that is satisfactory, not optimal We tend to satisfice Biases Affecting Rational Decision-Making Common decision-making biases (systematic errors) Availability Bias Readily available information (latest) Confirmation Bias Discount information that does not confirm Representativeness Bias Small sample problem (winning the lottery, shark attacks) Sunk Cost Bias/Escalation of Commitment Bias Anchoring/Adjustment Bias Framing Bias 25 Sunk Cost & Escalation of Commitment Bias Sunk cost-old investments of time/money that can’t be recovered. Escalation of Commitment Bias-Continuing to invest and increase commitment, even when it is evident that there is no justification; too costly or painful to abandon Organizations that penalize failed decisions heavily are more
  • 30. likely to create conditions that lead to these biases Anchoring/Adjustment Bias Divide into two groups and ask…. Is the population of Turkey greater than 35 million? What is the population of Turkey? Or Is the population of Turkey greater than 100 million? What is the population of Turkey? The answer to the second question (What is the population of Turkey?) increases by millions if anchored by higher amount 27 Framing Bias Gains vs. Losses (Prospect Theory, Kahneman & Tversky, 1979) Marine property adjuster: Charged with minimizing the loss of cargo on three insured barges that sank yesterday off the coast of Alaska. Each barge holds $200,000 worth of cargo, which will be lost if not salvaged within 72 hours. Two options
  • 31. Framing Bias A. This plan will save the cargo of one of the three barges worth $200,000 B. This plan has a 1/3 probability of saving the cargo on all three barges, worth $600,000, but has a 2/3 probability of saving nothing. Which plan would you choose? Framing Bias C. This plan will result in the loss of two of the three cargoes, worth $400,000. D. This plan has a 2/3 probability of resulting in the loss of all three cargoes and the entire $600,000 but has a 1/3 probability of losing no cargo. Which plan would you choose? Framing Bias A. This plan will save the cargo of one of the three barges worth $200,000 B. This plan has a 1/3 probability of saving the cargo on all three barges, worth $600,000, but has a 2/3 probability of saving nothing.
  • 32. 70 % 30 % Framing Bias C. This plan will result in the loss of two of the three cargoes, worth $400,000. D. This plan has a 2/3 probability of resulting in the loss of all three cargoes and the entire $600,000 but has a 1/3 probability of losing no cargo. 30 % 70 % Framing Bias The difference was framing. People are risk averse when a problem is posed in terms of gains (barges saved) But risk seeking when a problem is posed in terms of avoiding losses (barges lost). Framing Bias A. This plan will save the cargo of one of the three barges worth $200,000
  • 33. B. This plan has a 1/3 probability of saving the cargo on all three barges, worth $600,000, but has a 2/3 probability of saving nothing. Which plan would you choose? Risk Averse when facing gain (barges saved) Will choose sure thing (A) 71 % 29 % 34 Framing Bias C. This plan will result in the loss of two of the three cargoes, worth $400,000. D. This plan has a 2/3 probability of resulting in the loss of all three cargoes and the entire $600,000 but has a 1/3 probability of losing no cargo. Which plan would you choose? Risk Seeking when facing loss (barges lost) Will choose the riskier option (D) 30 % 70 % But we are missing something… Biggest bias of all?
  • 34. When we are evaluating alternatives, there is often one alternative that we are overlooking… It’s a given and therefore not considered an alternative… It happens if we don’t make a choice… Status quo is also a choice Much more likely to pick even if expected outcomes are way lower Fear of the unknown Leads people to overvalue what they have Overcoming Biases 1) Understand your Biases! 2) Look at a situation from a different perspective or from a different decision-making styles…what would a Rational/Guardian/Idealist Person do? 3) Our “gut” draws from patterns/rules that we may or may not see. Practice seeing patterns—data isn’t just data—there’s a message. 4) Don’t fall in love with your decisions. Everything is fluid. “Think Harder” & Repetition Products and structure
  • 35. Home & Family Graco Goody Tools & Hardware Irwin Lenox Cleaning-Org Levolor Rubbermaid Office Products Sharpie Paper Mate Rolodex 38
  • 36. --Newell-Rubbermaid is a well-performing diversified firm with a number of products, some of which may be familiar to most of us. They have structured these products in 4 business segments (click) --For example, The sell paper-mate and sharpie pens and highlighters as well as rolodex filing systems within the business segment of Office Products. --The also make industrial tools including Lenox handtorches within their Tools & Hardware segment. --Finally, they market Graco baby and young child stuff like car seats and strollers, and Goody combs and brushes through their home and family segment.. ---So, although the segments are fairly diverse in the products they market and sell, those segments have one thing in common in that they all need capital to grow and create future wealth with. Capital that gets allocated to them from the corporate office. Capital Allocation process Newell Rubbermaid Office Products 30mio Home & Family 8mio Cleaning-Org. 22mio
  • 37. Tools & Hardware 16mio How should this be done? Based on expected future business unit performance (prospects) Figure out prospect, then allocate in accordance with them Rational perspective of capital allocation 39 --For fiscal 2006, Newell Rubbermaids total capital budget of 76MIO was allocated in the following manner: STATE THEM. ---Those allocations, in turn, hold the key to the problem or question underlying this dissertation: is this allocation efficient??, or could the available capital have been allocated in a better way? For example, is too much capital going to Office Products and not enough to Home and Family?? Or it may be that Tools & hardware have the very best potential, and should have received the most capital instead of office products? ---Those are all questions I investigate by looking at capital allocation errors which I define conceptually as too much or too little investment in segments with relatively worse or better growth prospects, respectively. Capital Allocation process
  • 38. Newell Rubbermaid Office Products 30mio Home & Family 8mio Cleaning-Org. 22mio Tools & Hardware 16mio What are some impediments to rational allocation ? Prospects (future performance) hard to estimate (bounded rationality) Escalating commitments Tendency to be affected by gain/loss contexts (e.g., investment portfolio) Too much to poor performers to turn them around (risk seeking) Not enough capital to better units (risk aversion) Use previous year allocations as starting point Availability, confirmation Bounded rationality Escalating commitments Contexts (gain/loss) Status quo 40 --For fiscal 2006, Newell Rubbermaids total capital budget of
  • 39. 76MIO was allocated in the following manner: STATE THEM. ---Those allocations, in turn, hold the key to the problem or question underlying this dissertation: is this allocation efficient??, or could the available capital have been allocated in a better way? For example, is too much capital going to Office Products and not enough to Home and Family?? Or it may be that Tools & hardware have the very best potential, and should have received the most capital instead of office products? ---Those are all questions I investigate by looking at capital allocation errors which I define conceptually as too much or too little investment in segments with relatively worse or better growth prospects, respectively. Reasons for DiversificationValue-Creating DiversificationValue-Neutral DiversificationValue-Reducing DiversificationEconomies of scope (related diversification) Sharing activities Transferring core competencies Market power (related diversification) Blocking competitors through multipoint competition Vertical integration Financial economies (related & unrelated diversification) Efficient internal capital allocation Business restructuringAntitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Excess resources Diversifying managerial employment risk Increasing managerial compensation
  • 40. 41 Value-Neutral: Antitrust Laws Laws in 1960s and 1970s discouraged mergers that created increased market power (vertical or horizontal integration) Mergers tended to be unrelated Relaxation of antitrust enforcement results in more and larger horizontal mergers (80’s and 90’s) Concerns emerging and mergers now more closely scrutinized (2000’s and on) AT&T and T-Mobile, Nasdaq and New York Stock Exchange (2011) Economist article Anti-trust Legislation 42 High tax rates on dividends Firms shift from dividends to acquiring firms and expanding internally 1986 Tax Reform Act Reduced individual ordinary income tax rate from 50 to 28 percent Now treats capital gains as ordinary income Created incentive for firms to favor dividends Lately also buy-backs of firm stock
  • 41. Anti-trust Legislation Tax Laws Value-Neutral: Tax Rates What does high dividends and buy-backs say about a firm? 43 Reasons for DiversificationValue-Creating DiversificationValue-Neutral DiversificationValue-Reducing DiversificationEconomies of scope (related diversification) Sharing activities Transferring core competencies Market power (related diversification) Blocking competitors through multipoint competition Vertical integration Financial economies (related & unrelated diversification) Efficient internal capital allocation Business restructuringAntitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Excess resourcesDiversifying managerial employment risk Increasing managerial compensation 44
  • 42. Low performance makes diversification more likely Turn performance around Change focus to new business Makes sense: firms in loss context take more risks (diversification is risky) High performance eliminates the need for diversification Low Performance Value-Neutral: Firm Performance 45 Does Diversification Work? Only Up To a Certain Point 46 Diversification may be a good strategy if Industry segment is becoming unattractive Product line is mature or threatened Low Performance
  • 43. Poor Prospects Value-Neutral: Poor Prospects Uncertain Future Cash Flows 47 “Eggs in more baskets” Business unit returns are never 100 % correlated Returns from unrelated units have low correlations Excess resources invites diversification Original theoretical argument for diversification Many large US firms have sizable cash (Microsoft, Apple) Low Performance Uncertain Future Cash Flows Risk Reduction Value-Neutral: Risk Reduction & Excess Resources Excess Resources 48 Reasons for DiversificationValue-Creating DiversificationValue-Neutral DiversificationValue-Reducing DiversificationEconomies of scope (related diversification)
  • 44. Sharing activities Transferring core competencies Market power (related diversification) Blocking competitors through multipoint competition Vertical integration Financial economies (related & unrelated diversification) Efficient internal capital allocation Business restructuringAntitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Excess resourcesDiversifying managerial employment risk Increasing managerial compensation 49 Managers like diversification – why? Risk reduction Increased compensation from running bigger, more complex firms Shareholders don’t – why? They can do their own diversification Diversification discount (beyond a certain level of diversification) How is this dealt with? Corporate governance No duality Incentive compensation
  • 45. Outside directors Market for corporate control What happens to firms that do not maximize share holder wealth? Self-disciplining (takeover, reputation) Value-Reducing: Managerial 50 Al Dunlap at Sunbeam – Case Analysis Questions (100 points) 1. What were some big problems Sunbeam was facing around the time Dunlap was hired? Please do not comment on their low stock price when answering this question. 2. Based on your answer above, discuss whether the strategic actions Dunlap took to turn Sunbeam around were appropriate (e.g., did they fit). 3. Boards have a fiduciary duty to look after shareholder interests. With that in mind, please comment on the board of directors at Sunbeam – did they do a good job of looking after their shareholders?
  • 46. 9-899-218 R E V : D E C E M B E R 1 5 , 2 0 0 3 _____________________________________________________ _____________________________________________________ ______ Professors Brian J. Hall and Rakesh Khurana and Research Associate Carleen Madigan prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 1999 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. B R I A N J . H A L L R A K E S H K H U R A N A
  • 47. Al Dunlap at Sunbeam Dunlap v. [after Albert J. Dunlap (1937- )] 1. To turn a company around at lightning speed. 2. To focus on the best: to eliminate what is not the best. 3. To protect and enhance shareholder value. — Al Dunlap, Mean Business For much of his career before coming to Sunbeam, Al Dunlap was known as the poster child of corporate restructuring. Coming off a highly successful turnaround at Scott Paper, he had recently published a best-selling book, which detailed his career success at his previous jobs and celebrated his latest accomplishment, “rightsizing” the appliance-maker Sunbeam. Dunlap was both famous and infamous for his hard-nosed approach to turnarounds, which typically involved radical restructuring and downsizing. Although he was often criticized in the press, Dunlap was not shy about his “take-no-prisoners” managerial style, which he documented in his aptly titled book, Mean Business.1 His declared victory at Sunbeam (see Exhibit 1), however, may have been premature. Two months after increasing Sunbeam’s stock price to its all-time high of $53 per share, and only two weeks after Sunbeam’s largest shareholder Michael Price stated that Al Dunlap “is an outstanding executive and Sunbeam is fortunate to have him,” Dunlap was fired.2 Sunbeam’s board had hired Dunlap to turn around the company
  • 48. in 1996, in hopes that he could effect the same increase in shareholder value he had at Scott Paper from 1994 to 1995. As his tenure at Sunbeam carried into the second year, board members watched their stock price fall from a high of $53 to less than $16 the day his firing was announced. His cost-cuttings hadn’t panned out, and the companies acquired under his leadership had been much more trouble than the board had anticipated. Given his widely acclaimed history of turning around ailing companies, and the rapidity of his fall, many wondered what had happened. Was he really just a “one trick pony,”3 overrated and overpaid, or would his restructuring of Sunbeam have worked if he had only been given more time? 1 Dunlap, Albert J. Mean Business: How I Save Bad Companies and Make Good Companies Great. (New York: Simon & Schuster, 1996). 2 Business Wire. May 26, 1998. 3 “Al Dunlap: Exit Bad Guy.” Daniel Kadlec. Time, June 29, 1998. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016.
  • 49. 899-218 Al Dunlap at Sunbeam 2 “Rambo in Pinstripes” The day Sunbeam announced to Wall Street that shareholder- focused Al Dunlap would be its next CEO, the company’s stock price jumped 49%, creating almost $500 million of value for the shareholders, including Michael Price and Michael Steinhardt, the two men who controlled almost 42% of Sunbeam’s shares.4 Price and Steinhardt had pulled the appliance maker out of bankruptcy in 1990 when they bought the company from Allegheny International, a corporation that had acquired Sunbeam in 1981 and had done little to improve it. By the time Dunlap was hired in July of 1996, Sunbeam had been through two other CEOs, an intensive restructuring and a long period of instability.5 (See Exhibit 2 for a history of Sunbeam.) Paul Kazarian, one of the partners in the buyout from Allegheny, and the CEO who took Sunbeam public, was fired in 1993 for his highly volatile leadership style. The CEO that followed, Roger Schipke, was a former GE executive focused on growing Sunbeam slowly, over the long term. He resigned in early 1996, noting a change in strategy, dictated by Price and Steinhardt, from long term to short term. The controlling directors wanted to cash out, and had retained Merrill Lynch to shop the company in late 1995. There had not been any takers. Sunbeam, many believed, was a dying brand. It had failed to keep up the pace with competitors
  • 50. like Black & Decker, and had not succeeded in attracting new customers. Most of the consumers who bought Sunbeam products were older, and had been buying Sunbeam since its heyday in the 1950s and 1960s. Its factories were also aging, as were its machinery and tooling. There were no information systems to connect one department or factory to another. Turnover was high; among factory workers, it was well over 50%. Its board of directors was voted one of the worst boards of 1994 by Chief Executive magazine.6 By the middle of 1996, the stock price had hovered in the teens for close to a year and a half. Sunbeam needed a savior. Dunlap had a well-established track record for “rescuing” ailing companies. His list of accomplishments ranged from implementing operational improvements in the factory he supervised at Kimberley-Clark (his first civilian job after graduating from West Point), to putting Lily Tulip back in the black for Kohlberg Kravis Roberts & Co. (See Exhibit 3 for Dunlap’s employment history.) A man from the “slums of Hoboken”7 who worked the factory floor before becoming an executive, Dunlap attributed many of a company’s ailments to “ivory tower disease”: the inability of business school-educated managers to make decisions about processes occurring layers of management below them.8 In later years, his restructuring plans carried the trademark of firing from the top down, and he earned a reputation for attacking corporate culture as the source of a company’s problems. He was perhaps hired as much for his reputation as for his skills. His aggressive style offered fodder to those he fired, and to the media, who portrayed him
  • 51. as, in his words, “some kind of serial killer.”9 His nicknames (“Chainsaw Al” and “Rambo in Pinstripes” among the most used) were not self-appointed, but Dunlap acted the part, at one point even dressing up as Rambo and posing on the 4 “Chainsaw Al to the Rescue?” Matthew Schifrin. Forbes, August 26, 1996. 5 OneSource Corporate Overview. August 10, 1998. 6 “America’s Best and Worst Boards,” April 1994. 7 Mean Business, 107. 8 Ibid., 113. 9 Ibid., 132. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. Al Dunlap at Sunbeam 899-218 3 cover of USA Today (see Exhibit 4).10 Although his nicknames were originally meant to be compliments (John Aspinall, a friend of Sir James Goldsmith, said, “Al is like a chainsaw. He goes in
  • 52. and cuts away all the fat and leaves a great sculpture.”11), they more typically provoked comments like those of Thomas Petzinger, Jr. of the Wall Street Journal, who described Dunlap as, “an 80s style liquidator dressed up for the 90s as an angry white guy.”12 His tough-guy image and record for rapidly increasing his company’s share price, however, appealed to an important audience—shareholders. At his first major turnaround, Lily Tulip, Dunlap oversaw a $176 million increase in the company’s market value, while firing workers and closing factories. Working for Sir James Goldsmith and Kerry Packer in the late 1980s and early 1990s, he trimmed down large corporations, selling extraneous companies and saving billions of dollars. At Consolidated Press Holdings in Australia, he pared off 273 unrelated companies, generated a $623 million profit from a $25 million loss, and liquidated assets worth over $800 million.13 At his most famous turnaround, Scott Paper, Dunlap fired 10,500 people— 35% of all the employees and 71% of the corporate staff.14 During his tenure at Scott, he also raised the stock price from $38 a share (pre- split) to $120 (pre-split), and sold the company to Kimberley- Clark for more than a $6 billion shareholder gain (see Exhibit 5). 15 At Scott Paper, as with most of his other companies, the turnaround was executed in rapid fashion. From the day of his arrival at the company to the day the merger closed with Kimberley- Clark, Dunlap’s tenure at Scott lasted only 20 months. The merger, which was announced just a year after he signed on, marked the end of the official restructuring in typical Dunlap style. “You look at
  • 53. some of these brand name companies where someone has been there a year and a half or two years and they haven’t turned it around,” he said. “If you are there that long, you’ve missed the window. The window shuts and you are trapped in the building.”16 In addition to downsizing quickly, Dunlap also strongly believed that layoffs should only be done once, in order to avoid creating a culture of paranoia among employees. “Do it once, do it severe, and get it over with. If you have to go back a second time, you’ve made a mistake.”17 Stakeholder vs. Shareholder The ultimate goal of Dunlap’s restructuring plans was always to create value for the shareholders of the company. He championed himself as the shareholders’ savior, likening them to hostages held for ransom. “Sir James and I coined the phrase ‘corpocracy’— companies run for the benefit of 10 USA Today, August 30, 1996. 11 Ibid. 12 “Does Al Dunlap Mean Business, or Is He Just Plain Mean?” Thomas Petzinger, Jr. Wall Street Journal, August 30, 1996. 13 “CPH Shedding Done About As Pens Poise for Chemplex Deal.” Australian Financial Review, October 23, 1992. 14 “Can Al Dunlap Do It Again At Sunbeam?” Matt Krantz. Investor’s Business Daily, July 22, 1996. 15 Mean Business, 21.
  • 54. 16 “Who’s Chainsawed Now? Dunlap Out As Sunbeam’s Losses Mount.” Martha M. Hamilton. Washington Post, June 16, 1998. 17 Investment Dealers’ Digest, Inc. January, 1995. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. 899-218 Al Dunlap at Sunbeam 4 bureaucrats rather than the shareholders,” he said. “Scott was a microcosm of that. Its shareholders would have been better off captured by terrorists. They’d have been treated better.”18 Dunlap was no fan of the stakeholder model of corporate governance, which emphasized a manager’s accountability to multiple constituencies besides the shareholder (e.g., the employees, the community). “If you see an annual report with the term ‘stakeholders,’” Dunlap wrote, “put it down and run, don’t walk, away from the company. It means the company has its priorities upside down.”19 Dunlap argued that shareholders were the only ones in a company who had any kind of stake to claim, and that the company should be run for their profit alone. “Stakeholders! Every time I hear the word, I ask, ‘How much did they pay for their stake?’
  • 55. Stakeholders don’t pay a penny for their stake. There is only one constituency I am concerned about and that is the shareholders.”20 Dunlap’s invocation of the rights of shareholders caused Peter Cappelli, chairman of the management department at Wharton Business School, to comment. “He is persuading others that shareholder value is the be-all and end-all. But Dunlap didn’t create value. He redistributed income from the employees and the community to the shareholders.”21 Marjorie Kelly, a co-founder of the publication Business Ethics, agreed. “So much for the theory popular among business ethicists that ‘In order to serve stockholders well, you have to serve all other stakeholders first,’” she said, in reference to Dunlap’s turnarounds. “The theorem at work goes more like this: ‘In order to serve stockholders well, you have to squeeze the living daylights out of employees.’”22 Dunlap, however, accepted responsibility for his management decisions, including their effect on his employees. “I accept the heat because I am my own biggest critic. Every day I’ll ask myself, ‘Did I really do a good job?’ So long as the answer is yes, somebody else’s criticism doesn’t bother me much.”23 One of Sunbeam’s employees at the company’s electric hair clipper manufacturing plant in McMinnville, Tennessee, was Marsha Dunlap (no relation to Al). She was fired in 1997, after having worked at the plant for 34 years. She made $9.30 an hour and provided her family’s only form of health insurance. By transferring the hair clipper production to Mexico, Sunbeam would save on wages, insurance and pensions. “They say the wages in Mexico
  • 56. is (sic) a lot less than what they pay us, so that’s where their profit is,” she said. When she received her termination letter, the effective date for the end of her employment with Sunbeam read ‘July 4, 1997.’ “It was very devastating to find out that you’re going to lose your job. People don’t understand, not unless you’ve been there. And it affects everyone—the whole community: the car dealership, the real estate, discount stores, everyone.”24 At Scott Paper, it was more than just the car dealerships and the discount stores that were affected. In Scott’s hometown of Philadelphia, Dunlap shuttered the company’s 750,000 square-foot headquarters, fired 70% of the headquarters’ staff, and moved the operation to a more modest setting in Boca Raton, Florida. He reneged on all of Scott’s charitable donations, including the last $50,000 of a $250,000 pledge to the Philadelphia Museum of Art. Just after Dunlap’s appointment as CEO, Scott 18 “Scott’s Clean Sheet: Tony Jackson Speaks to Al Dunlap.” Tony Jackson. Financial Times, October 27, 1994. 19 Mean Business, 197. 20 Ibid. 21 “Dunlap: I Saved Scott Paper.” Marcia H. Pounds. Sun- Sentinel (Ft. Lauderdale), January 14, 1996. 22 Marjorie Kelly, Minneapolis Star Tribune, December 2, 1996.
  • 57. 23 Mean Business, 23. 24 Ibid. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. Al Dunlap at Sunbeam 899-218 5 also began breaking off ties with suppliers, in an effort to bring the total number down from 20,000 to 1,000.25 Al and others argued that his controversial layoffs were necessary to save the company. When I become ‘Rambo in Pinstripes’ or ‘Chainsaw Al,’ who sells assets and fires people, I have empathy for those let go. But what I keep uppermost in my mind is not that I cut away 35%, but that I saved 65%. I think that’s terribly important. If I don’t take action—if I back off as most chief executives do, and fire a nominal 10% of the workforce—that’s nothing. It’s a tease. I could do less and avoid the criticism. But then I’ll have to go back and slash again and again. That is a fraud imposed on employees.26 He also remarked that benevolence isn’t what gets a company
  • 58. back on track, saying “the harshest critics call me a bastard and say I have no heart. I’m probably a much nicer guy than most people think, but who’s going to hire a nice guy to turn around a failing conglomerate?”27 For all of the controversy he created, however, one undisputed fact was that shareholders greatly profited while Dunlap was at the helm. And Dunlap was always one of those shareholders. Indeed, one of his core beliefs was that managers should have their compensation linked to shareholder wealth creation. At both Scott and Sunbeam, his compensation was directly tied to the stock performance of the company, in the form of options and grants. As a result of the rise in stock price during his 20-month tenure at Scott Paper, Dunlap increased his own wealth substantially—by almost $100 million, according to his calculations. “Did I earn that? Damn right I did. I’m a superstar in my field, much like Michael Jordan in basketball and Bruce Springsteen in rock ‘n’ roll. My pay should be compared to other superstars in other fields, not to the average CEO. Only a handful of chief executives are worth the big bucks they are paid. Many are grossly overpaid and should be fired and then replaced by CEOs whose pay is strictly performance-based.”28 Sunbeam Because of his apparent success at Scott Paper, Dunlap received a large compensation package upon his arrival at Sunbeam (see Table 1A and 1B). True to his philosophy of aligning compensation with company performance, Dunlap took no
  • 59. bonus, but received a substantial package of stock options and awards. Also believing that CEOs should put their own money into the company they work for, he invested $5 million in Sunbeam stock the first year of his tenure. As Nell Minow, an institutional investor known for her shareholder advocacy, said of Dunlap, “He puts his money where his mouth is.”29 His initial purchase of 244,898 shares from the company came at a price of only $12.25 per share; he bought them just 48 hours before it was announced that he would be the next CEO of Sunbeam.30 From those shares alone, Dunlap made more than $1.5 million in two days. 25 “The Shredder: Did CEO Dunlap Save Scott Paper, or Just Pretty It Up?” John A. Byrne. Business Week, January 15, 1996. 26 Mean Business, 23. 27 Ibid. 28 Ibid., 22. 29 “Corporate Blitzkrieg Brings a Rapid Turnaround.” James Flanigan. Los Angeles Times, March 19, 1995. 30 Sunbeam Shareholder Proxies 1997 and 1998. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016.
  • 60. 899-218 Al Dunlap at Sunbeam 6 Table 1A Al Dunlap’s Compensation at Sunbeam 1996 1997 Dunlap’s New Contract for 1998 Salary $507,054a $1,115,385 $2,000,000b Bonus 0 0 0 Other Compensation $68,600 $287,638 N/A Options (number) 2,500,000c 0 3,750,000d Black-Scholes Value on grant date $16,621,000 0 $75,000,000 Value at peak stock pricee $110,724,000 0 $127,406,000 Restricted Stock Awardsf (number of shares) 1,000,000 0 0 Value on grant date $12,500,000 0 0 Value at peak stock priceg $31,200,000 0 0 Stock Grants (number of shares) 0 0 300,000 Value on grant date 0 0 $11,055,000 Value at peak stock price 0 0 $15,600,000 Stock Purchased (number of shares) 244,898 77,669 0 Value on date of purchase $3,000,000 $2,000,000 0 Value at peak stock price $12,734,696 $4,038,788 0 Source: SEC Filings. a Dunlap became CEO of Sunbeam on July 19, and therefore did not receive his full salary for 1996. b Dunlap’s contract was renegotiated in February of 1998, but terminated on June 15, when Dunlap was fired.
  • 61. c These options were granted with an exercise price of $12.25. A third of the options were immediately vested, and the remaining two-thirds would vest over two years. The term of the options was ten years. d Under Dunlap’s new contract, the options granted in 1996 were fully vested, and Dunlap received 3,750,000 new options (with the same vesting restrictions as his previous agreement) at an exercise price of $36.85. e Sunbeam stock reached a record high of $53 per share in March 1998. f One third of these shares were immediately vested on the grant date, with the remainder vesting in two equal installments on the first and second anniversaries of the grant date. g As per Dunlap’s new contract, 40% of his original restricted stock award was cancelled, and the remainder became fully vested. Table 1B Value of Dunlap’s Stocks and Options Upon Departure Unvested Vested Options held at the time of departure 2,500,000 3,750,000 Black-Scholes value at the time of departure $7,450,000 $21,225,000 Shares held at the time of departure 1,491,564 Value on date of departure $23,492,133 Company shares outstanding 100,811,194 Source: SEC Filings.
  • 62. Upon his arrival at Sunbeam, Dunlap made the board of directors take similar action. He ended monetary compensation for all outside directors, and severely reduced the size of stock grants they received. Previously, board members had received $20,000 annually, in addition to $1,000 for each meeting they attended in person. They had also received 5,000 shares of stock, and options to buy 1,000 shares upon each re-election. Under Dunlap’s plan, members of the board of directors were each granted 1,500 shares of stock upon their election to the board, and upon each subsequent For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. Al Dunlap at Sunbeam 899-218 7 election. They were also required to buy and maintain ownership of at least 2,000 shares of Sunbeam stock31 (see Exhibit 6). Charles Elson, a law professor from Stetson University, was one of the first people Dunlap asked to join the board. The two first met when Dunlap was still at Scott Paper, and Elson had just published a study linking executive overcompensation to a low
  • 63. level of stock ownership by the board. In an article he wrote for the Wall Street Journal, Elson proposed that board members be paid only in stock, indicating the findings of his study. The article caught Dunlap’s attention, and he asked to meet with Elson, saying that he wanted to institute a similar plan for board members at Scott Paper. When Dunlap then went to Sunbeam, he called Elson and said that he’d like to put a shareholder advocate on the board. “I said, ‘great!’—thinking he meant someone like Nell Minow, or another well-known person,” said Elson. Dunlap asked Elson if he’d consider becoming a board member, provided he would be willing to buy stock in Sunbeam—$100,000 worth. “That’s a lot of money for a law professor,” said Elson. “Dunlap said, ‘I wanted to make you sweat a little.’ I said, ‘It worked—I’m drenched!’” He agreed to join the board. Although applauded by shareholder activists, Dunlap’s appointment of a close friend to the board of directors also drew criticism from some in the investment community. Sarah Teslik, executive director of the Council of Institutional Investors maintained that, “(Mr. Dunlap) is closer to Elson than he is to his wife. Mr. Elson is not just a ‘yes’ man, he’s a ‘yes’ lapdog.”32 Despite some initial criticisms, the first months of Dunlap’s turnaround of Sunbeam were quite successful. By November of 1996, the company’s stock was up to $25.37 and Dunlap had announced the first phase of the company’s restructuring. It was reminiscent of his previous work—he had plans to cut the 12,000-person workforce in half, reduce the product lines by 87%, close 18 of the
  • 64. company’s 26 factories, consolidate the administration, and sell off several divisions. He planned to cut $225 million a year from operating expenses. He also announced that he would double Sunbeam’s sales over the next three years, primarily through introducing new products and expanding overseas markets.33 The market, however, was already crowded with competitors, and shelf space at retailers was limited. Another problem, thought Ron Graber, a former executive at Black & Decker, was Sunbeam’s product development. Dunlap’s plan called for a lead time of six months for new products—about a third of the usual 16 to 18 months, and operating with a severely reduced research and development staff. Graber offered the comparison of Black & Decker’s “Snakelight” product, which took 22 months to develop, and which had brought in $100 million in sales by 1995. “Sunbeam needs four Snakelight-caliber products each year to double sales by 1999. I doubt those guys have one.”34 By October of 1997, Sunbeam had hired Morgan Stanley to investigate the possibility of either selling the company or making an acquisition. At first, Black & Decker, Sunbeam’s top competitor, was rumored to be targeted. Months of decision-making, however, ended in March 1998 with 31 Sunbeam Shareholder Proxy, 1997. 32 “Sunbeam’s Chief Picks Holder Activist and Close Friend as Outside Director.” Joann S. Lublin. Wall Street Journal,
  • 65. September 26, 1996. 33 “Dunlap Puts Sunbeam On a Reducing Plan.” Steven Pearlstein. Washington Post, November 11, 1996. 34 “Forget About Sunbeam: You Should Invest Instead In Rival Black & Decker.” Junius Ellis. Money, January, 1997. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. 899-218 Al Dunlap at Sunbeam 8 Sunbeam’s $2.5 billion purchase of three other appliance companies: Coleman, First Alert and Signature Brands (the makers of “Mr. Coffee”).35 Immediately after signing on Sunbeam’s new acquisitions, Dunlap got a bonus—a three-year contract extension that doubled his salary from $1 million a year to $2 million, and a grant of 300,000 Sunbeam shares.36 “You can’t overpay a great executive,” he said. “I’m in the business of creating shareholder value. I intend to create a lot of value for me and for everybody else. Don’t you think I’m a bargain?”37 Not everyone was convinced that Dunlap’s compensation package was in the shareholders’ best
  • 66. interest. CEO pay gadfly and compensation consultant Graef “Bud” Crystal led the chorus of those criticizing Dunlap’s pay package. “He likes to portray himself as a swashbuckling CEO, but real men don’t take $2 million salaries and lots of free stock. He’s a pay wimp, when it comes down to it.”38 “Chainsaw Al Gets the Chop”39 Although it was difficult to identify any single move that might have caused Dunlap’s downfall at Sunbeam, many pointed to two events in particular: the acquisition of three new, troubled companies, and the institution of a marketing strategy called the “early buy” or “bill and hold” program for gas grills and other seasonal products. The program worked by offering retailers substantially reduced prices on gas grills during the winter months, when grill sales were slow. Sunbeam then stored the grills in warehouses until retailers put them on the shelves. The result was that stores stocked up on grills off-season, and didn’t reorder any in the spring.40 The ordered items were accounted for as sales, even though they had not been shipped or paid for, a practice commonly used by many companies. One article in Fortune noted the increased sales as a sign that Dunlap was making the turnaround work, and that he was succeeding in being more than just a cost- cutter. “Al Dunlap wants to be known as Mr. Growth. It’s hard to imagine. Yet when Sunbeam announces year-end results in January, people will see that sales, not just profits, are rising dramatically.”41 However, Andrew Shore, an analyst with Paine Webber who had followed
  • 67. Sunbeam’s stock for more than a decade, noticed that with the increased sales, Sunbeam was also building up what he considered an abnormally large inventory. Shore decided to alert his clients, but continued to recommend the stock, as he felt it would continue to be bid up. In March, it reached an all-time high of $53 (see Exhibit 7).42 By April, however, Sunbeam had begun to search for Dunlap’s replacement, someone to take over the CEO position after a year of understudy.43 The company’s stock price had also started to slide— 35 “Sunbeam Buys 3 Appliance Companies.” Steven Pearlstein. Washington Post, March 3, 1998. 36 “Sunbeam Doubles Dunlap Pay: ‘Bargain’ CEO Gets $70M Deal.” Bloomberg. Sun-Sentinel, March 10, 1998. 37 Ibid. 38 Ibid. 39 “Chainsaw Al Gets the Chop.” Daniel Kadlec. Time, June 29, 1998. 40 “The Unkindest Cuts.” Matthew Schifrin. Forbes, May 4, 1998. 41 “Can Chainsaw Al Really Be A Builder?” Patricia Sellers. Fortune, January 12, 1998. 42 Ibid. 43 “Exit For Chainsaw? Sunbeam’s Investors Draw Their Knives.” Patricia Sellers. Fortune, June 8, 1998.
  • 68. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. Al Dunlap at Sunbeam 899-218 9 partially due to the admission by Sunbeam that its first quarter earnings for 1998 would be below company estimations. On April 3, it was announced that Donald Uzzi, Sunbeam’s executive vice- president for consumer products and one of Dunlap’s favored employees, had been fired. By the end of the day, Sunbeam had announced a loss for the quarter, and the stock price had fallen 25%.44 As stock prices continued to slide, Dunlap announced a new round of layoffs—40% of the workforce. The day the cuts were announced, Sunbeam stock fell an additional 7.5% from $27.81 to $25.75.45 The increasing pressure from Wall Street and the media was “enough to keep (Dunlap) looking over his shoulder.”46 At a meeting with analysts in New York in late May, he blew up at Andrew Shore for suggesting that he should give back his stocks and options, and work for a dollar. Dunlap confronted Shore after the meeting and warned, “You son of a bitch. If you want to come after me, I’ll
  • 69. come back at you twice as hard.”47 Media attention on Sunbeam’s troubles sharpened when the June 8 edition of Fortune was released with the following quote from Michael Price: “Look, this is an interesting stock at $25. It’s down in an up market. The company’s got a great mix of products. It has two guys who control 30% of the shares. And we’re not going to sit around and let Al wreck the company. We’re paying a lot of attention.”48 Although Price claimed the quote had been taken out of context, many in the press interpreted it to mean that Price had lost confidence in Dunlap. Dunlap had further reason for concern on June 8, when Barron’s published a scathing denouncement of Sunbeam’s accounting tactics. The article, which generated enormous publicity, discussed Sunbeam’s “inventory stuffing,” the bill and hold program, and other, what Barron’s called, “mother’s little helpers” to make the company look more profitable.49 Perhaps spurred both by Price’s statement and by the Barron’s article, Dunlap called a board meeting for two days later. Charles Elson received a phone call asking him to attend the board meeting while he and his wife were on a trip to New York. On their way to the airport, Elson stopped by a newsstand to buy a paper and noticed that a few papers had printed stories about his as yet unpublished study on CEO succession. Elson and his co-authors had found a strong correlation between director stock ownership and corporate performance. Perhaps more strikingly, the authors also found that
  • 70. directors with significant stock holdings were more likely to fire a CEO for poor performance. “Little did I know,” Elson said, “that I was about to become a guinea pig for my own study.” In the board meeting, Dunlap and Russ Kersh (the CFO) went through the Barron’s accusations one by one, offering thorough explanations for each and defending their positions. When they were finished, the board members felt assured that the accusations were false. Elson then turned to Dunlap and asked, “So, how’s the second quarter shaping up?” Dunlap deferred to Kersh, who said, 44 “How Al Dunlap Self-Destructed: The Inside Story of What Drove Sunbeam’s Board to Act.” John A. Byrne. Business Week, July 7, 1998. 45 “Sunbeam Shares Fall On Restructuring Plan.” James McNair. Miami Herald, May 12, 1998. 46 “Exit for Chainsaw,” Fortune, 1998. 47 Ibid. 48 Ibid. 49 “Dangerous Games: Did ‘Chainsaw Al’ Dunlap Manufacture Sunbeam’s Earnings Last Year?” Jonathan R. Laing. Barron’s, June 8, 1998. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in
  • 71. Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. 899-218 Al Dunlap at Sunbeam 10 “Well, sales are a little soft.” Elson, not feeling that his question had been answered, asked again, “That’s not what I asked. How is the second quarter shaping up? Are we going to make five to ten cents a share, like we said we would?” Dunlap retorted that the board couldn’t judge their performance based on one quarter, that it was a turnaround situation and would take a long time to carry through. For such an innocuous question, the board was surprised by Dunlap’s response.50 Dunlap then issued an ultimatum to the board: “Either we get the support we should have, or (CFO) Russ and I are prepared to go . . . Just pay us.”51 “We were shocked. No one had even hinted that he should resign,” said Elson. The directors agreed that they needed to investigate the matter, to find out why Dunlap was so eager to leave. Peter Langerman (Michael Price’s representative on the board) and general counsel David Fannin did some research on their own, and spoke with several people who worked closely with Dunlap about the financial situation of the company. They found that Dunlap and Kersh had underestimated the extent of the damage. They believed that
  • 72. Sunbeam was in serious financial trouble.52 The board planned to reconvene on Saturday, June 13. On his way to the board meeting, Elson re- read parts of Dunlap’s bestseller, Mean Business—a book Elson himself had written an endorsement for. He felt that there was a disconnect between the lessons of Dunlap’s book and what was happening at Sunbeam. At the meeting, Langerman presented what he had found, and the board elected unanimously to fire Dunlap. Russ Kersh was fired just a few days later. Peter Langerman, in an official press release, stated that: The outside directors have unanimously taken this decisive action because we have lost confidence in Mr. Dunlap’s leadership. This action did not result from any concern about the Company’s 1997 audited financial statements. Arthur Andersen LLP, Sunbeam’s auditor, has assured the Board that Sunbeam’s audited financial statements are accurate in all material respects. However, Sunbeam has continued to incur operating losses in the second quarter of 1998 and the Board no longer expects the Company to achieve the earnings and other forecasts announced on May 11, 1998. The Board continues to believe Sunbeam’s businesses are fundamentally sound and expects the Company will be successful under new leadership.53 Throughout his career, Dunlap had been alternately portrayed in the press as a shareholder savior
  • 73. and the enemy of the working man. The day of his termination was cause for his critics to celebrate, and journalists who had long followed Dunlap’s pursuits with distaste opened a forum for those who had ended up at the wrong end of Dunlap’s restructurings. “I’m happy the son of a bitch is fired. I was so happy—I was watching CNBC at 8 o’clock, and I’ve just been happy all day,” said Emery Michael Cole, who lost his job under Dunlap’s reign at Scott Paper in 1994.54 “Somebody at that 50 Business Week, July 6, 1998 51 Ibid. 52 Ibid. 53 Business Wire, June 15, 1998. 54 “A Veteran Perelman Fireman Sets Out to Resuscitate Sunbeam.” James R. Hagerty and Tara Parker-Pope. Wall Street Journal, June 6, 1998. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. Al Dunlap at Sunbeam 899-218 11
  • 74. company finally got some sense,” commented Archie Worsham, mayor of Coushatta, Louisiana, which lost its Sunbeam factory in 1996.55 Despite the accusations and widespread criticism he faced in the media, Dunlap defended his leadership of Sunbeam and the financial statements released by Arthur Andersen. “Everyone said they were correct. I am not an accountant. Why wouldn’t I rely on the outside auditors and the audit committee? …I had no involvement with the audits…and I have zero reason to not believe (the numbers), because that’s what the accountant said. That’s what the outside auditor said. That’s what the… directors on the audit committee said.”56 Dunlap also believed that he was fired too quickly, and that he should have been given more time to make the turnaround work. “I passionately believed in Sunbeam. I believed that we had accomplished the first phase of the turnaround. I believed we’d positioned ourselves for the future… I signed a new three-year contract at the pinnacle of my career… The contract I signed was heavily incentivised with stock. Obviously, if I didn’t believe in the ability to do this, I wouldn’t have accepted a contract that was so heavily incentivised with stock… I have never sold a share, never exercised an option, and I have taken horrific losses along with other shareholders.”57 55 Ibid. 56 CNN “Moneyline with Lou Dobbs” July 8, 1998.
  • 75. 57 Ibid. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. 899-218 Al Dunlap at Sunbeam 12 Exhibit 1 Sunbeam Corporation 1996 Annual Report To Our Shareholders � A new Sunbeam is shining—and with it a major American company is being rescued. Your new management team has laid out a rescue plan, we are implementing that plan and it is working—all in record time. In July 1996, Sunbeam was flat on its back. Earnings had plunged 83% since July of 1994. Excluding acquisitions, sales were down 4%. The operating margin had shrunk to an almost invisible 2%. The stock price had plummeted 52% since its high in 1994. And even as this once great company headed towards possible bankruptcy, Sunbeam had no strategic plan.
  • 76. That is why, when your Board asked me to rescue Sunbeam, we had to move fast. I made it clear that creating the levels of return our shareholders have the right to expect was our top priority. I have always believed that if you focus on maximizing shareholder value, you will have the very best people, the very best products and the very best facilities. The rescue plan for Sunbeam was simple: 1) Recruit a top management team; 2) eliminate waste and make Sunbeam cost competitive again; 3) focus on core businesses, divesting everything else; 4) implement an aggressive strategy for global growth. With rapid action, the first three steps are complete: Step 1. An outstanding new management team is in place. Call it the Sunbeam Dream Team. The recipe was simple. We started with talented outsiders who have helped me rescue companies before; experts in areas like finance, international expansion, purchasing and logistics. We added newcomers with great track records, experts in manufacturing, marketing and product development. And we retained the best people from the old Sunbeam. This is a powerful combination: the best insiders, the best outsiders, and the best leaders from my past teamed together to give Sunbeam great leadership for a great future. Everyone in your company is committed to building that future. As part of its commitment, your Board of Directors has agreed to be compensated solely in Sunbeam stock. Meanwhile, senior executives have invested substantially in Sunbeam stock as well. On my first day on the job, I set the pace with a $3 million
  • 77. purchase and I followed that up with a $2 million open market purchase in February of 1997. And because membership in this—or any—corporate rescue team must include everyone in the company, we have instituted a highly innovative employee stock option plan, giving all domestic Sunbeam employees a stake in their Company’s growth. From this day forward, everyone on the Sunbeam team—the shareholders, your Board, your senior management and all your Company’s workers—are joined together in a common mission: to restore Sunbeam’s profitability and deliver the maximum return to the shareholder. Step 2. We’ve attacked excessive costs. Our cost saving measures are projected to save Sunbeam $225 million a year. For example: six separate headquarters are now one; a 12,000 employee workforce is now 6,000; 26 production facilities—some operating at 30% to 50% of capacity—are down to nine (soon to be eight); 61 warehouses have been reduced to 18. Step 3. We have focused on our core businesses. Companies succeed by achieving excellence in a core business, not mediocrity everywhere. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016.
  • 78. Al Dunlap at Sunbeam 899-218 13 We have redefined Sunbeam’s core product categories: Kitchen Appliances, Health Care Products, Personal Care and Comfort, Outdoor Cooking, and Away From Home. We are eliminating product lines that do not fit these categories. For example, since December we have sold our outdoor furniture division, our time and temperature product line and our decorative bedding line. We have also signed an agreement to sell our Biddeford textile factory to an investment group which includes the employees of that facility. All this has been substantially completed in just six months. But the final step is the most important of all, and it’s just getting started: Step 4. Execute an aggressive growth plan, making Sunbeam a global leader once again. Our goals for the next three years are: double annual revenues to $2 billion; raise operating margins to 20% of sales; triple international sales to $600 million; realize a 25% return on equity; and generate approximately $600 million of free cash flow. How? 1) Strong advertising support. We will rebuild consumer awareness of our powerful Sunbeam® and Oster® brands behind unprecedented levels of media advertising. The advertising program started
  • 79. in the fourth quarter of 1996 with a $12 million campaign that has already increased Sunbeam’s brand relevance by 25%. In connection with our new advertising campaign, we are introducing new packaging to make our brands more attractive, distinctive and appealing. 2) Fast product development. We are committed to becoming the industry leader in new product development. To introduce 30 new domestic products a year, we have cut new product development time from two-and-a-half years to six months. We are bringing out innovative products that will satisfy the wants and needs of our consumers and that are truly differentiated from any products in the marketplace today. 3) Go global. Soon, Sunbeam products will be reaching consumers throughout the world. In December 1996, we completed the successful launch of 42 new 220-volt products into 10 international regions. Additionally, in late 1996, we set a goal of signing 15 new international distribution and licensing agreements by April 15th of this year and many more throughout the year. Through mid- March, 13 such agreements were in place, giving Sunbeam access to fast-growing markets in Asia, Latin America an Africa. 4) New channels of distribution. We are expanding our distribution into new channels that offer tremendous new opportunities for Sunbeam. We have a focused “Away From Home” team dedicated to broadening Sunbeam’s presence with commercial customers such as hotels, motels, restaurants and universities. We also have a team dedicated to
  • 80. exploring new opportunities in other non-traditional channels of distribution such as catalogs, the Internet and our own Sunbeam factory outlet stores. We have already opened six factory outlet stores since November and plan to open 18 more this year. This is the Sunbeam growth plan. It is simple. It is powerful. And it is working, after just six months. A talented, innovative new management team transforming a leaner, more competitive, more focused Sunbeam into the dominant global leader in the industry. Yes, a new Sunbeam is shining—and the best is yet to come. Albert J. Dunlap Chairman and Chief Executive Officer For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. 899-218 Al Dunlap at Sunbeam 14 Exhibit 2 Sunbeam Company History 1897 John Stewart and Thomas Clark found the Chicago Flexible Shaft Company. Early
  • 81. products include agricultural tools, sheep-shearing machines and hand clippers, and the flexible shafts used to balance or propel them 1910 The original company moves into production of electrical appliances, like the Princess iron. Stewart and Clark adopt the Sunbeam name in advertising. 1930-1946 The Sunbeam Mixmaster, the first automatic coffeemaker and the first pop-up electric toaster give Sunbeam widespread household recognition, and in 1946, the company officially changes its name to Sunbeam Corporation. 1960 After a decade of innovating new products and increasing growth, Sunbeam acquires rival appliance-maker Oster. 1981 Sunbeam is acquired by Allegheny International. Product development expands to include two of Allegheny’s divisions, John Zink (air-pollution control devices) and Hanson Scale (maker of bathroom scales). 1988 Decreased revenues in other divisions forces Allegheny into bankruptcy. 1990 Michael Price, Michael Steinhardt and Paul Kazarian buy Sunbeam from Allegheny’s creditors, re-naming it the Sunbeam-Oster Company. Kazarian becomes Chairman and CEO. 1992 Sunbeam-Oster goes public. 1993 Kazarian is forced out, and Roger Schipke replaces him as
  • 82. CEO. Sunbeam relocates to Florida, acquires the consumer products division of DeVilbiss Health Care. 1994 Sunbeam board of directors is voted one of the top five worst boards in America by Chief Executive magazine. Among Sunbeam’s negative aspects listed were its lack of independent directors, and excessive control by Price and Steinhardt. 1994-1995 Sunbeam acquires Rubbermaid’s outdoor furniture business. The company changes its name back to Sunbeam Corporation. 1996-1997 Al Dunlap replaces Schipke as CEO, lays off half the workforce and closes or sells 80 of the company’s 114 factories. 1998 The stock price reaches an all-time high of $53 per share. Sunbeam acquires First Alert, Signature Brands and Coleman. The stock price falls dramatically, and Dunlap is fired after disappointing first quarter results and growing concern about his leadership. Source: Compiled by case-writer. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016.
  • 83. Al Dunlap at Sunbeam 899-218 15 Exhibit 3 Employment History of Al Dunlap 1963-1967 Kimberley-Clark (factory superintendent) 1967-1977 Sterling Pulp and Paper (general superintendent of a manufacturing plant in Eau Claire, Wisconsin) 1977-1982 American Can (executive vice-president of Performance Plastics division) 1982 (March) - 1982 (November) Manville Forest Products Corporation Dunlap became president of Manville in early 1982, presumably to attempt a restructuring. He left the company only months later, after Manville Corporation filed for Chapter 11 bankruptcy (as a result of asbestos-related lawsuits). 1983-1986 Lily Tulip (CEO) Dunlap’s first turnaround of an entire company. In late 1982, he was recruited by KKR, which had bought Lily-Tulip for $150 million in an LBO in 1981. When Dunlap was hired, Lily-Tulip was near bankruptcy, with a debt-to-equity ratio of 9-to-1. Dunlap fired 20% of the salaried workers, 50% of the headquarters staff, sold two plants, consolidated manufacturing facilities, and grounded the company airplane.
  • 84. Lily Tulip went public in 1984 with an IPO of $9.50 per share (with 17,572,800 shares outstanding by year-end). It was sold to Fort Howard Paper Company in 1986 for $18.50 a share. 1986-1989 General Oriental Securities Limited Acquisition Group (CEO) Working with Sir James Goldsmith, Dunlap had some part in restructuring Diamond International and Cavenham Forest Industries (previously part of Crown-Zellerbach). During this time period, he also worked with Kerry Packer, an Australian billionaire and owner of ConsPress, to help restructure Australian National Industries (1989). 1989-1990 Anglo Group, PLC. (CEO) 1991 Greystar, Inc. (CEO) 1991-1993 Consolidated Press Holdings Limited (CEO) After helping Packer restructure ANI, Dunlap became managing director of ConsPress in September of 1991. Dunlap’s mission was to slim down ConsPress from a corporation of unrelated businesses (ranging from chemical manufacturing to ski resorts) to its core of media-related industries. By the end of 1992, he had reduced ConsPress holdings from 413 business to just 140. He left ConsPress in February of 1993. 1994-1996 Scott Paper, Inc. (CEO)
  • 85. 1996-1998 Sunbeam (CEO) Source: Compiled by case-writer. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. 899-218 Al Dunlap at Sunbeam 16 Exhibit 4 Rambo in Pinstripes Photo by Andrew Itkoff “The meek will not inherit the earth, and for sure they won’t get the mineral rights.” —Al Dunlap, Washington Post, June16, 1995 For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016.
  • 86. 899-218 -17- Exhibit 5 Scott Paper Stock Performance, Relative to the S&P 500 SCOTT PAPER RELATIVE STOCK PRICE PERFORMANCE 0 50 100 150 200 250 300 350 400 31 -D ec -8 9 28
  • 94. 5 30 -J un -9 5 31 -A ug -9 5 31 -O ct -9 5 Dunla p b eco m es CEO M erge r with Kimb e rle y-Cla rk Scott Paper S&P 500 Source: Datastream
  • 95. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. 899-218 Al Dunlap at Sunbeam 18 Exhibit 6 Directors of the Sunbeam Board: Before, During and Following Dunlap’s Tenure Sunbeam Board of Directors, 1995 � Roderick M. Hills, age 64, has been a Director of the Company since 1990. Mr. Hills is currently a partner in the Washington office of Mudge, Rose, Guthrie, Alexander & Ferdon, a law firm, and Counselor, Hills & Company, international consultants. Amount of Ownership: 8,000 shares. Peter A. Langerman, age 39, has been a Director of the Company since 1990. Mr. Langerman has been Executive Vice President and a Director of Mutual Series Fund Inc., a no-load, diversified, open- end management investment company, since 1988. He has been a Director of Hexcel Corporation, a manufacturing company, since 1995. Mr. Langerman has been a
  • 96. Financial Analyst for Heine Securities Corporation, an investment advisory service company, since 1986. Amount of Ownership: 0 shares. Daniel J. Meyer, age 58, was nominated to become a Director of the Company at the February 1995 meeting of the Board of Directors. He has been the Chairman of the Board and Chief Executive Officer, of Cincinnati Milacron Inc., a manufacturer of processing equipment and systems for the metal working and plastic industries, since 1991. Amount of Ownership: 0 shares. Roger W. Schipke, age 58, has been Chairman of the Board, a Director, and Chief Executive Officer (“CEO”) of Sunbeam-Oster since August 1993. From December 1990 to August 1993, he was Chairman, Chief Executive Officer and President of Ryland Group, Inc., a mortgage banking and home building company. Prior to joining Ryland, Mr. Schipke spent 29 years with General Electric Corporation, most recently as Senior Vice President in charge of the Appliances Division. Mr. Schipke is a member of the Boards of Directors of each of the Brunswick Corporation, Legg Mason Inc., Mohawk Industries, Inc. and The Rouse Company. Amount of Ownership: 479, 337shares. Charles J. Thayer, age 51, has been a Director of the Company since 1990. He served as Chairman of the Board of Directors from January 1993 until August 1993. Mr. Thayer also served as Interim Chief Executive Officer of the Company from June 1993 until August 1993 and as Vice Chairman from August 1993 until December 1993. He has been Managing
  • 97. Director of Chartwell Capital, Ltd., a financial advisory services company, since 1989. Mr. Thayer was Executive Vice President of PNC Financial Corp., a multi-bank holding company, from 1987 until 1989. Amount of Ownership: 42,000 shares. Shimon Topor, age 51, was appointed by the Board of Directors to fill a vacancy on the Board in February 1995. He has been a General Partner of Steinhardt Management Co., Inc., an investment partnership, since 1985 and is currently a General Partner of several other investment partnerships. Amount of Ownership: 0 shares. Paul W. Van Orden, age 68, has been a Director of the Company since 1993. He is Executive Director of each of the Chazen Institute of International Business at Columbia University Business School and the Columbia University Center for International Business Education. Amount of Ownership: 6,000 shares. Source: Sunbeam Proxy, April 7, 1995. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. Al Dunlap at Sunbeam 899-218 19
  • 98. Exhibit 6 (continued) Sunbeam Board of Directors, 1997 Albert J. Dunlap, age 59, has been Chairman of the Board of Directors and Chief Executive Officer of Sunbeam Corporation since July 18, 1996. From April 1994 to December 1995 he was Chairman and Chief Executive Officer of Scott Paper Company. From 1991 to 1993, Mr. Dunlap was the Managing Director and Chief Executive Officer of Consolidated Press Holdings Limited (an Australian media, chemicals and agricultural operation). Mr. Dunlap is a Director of General Oriental Investments Limited. Amount of Ownership: 1,324,898 shares. Charles M. Elson, age 37, has been a Director since his appointment to the Board on September 25, 1996. Mr. Elson has been a Professor of Law at Stetson University College of Law since 1990 and serves as Of Counsel to the law firm of Holland & Knight (since May 1995). He is also a member of the American Law Institute and the Advisory Council and Commissions on Director Compensation and Director Professionalism of the National Association of Corporate Directors. Mr. Elson is Trustee of Talledega College and a Salvatori Fellow of the Heritage Foundation. Amount of Ownership: 7,500 shares. Russell A. Kersh, age 43, has been Executive Vice President, Finance and Administration of Sunbeam Corporation since July 22, 1996, and has been a Director since August 6, 1996. From June 1994 to December 1995 he was Executive Vice President,
  • 99. Finance and Administration of Scott Paper Company. Amount of Ownership: 140,817 shares. Howard G. Kristol, age 59, has been a Director since his appointment on August 6, 1996. He has been a partner in the law firm of Reboul, MacMurray, Hewitt, Maynard & Kristol since 1976. Amount of Ownership: 7,500 shares. Peter A. Langerman, age 41, has been a Director of the Company since 1990 and served as Chairman of the Board from May 22, 1996 until July 18, 1996. Amount of Ownership: 0 shares. William T. Rutter, age 66, has been a Director since his appointment on April 8, 1997. He is a Senior Vice President/Managing Director, Private Banking, First Union National Bank of Florida, a position he has held since 1986. Amount of Ownership: 2,000 shares. Faith Whittlesley, age 58, has been a member of the Board of Directors since her appointment in December 1996. Mrs. Whittlesey has served as the Chief Executive Officer of the American Swiss Foundation, a charitable and educational foundation, since 1991. She is a member of the Board of Directors of Valassis Communications, Inc. Amount of Ownership: 3,500 shares. Source: Sunbeam Proxy, June 11, 1997. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE
  • 100. OTHER from August 2016 to December 2016. 899-218 Al Dunlap at Sunbeam 20 Exhibit 6 (continued) Sunbeam Board of Directors, 1999 Jerry W. Levin, age 55, was appointed Chief Executive Officer, President and a Director of Sunbeam in June 1998 and was elected as Chairman of the Board of Directors in March 1999. Mr. Levin was also appointed to serve as Chief Executive Officer and a Director of The Coleman Company, Inc. (“Coleman”) and Camper Acquisition Corp. (“CAC”), a wholly-owned subsidiary of Sunbeam, in June 1998. Coleman is a publicly held company of which approximately 79% of its stock is owned by the Company. Mr. Levin previously held the position of Chairman and Chief Executive Officer of Coleman from February 1997 until its acquisition by Sunbeam in March 1998. Mr. Levin was also the Chairman of Coleman from 1989 to 1991. Mr. Levin was Chairman of the Board of Revlon, Inc. from November 1995 until June 1998, Chief Executive Officer of Revlon, Inc. from 1992 until January 1997, and President of Revlon, Inc. from 1992 to 1995. Mr. Levin has been Executive Vice President of MacAndrews & Forbes Holdings, Inc. since March 1989. Amount of Ownership: 0 shares.
  • 101. Philip E. Beekman, age 67, is a nominee for election as a Director of Sunbeam. Mr. Beekman is President of Owl Hollow Enterprises Inc., a position he has held since July 1994. From December 1986 to July 1994, he was Chairman and Chief Executive Officer of Hook SUPERX, a retail drug store chain. Amount of Ownership: 5,000 shares. Charles M. Elson, age 39, has been a Director of Sunbeam since his appointment to the Board of Directors in September 1996. Mr. Elson was a Director of Coleman from March 30, 1998 until June 24, 1998. Amount of Ownership: 10,500 shares. Howard Gittis, age 65, was appointed to the Board of Directors of Sunbeam in June 1998. Mr. Gittis has been a Director, Vice Chairman and Chief Administrative Officer of MacAndrews & Forbes and certain of its affiliates since 1985. Mr. Gittis also is a member of the Boards of Directors of Golden State Bancorp Inc., Golden State Holdings Inc., Jones Apparel Group, Inc., Loral Space & Communications Ltd., M & F Worldwide Corp., Panavision Inc., Revlon Consumer Products Corporation, Revlon, Inc., REV Holdings Inc. and Rutherford- Moran Oil Corporation. Amount of Ownership: 0 shares. John H. Klein, age 53, was appointed to the Board of Directors in February 1999. Mr. Klein is Chairman and Chief Executive Officer of BiLogix, Inc. and Strategic Business and Technology
  • 102. Solution s LLC and Chairman of CyBear, positions he has held since mid-1998. From April 1996 to May 1998, he was Chairman and Chief Executive Officer of MIM Corporation, a provider of pharmacy benefit services to medical groups. Amount of Ownership: 415 shares. Howard G. Kristol, age 61, has been a Director of Sunbeam since his appointment to the Board of Directors in August 1996. Mr. Kristol has been a partner in the law firm of Reboul, MacMurray, Hewitt, Maynard & Kristol since 1976. Amount of Ownership: 10,500 shares. Peter A. Langerman, age 45, has been a Director of Sunbeam since 1990 and served as the Chairman of the Board of Directors from May 1996 until July 1996 and from June 1998 until March 1999. Amount of Ownership: 0 shares. Faith Whittlesley, age 60, has been a Director of Sunbeam since
  • 103. her appointment to the Board of Directors in December 1996. Amount of Ownership: 6,890 shares. Source: Sunbeam Proxy, May 11, 1999. For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016. 899-218 -21- Exhibit 7 Sunbeam Stock Performance Relative to the S&P 500 SUNBEAM RELATIVE STOCK PRICE PERFORMANCE 0 50
  • 116. 8 Sunbeam S&P 500 Dunlap becomes CEO Dunlap is fired Source: Datastream For the exclusive use of J. Hao, 2016. This document is authorized for use only by Jing Hao in Strategic Management Fall 2016 taught by Mathias Arrfelt, HE OTHER from August 2016 to December 2016.