Royal Numico N.V.: Resurrecting Shareholder Value

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Transcript of Royal Numico N.V.: Resurrecting Shareholder Value

As the multitudes slowly began filing out of the meeting-hall at the Schiphol Airport office complex just outside of Amsterdam, the general shareholders’ meeting having come to a conclusion, Chairman of the Supervisory Board Rob Zwartendijk allowed himseRoyal Numico N.V.: Resurrecting Shareholder Value As the multitudes slowly began filing out of the cavernous assembly-hall at the Schiphol
Airport office complex just outside of Amsterdam, the 26 September 2007 extraordinary Royal Numico N.V. general shareholders’ meeting having come to a conclusion, Chairman of the Supervisory Board Rob Zwartendijk allowed himself a moment to linger behind and fully appreciate the moment. For at this meeting the shareholders had just closed the book on Numico’s 111-year existence as an independent company, which incidentally meant and end to that Supervisory Board and therefore his position as its Chairman. But they had done so at the explicit and unanimous recommendation of Zwartendijk and his board colleagues: the €55-per-share tendered by the Paris-based foodstuffs company Danone was an offer that everyone both within and outside the company recognized as simply too high to turn down.
Gaining such a high price from Danone to take over control - as well as other significant concessions concerning takeover procedure and employee protections – was in itself a considerable achievement for the Numico Management Board, headed by CEO Jan Bennink and working in close cooperation with the Supervisory Board. More surprising, though, was the realization that things could ever come to such a result, with the company bought at an implicit valuation of €12.3 billion, when throughout its existence Royal Numico N.V. had been little more than a mid-sized (although internationally-operating) specialized-nutrition company. That is certainly all that it was back in 1994, when Rob Zwartendijk had first taken a place on the Supervisory Board (the company was then called Nutricia). Such a high valuation would have seemed even more unlikely in 2001, when Zwartendijk became Supervisory Board Chairman just as the company was starting to struggle with the ramifications of a series of acquisitions, which had presented unexpected problems. No, thinking back on it all, Zwartendijk could only shake his head in disbelief, even as his fellow Numico company officials gathered their papers and started following the shareholders out of the hall. There was no one among any of these executives with whom he could share such insights from 1994 or even 2001, anyway; A wholesale replacement of mid- and top-executive ranks (including the Board of Supervisors) had stood central in the campaign to turn company fortunes around. He was the “old survivor,” with the greatest seniority by far among board members and, for that matter, among most of those in managers’ ranks. Of course, some of those replacements had had more impact on company fortunes than others. While Zwartendijk had reason to believe his own taking-up of the Supervisory Board Chairmanship in 2001 had had a certain important catalytic effect, there was no doubt that the decisive change had come with the replacement in the spring of 2002 of Numico CEO Hans van der Wielen with Danone division head Jan Bennink. NUTRICIA GROWS UP Royal Numico N.V. had its genesis in the Stoomzuivelfabriek (steam dairy factory) established in 1896 in The Hague’s suburb of Zegwaard by one Martien van der Hagen, which in 1901 adopted for itself the somewhat more agreeable name of Nutricia B.V. The idea was to exploit in the Netherlands an exclusive license to the Backhaus method (developed in neighboring Germany) for using cow’s milk to produce a suitable replacement for mother’s milk for human infants. Soon Nutricia added other sorts of baby food to the product-line and then, in the 1970s, “enteral clinical nutrition,” i.e. special foods usually consumed via an intravenous feed for those patients (usually in hospitals) with special needs and/or who could not feed themselves.
Professor Fred Lachotzki and research associate Michael A. Olson prepared this case. Nyenrode 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. The sources for the preparation of this case include interviews with Jan Bennink, the former CEO of Numico; Rob Zwartendijk, the former chairman of its supervisory board as well as other executives at the company. The memorandum prepared by Hans van der Wielen, the CEO preceding Jan Bennink, has been attached at his request. Copyright© 2008 by Nyenrode University Press, Breukelen, The Netherlands.
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A crisis in company fortunes caused by over-diversification and aggravated by bad macroeconomic conditions reached its peak in 1979, when Nutricia suffered its first operating loss since its founding and, in response, E.J. van der Hagen (from the founding family’s third generation) took up the reins as CEO and began to re-focus the company back upon its core competencies. This process continued after Johannes (Hans) van der Wielen (a trained chemical engineer, formerly Director of Production, and a Nutricia employee from 1980) took over as CEO in 1992, enabling Van der Hagen henceforth to keep an eye on the family business as Chairman of the Supervisory Board. Van der Wielen continued to build on Nutricia’s original baby food base, and boosted the company’s presence in the European market significantly by managing to take over the German baby food-maker Milupa AG in 1995. At that same time he supervised an ambitious self-evaluation process – the “Michelangelo Project” - designed to better sharpen the company’s common focus in order to improve overall performance before the company got so big as to become uncontrollable.1 Growth Prescription: America One key output of the Michelangelo Project was the formulation of a company mission statement: “To be the world-wide leader in specialized nutrition, primarily emanating from a dairy base.” At the same time, Numico was a public company and thus had to come to terms with performance expectations held by its shareholders and the financial community at large. The constant worry over being bought up by some other company if its stock price remained too cheap only made more urgent the imperative to achieve impressive growth in financial results, quarter after quarter.
In practice, this came down maximizing performance from the Baby Food Division, encompassing both infant milk formula and a wide assortment of baby foods.2 Geographic expansion had been one traditional means to this end, and from Numico’s home market in Western Europe (including the UK), Van der Wielen had moved the company aggressively in the 1990s into the newly opened Eastern European markets, gaining market-share figures there comparable to those it had already achieved in the West. Yet natural population increase had also always been a guarantee of financial growth, but as the twentieth century came to its end, that factor was having a reverse effect. Population growth rates in Western Europe had in fact already been stagnating for some while, and it turned out that Eastern Europeans were no more in a hurry themselves to produce large families. Of course, Numico had also succeeded through the years in building an export business to world markets further afield, mainly in South America, Australia, and Indonesia. It was not clear how to expand that turnover to any significant degree, however – with the exception of China, a market newly opening to Western firms, with no Numico presence as of yet, but with fantastic potential. However, gaining entry there required specialized expertise and governmental access that either had to be developed over the long haul or hired from somewhere. In the view of most top Numico company officials, the answer to their growth dilemma was the North American market. Together with Canada, the United States offered a gigantic market that was really the touchstone for product and marketing quality. As it happened, that area also boasted vigorous population growth, i.e. cohorts of new, hungry babies as long as any planning horizon. However, the downside here was also clear: the North American baby food market had already been occupied by numerous baby food providers. Most were native to the market (e.g. Gerber), but there were others with foreign headquarters who had had the means to win their own slice of the North American market through sheer size and effort (e.g. Nestlé). So for Numico, while market penetration there was probably worth pursuing, it certainly would not be easy and could not come fast.
1 Readers desiring a complete discussion of the Michelangelo Project, together with a fuller assessment of Nutricia’s company history up to and slightly beyond that point, can consult the earlier Nyenrode business case “Nutricia: Michelangelo, a Strategy Tool,” published in 1998. Henceforth in this paper, the company will be referred to as “Numico.” 2 Nutricia’s ECN (Enteral Clinical Nutrition) operating division, in comparison, contributed a much – smaller return to company coffers than did baby food. It was true that ECN’s share of the European market, in particular, exceeded the Baby Food Division’s corresponding share, but ECN was subject to entirely different and very unique market considerations, such as hospital policy, sheer awareness of the possibility of ECN, and competition from medical feeding means. Long-term prospects for ECN sales growth seemed encouraging, what with aging populations in the developed world and improving standards of hospitalization in the developing world, but the ECN market would always proceed according to its own rules.
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However, perhaps there was some “back door” to be found into that North American market. Van der Wielen thought he had found it; the clue was in a smallish acquisition Numico had carried through in 1997, of the Swedish firm Vitamex AB, a producer of vitamins, nutritional supplements, and related non-prescription pharmaceutical health-aids (products often collectively known as nutriceuticals). These products did show some promise: first, they involved Numico’s traditional expertise in specialized nutrition, and in the late 1990s, they were relatively new on the market. Here was the chance to grab a “first-mover” advantage by developing these products in any given target market, where the potential for sales growth could be tremendous if consumers could merely be made aware of the health benefits nutriceuticals offered.
All this seemed a reasonable goal to achieve in those developed markets where consumers were increasingly concern about healthy lifestyles and the foods and supplements necessary for that. However, market research at the time showed such a health-consciousness as not a feature of European markets (not yet), at least outside of Sweden and its Nordic neighbours. Rather, it was precisely in North America that such health-consciousness was becoming manifest; higher incomes in the prosperous “dot-com” boom of the late Clinton years, combined with the generally freer and broader range of choice in retail food outlets, meant that American consumers especially were more often inclined to search out healthier nutrition alternatives. In itself, then, Numico’ new acquisition Vitamex was fine as a small-scale experiment, functioning to familiarize the company with the production and sales of nutriceutical products, but what would really fit the bill was some American- based version. Enter GNC (General Nutrition Companies), based in Pittsburgh, Pennsylvania. By 1999 GNC was in fact the largest food-supplement firm in the world, exporting to more than 25 foreign lands, but of real interest to Numico was its large presence – and success – in the American market. While functioning as a nutriceutical manufacturer in its own right, both for its own brands and for private labels, at GNC’s core was its thick web of more than 6,000 GNC stores nationwide,3 most of them operated by franchisees, and their coverage was remarkable: reportedly a full 90% of the American population was located within a radius of 3 miles of the GNC store network. GNC brand-recognition was also exceptional among consumers. Revenues for 1998 were the equivalent of €1.4 billion, rendering a profit for the year of the equivalent of €180 million. And GNC was for sale. Numico was of course very interested in this opportunity. However, stepping into the American market in this way was a very serious step to undertake. Were company executives absolutely sure that the scientific expertise that had really been their key competitive advantage for decades could seamlessly be applied towards gaining continuing edges in innovation and quality in vitamins and nutritional supplements? One thing Numico had not really gotten involved in itself over the years, on the other hand, was retail operations, yet here it was contemplating taking over control of that 6,000- store network. A huge, competitive new market and a new set of operations: was Numico ready to take the jump into both at the same time? Answering that question was largely what the “due diligence” process was going to be about, but there was not much time to spare. GNC was for sale to all comers, and other companies were said to be ready to pounce on this opportunity, including the pharmaceutical company Novartis: it was pushing hard for an agreement for research cooperation with GNC which, while not an outright purchase, would nonetheless freeze Numico out of the picture. Anyway, the financial numbers were good, and GNC founder and CEO Bill Watts was both very competent and willing in the event of any sale to take up a place in the Numico Management Board to retain responsibility for GNC’s operations. In a press release of 5 July 1999, Numico announced its acquisition of GNC for USD 2.5 billion, which included taking on the USD 760 million debt on the company’s books. The acquisition was financed via a combination of a new issue of shares, bank loans, and a subordinated convertible debenture loan.
Other acquisitions in a similar vein followed. The first one after GNC was Enrich International. Based in Orem, Utah, Enrich produced nutritional supplements and personal-care products for sale in the US and ten other countries (mostly in Asia), earning revenues in 1999 of €170 million. It was distinct from its rivals (including from GNC) in that 1) It had its own R&D section, and 2) It’s business model was based upon sales via a network of 250,000 private distributors, who
3 Plus, of course, a small but growing on-line sales outlet.
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primarily used get-togethers in private homes to push their wares. Numico bought out Enrich Int. on 4 November 1999. Numico then continued in mid-2000 with the take-over of another American firm, Rexall Sundown, based in Boca Raton, Florida, at a price of $1.9 billion. Rexall Sundown was a family-owned business, with estimated revenues for 2000 of $820 million, and which, like Enrich Int., provided a lot of the production capacity for the US nutriceuticals market, although Rexall distributed its products via drug stores and supermarkets (often as private-label), as well as through a franchisee network of Rexall Sundown branded stores. With this last acquisition all the pieces to Numico’s new strategic direction were in place. Quite deliberately, Numico now dealt - as it never had had to deal before - with retail operations and all related issues those entailed (e.g. transportation, private labels, dealing with franchisees). Still, there were certainly retail-savvy executives on-board; one was Bill Watts on the Management Board, but Rob Zwartendijk, on the Supervisory Board, could also claim considerable US retail experience, having been involved as an executive with the Holland-based food and consumer good retailer Ahold and its earlier moves into the US supermarket sector. The stage seemed set for exploiting the distribution network for nutriceuticals that Numico had assembled – the largest for that product-line in North America by far – for profit and success, and then even turning the expertise back to the home European market to replicate the same process there. The markets seemed to agree: the Numico share price on the Amsterdam Stock Exchange in late 2000 climbed to almost €60 a share. A BITTER PILL TO SWALLOW The time seemed propitious for high-level personnel changes. Specifically, in early 2001 the elderly founding-family scion E.J. van der Hagen finally saw the chance to yield to some long-standing physical ailments and resign from the Supervisory Board. Rob Zwartendijk stepped up to replace him as Chairman. In addition, here Hans van der Wielen also saw an opportunity for change, in another area of concern, namely executive compensation. Actually, he had really never been satisfied with what they were paying him as Numico CEO; given his chemical engineering background, the key duties at the heart of the company’s operations for which he had been responsible, the successful expansion and acquisitions he had masterminded in the top job, the increase in shareholder value that all that had created – given the sheer loyalty he had shown the company for over almost twenty years, he was sure he was grievously underpaid and had not been shy about letting the Supervisory Board know about it. The brush-off he had always received was particularly glaring now, after dealings with the American take-over targets had put Van der Wielen face-to-face with the rather different American norms for top management remuneration. He had had to stifle his amazement at negotiating to take over a much smaller company than Numico, whose boss nonetheless earned much more than he.
Now there was no longer any Van der Hagen family member there heading the Supervisory Board, but instead Rob Zwartendijk – also a capable businessman, but with considerably more international experience to his name than Van der Hagen had ever had, gained mainly at the Dutch supermarket and retail conglomerate Ahold N.V. Surely he would understand that what Numico was paying its CEO lagged considerably behind worldwide standards! In any event, this transition at the Supervisory Board was the occasion to let those Board members know in no uncertain terms that, now that he had stabilized the company’s outlook with the move into American nutriceuticals, he was adamant that he be paid at least double what he was currently earning as Numico CEO. And either he would get sufficient assurances that this would happen, or in fact he would refuse to put in an appearance at the upcoming May 2001 annual general shareholders’ meeting.
Such an uncompromising stand the Supervisory Board found rather alarming, not to mention unseemly. Van der Wielen’s demands simply could not be put through as quickly as he desired, and in any event could not be treated on so limited a basis. If in fact there was a problem with executive remuneration, then the Supervisory Boarded needed to address it across-the-board, reviewing the pay and benefits of all of the company’s top managers.
Zwartendijk did manage to find a stopgap formula in time to reassure Van der Wielen’s concerns sufficiently for him to present his customary annual report at the shareholders’ meeting. Inevitably, though, the incident soured relations between Numico’s Management and Supervisory Boards – especially when Zwartendijk’s truly limited room for maneuver in the short term to give Van der Wielen what he wanted led to considerable frustration on all sides.
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In any event, Van der Wielen’s case for higher pay was becoming undercut by the company’s recent performance figures, especially the slide in its share price (e.g. December, 2000: €53; May, 2001: €48; May, 2002: €22). After initially continuing their previous healthy sales growth in the period immediately after their acquisition by Numico, by 2001 the American companies making up Numico’s nutriceuticals operating division were experiencing a serious downturn. The problem partly lay in an ongoing market trend that somehow had escaped everyone’s attention back when the initial decision whether to buy GNC was being considered:4 commoditization. North American consumers were still just as enthusiastic about the benefits to their health derived from vitamins and nutritional supplements. It was just that they increasingly were unable to see the difference in what they would gain from a brand-name pill versus…