Sent: 01-06-2010 09:39:07
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Foster's continues as a model for many of the strategic pitfalls that bedevil Australian companies. It is also an excellent case study of the external pressures to which many ultimately succumb.
Australia's leading alcohol products supplier, Foster's Group, has flagged an intention to place its beer and wine businesses into separate companies some time in 2011.
The current Foster's predicament is the culmination of several strategic missteps going back as far as the late 1980s. The initial venture into wine and the acquisition of Southcorp, perceived to be at the heart of its current problems, can be traced directly to the strategic misjudgements of the former Foster's chief executive, John Elliott.
Elliott oversaw the most successful international marketing achievement of any Australian consumer goods company but left the Foster's beer brand strategically hamstrung and the company incapable of getting a financial return on its popularity. It had to look elsewhere to grow.
In more recent years, the strategic ghosts haunting the company from its past multiplied as it:
- failed to recognize how its wine industry involvement would affect the risk profile of its earnings;
- lacked the discipline to say " no" to an acquisition that had become a management obsession over many years - a trap which even the venerable Warren Buffett conceded recently was a risk for all companies and one he had to be careful to avoid in his company's acquisition of Burlington Northern; and,
inadequately planned a post acquisition strategy.
The wine business clearly failed to get the returns that had been flagged but Foster's, like others, faced unrelenting pressures from analysts, corporate advisers and media commentators who seemingly thrive on deal frequency and are far less interested in good old fashioned operating improvements.
Separately operating business units are especially prone to attack. CSR and Orica are just two current examples. Analysts and corporate advisory types are continually seeking to persuade diversified groups that the sum of the parts trading separately will be worth more to shareholders than if the assets remain lumped together. They assure executives they will attract broader analyst coverage if they make the change.
Newspapers and daily business programs, feeding off the analysts and corporate advisers, increase the pressure as they constantly pepper executives with questions about when their businesses are going to be split. The absence of a transaction is construed as inertia.
The weakest business unit in a group becomes a divestiture candidate, sometimes precipitating the dismemberment of the whole group. Advisers will start preparing their pitches as surely as the cheetah senses the weakest in the herd of antelopes.
Too often, directors who concede that the parts will be better off managed separately are adopting the Pontius Pilate theory of management: when faced with a strategic dilemma requiring sound judgment and analytical strength, wash your hands of the problem by leaving it to the crowd to sort out.
The Foster's board is just the latest to defer to the crowd while papering over a disappointing skill failure and pretending they are going to get a good result for shareholders.
Analysts at Goldman Sachs J B Were have shown how little existing shareholders might benefit from the proposed transaction. On their numbers, the proposed Foster's restructuring could cost as much as $200 million. There would be additional annually occurring charges of up to $10 million by having two companies perform the same functions as a single company.
Assuming no other operating changes were made, the combined value of the two companies would be $6.30 a share, according to the brokerage firm, compared with its valuation of $6.50 a share for the business in its current form.
They still think the restructuring should go ahead. They, like others in a deal mad market, are hoping the split will result in a takeover bid for either or both of the new entities.
The conventional wisdom ahead of the announcement was that Coca-Cola Amatil would grab the beer business but ironically (since its chief executive used to head up the Foster's wine unit) not the poorly returning wine subsidiary.
There are also a couple of Asian based brewers supposedly interested despite none having shown the slightest inclination to make a move when Foster's was far weaker and cheaper than it is today.
There is hope, too, that operational improvements in both the beer and wine businesses will make both of them more successful than they have been under the one roof. This possibility raises another question about corporate leadership.
If operational improvements are possible, the existing directors should be getting them. They could spend up to $300 million in searching them out and still leave shareholders better off, based on the Goldman Sachs numbers.
The Foster's directors are saying that even with $300 million to spend they could not recruit appropriately skilled people to make the necessary changes and, yet, the people must exist somewhere if performance is to be improved. Too often, as we have seen recently in the cases of the separated Coles and Myers, for example, the skills can be assembled under the right leadership. If the interests of shareholders are being given priority, that means changing the leadership not restructuring the company.
John Robertson has a beneficial interest through his superannuation arrangements in the shares of Foster's Group, Orica, CSR, Coca Cola Amatil and Wesfarmers and is a former senior executive within the corporate finance and strategy division of Foster's.
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