Royal 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 one plucked out of a jar without the fancy label, but generally composed of a very similar combination of chemicals - indeed, in many cases coming from the same factory as the branded product. Over 2001 nutriceuticals sales volume in the American market was same as in 2000, but sales were down 6% by value. The alarming prospect arose that Numico had paid to acquire the leading American nutriceutical brands just at a time when such brands commanded less and less of the consumer’s respect.

At the same time there arose that greatest nightmare for any company selling things that people eat: a purity scare. At issue was the chemical compound ephedra. It was an ingredient in many of the products sold by Numico’s nutriceuticals division, even while it was also gaining an unsavory reputation by professional athletes using it to gain an unnatural competitive edge (in a word, “doping”). Any such “edge” was unnatural and even dangerous; in ephedra’s particular case, medical professionals had judged that its use posed particular risk to those with weak hearts. The wave of alarming media reports uncovering ephedra abuse was followed shortly by another wave of lawsuits from those claiming injury. This hardly helped to boost demand for vitamin supplements such as that Numico’s nutriceutical division were trying to sell.5

Serious problems indeed – but the response from Numico’s top ranks remained strangely muted. Indeed, the attitude of most Netherlands-based management towards the nutriceuticals division was “hands off.” Bill Watts was still over there in the US and supposed to take care of things there. He did fly back to Amsterdam on occasion to be physically present at Management Board meetings, and for his part Hans van der Wielen made occasional trips in the other direction to confer with Watts and look over the performance numbers. At the Supervisory Board level, the officials there by-and-large balked when faced with the issue of how such large acquisitions on the other side of the Atlantic should be properly integrated and managed. It was a problem whose scale and nature most of them had never before encountered – yet the option of bringing in outside advice to help them get a grip on it also seemed to escape them.

The prevailing attitude to the American acquisitions, by default, was simply “hands off.” When they had been made the only direct trans-Atlantic interaction envisioned in the first place was that of teaming Numico’s considerable life sciences expertise with the nutriceuticals people to try to create some “synergy” in the form of product innovations and the like. A joint committee was indeed established to that end of Dutch scientists and American marketing executives. Otherwise, those in charge of the nutriceuticals division over there in the Western Hemisphere were largely left to their own devices.

However, as the numbers coming from across the Atlantic increasingly bore witness, such confidence was misplaced. It seemed that Bill Watts' own capacity for effective supervision had been somewhat diluted as a result of the lucrative cashing-out which the purchase of GNC by Numico had meant for him personally, and the quality of management he had left behind to run operations after being kicked upstairs to the Numico Management Board was inadequate for the task at hand. And then a number of after-the-fact revelations cast doubt on the decisions to invest in American nutriceuticals in the first place. It seemed certain adverse information – reports about ephedra, studies that warned about the commoditization of the market – had been suppressed during the company’s deliberations on those investments, most likely by then-members of the Management Board.

4 Although perhaps the extensive private-label production even then being undertaken by GNC – and by Rexall Sundown and Enrich Int. as well – might have provided one clue. 5 Later, in the early months of the tenure of Jan Bennink, Numico would announce its exclusion of ephedra as an ingredient in its products altogether – this at a point when the US Food and Drug Administration (FDA) had yet to make any determination whether it in fact was dangerous.

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Search for a Successor

Nevertheless, the present grim reality had to be acknowledged, and in September 2001 Numico issued a serious profit warning that launched the company’s share price downwards past the €30 mark.6 It was here that Rob Zwartendijk judged the time opportune to devote some more attention to the post of company CEO. The official plan was still to have Hans van der Wielen end his long career at Numico in 2003, when he reached the mandatory retirement age for company executives of 60 years. But who would succeed him? Up until that point, the issue had never been addressed, but now the Supervisory Board formally asked Van der Wielen to suggest a successor.

He proposed Jan Bennink, then in charge of the dairy division at Danone, the Paris-based food-and-beverages company. Van der Wielen had had the chance to get to know Bennink well during on-going discussions that had been taking place between the two companies about establishing some sort of cooperative arrangement, and he had been impressed. Not only was he a quality executive, but he was probably available: although Bennink was a star performer there, Danone already had in place, in the person of Franck Riboud, a young and vigorous CEO who seemed likely to be there for a long time. It was reasonable to assume that Bennink was keeping an eye out for opportunities to gain a CEO position elsewhere.

The first step was to get re-acquainted, which was accomplished that same month of September 2001 as Van der Wielen hosted Bennink to a private dinner that featured a comprehensive review and defense of the American nutriceuticals strategy. This suited Bennink very well, as Numico’s efforts in the American market were not only evidently of great current relevance to the company’s fortunes, but also something that intrigued him to explore the company further. Later, in November, Bennink was given the opportunity to introduce himself to and get to know Numico’s Supervisory Board. The Board came away from that encounter already impressed; members promptly brought forward a proposal to put him on the management team right away as a sort of deputy to Hans van der Wielen, enabling him get familiar with Numico from the inside at a leisurely pace before eventually taking charge. But, although the prospect of coming to Numico was indeed beginning to interest Bennink, holding such a subordinate position, even temporarily, was of no interest to him.

Still, the recruitment process for Numico’s number-one succession candidate seemed to be going very well indeed, and that inevitably started to play a part as relations between the Supervisory Board and Van der Wielen continued to deteriorate. Rob Zwartendijk took the initiative over Christmas 2001 to meet with Bennink and to work out, on his own authority, an informal agreement designed to lend maximum flexibility to bringing him on board. Formally, he was still scheduled to take over CEO duties at the beginning of January 2003, at the earliest; but, in order to ensure that he be available to do so earlier, if necessary, Zwartendijk was willing to pay him a base salary (plus a lump-sum compensation for the Danone stock-options he would lose) for doing nothing but leaving Danone with immediate effect and holding himself available for Numico. This agreement was formalized by signature in February 2002; Rob Zwartendijk’s last instruction upon parting company on this occasion was simply “Be ready for 2003!” That sounded good to Bennink, as he set about ensuring a smooth transition at Danone for his successor at the head of the dairy division there. To the Task at Hand Soon, though, Rob Zwartendijk was back on the line – much sooner than anyone had expected as his summons came only a month later, in late March. The problem was that relations between the Supervisory Board and Van der Wielen had continued to deteriorate, to the point that a regime-change at the head of the Management Board was now urgently needed just to keep the company running in a stable manner. Strictly speaking, under Dutch corporate law the most that could be done in the short term was to suspend a CEO from his position prior to asking the assembled shareholders at the next shareholders’ meeting to confirm dismissal. Likewise, shareholder approval was also needed for Bennink to take over full powers as the new CEO. But a transitional arrangement was surely possible in the meantime, especially considering that the Supervisory Board was willing to open company coffers somewhat wider to bring it about. The Board came to an agreement with Hans van der Wielen whereby he voluntarily took early retirement early retirement (as of the general shareholders’ meeting

6 Presumably, that was the cause of the stock’s subsequent slide, although other historical events of that month also contributed to lowering world stock market prices generally.

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of 7 May 2002) in exchange for a generous final payout. At the shareholders’ meeting in early May approval was easily gained to make Jan Bennink Royal Numico N.V. CEO as of 1 June 2002. ENGINEERING THE TURNAROUND Bennink took over a company whose stock-price was now skidding downwards (average price that June of €22.71, down from €45.33 just a year before) due to shareholder and analyst dismay over its financial performance and over the chaotic leadership situation, which cut deeply into the credibility with which official company announcements and press releases were received. At the same time, fundamental dilemmas remained: Numico’s traditional sales-pillars of baby food and enteral clinical nutrition continued to post only indifferent growth figures, due to lack of investment in those divisions, while earnings were maintained only by cutting support and maintenance that were vital for long-term viability. In addition, the bold initiative into the North American nutriceuticals market had seemingly bogged down. As Bennink finally took charge, the pressure to just do something – anything – to start turning company fortunes around and stop the daily erosion of its market capitalization on the exchange was tremendous. Still, he fully realized that measures taken in ignorance of the true determinants of the situation - measures taken in haste, just for show - usually turned out worse than if nothing were done at all. It was true that he was very well versed in the baby food business, and had been familiar with Numico for some time as a competitor. But the company now dealt in more than just baby food, and did so in more places than just Holland, or even just Europe. Every new boss gets at least one hundred days to familiarize himself with his new environment, Bennink told himself, and he was determined that that would be his right as well. The first step was embarking on a vigorous schedule of travel that took him to visit company operations in every corner of the globe. (Indeed, Bennink had gained a head start even before taking over as CEO by managing a tour in April 2002, of the US-based divisions in the company of Hans van der Wielen.) From the briefings he received during these trips, certain truisms became clear straight away. Recent results may have been disappointing, but the company was clearly structured around a solid core of activities - mainly in baby food and enteral clinical nutrition – that had built strong positions in their respective markets over the years and still earned robust levels of revenue year-in and year-out. Further, as the embodiment of Numico’s permanent core competence there was always the company research installations, with their scientific talent and R&D programs.

Good, but still the company was losing the confidence of the outside world, including both the holders of its stock and analysts. Its performance was increasingly under pressure – what was the problem? Some hints as to what might be wrong did arise during Bennink’s extensive travels. For one thing, he noticed an organizational structure not really set up with a view to strategy but rather in a more ad hoc manner, constructed according to the dictates of local tax regimes more than anything else. And of course there was new and serious problem of the collapse in Numico’s public credibility, brought about as spokesmen had tried to sugarcoat the recent unbroken stream of unsatisfactory results. Viewed more broadly, though, these unsatisfactory results themselves constituted a serious blemish on the credibility of the individual members of top management who had allowed them to happen on their watch. Grabbing the right people

By November 2002, Bennink had seen enough to be able to present a plan for taking the company forward. At the front-end were certain fundamental building blocks intended to lay the basis for future improved performance, most importantly management personnel. New leadership was needed at the company’s top levels, across the board, and by mid-2003 Bennink was able to reconstitute his entire Management Board,7 generally with experienced executives coming from related FMCG goods companies and also Bennink’s own previous company, Danone. But there was also his new Chief Financial Officer (from 13 February 2003), Jean-Marc Huët. Huët had been a lead member

7 In fact, Bennink’s very first Management Board assignment (Niraj Mehra, hired to take over supervision of Numico’s factories as President, Operations) occurred as early as the first part of October 2002, i.e. before the formal presentation in November of his strategic plan. However, Mehra’s early appointment was no real surprise, as he was both a colleague and production expert whom Bennink was able to dislodge from Danone to take with him over to Numico.

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of the team from Goldman Sachs that Bennink called in early in his tenure to strengthen Numico’s balance sheet, by examining its various component divisions and evaluating whether, how, and for how much they might be sold. During that review, he became so thoroughly grounded in Numico’s operations that selecting him for CFO was a natural choice.8 Structural Changes It is ultimately people that carry out any company’s operations, so that putting standards and procedures in place o attract and retain the right personnel – and not just the Management Board, but the Numico manager cohort in general - was obviously a key step in laying the groundwork for turning the company’s fortunes around. But this was only a first step; it prepared the way for various other changes to the company, changes in procedure but more importantly in outlook and perception. For one thing, Jan Bennink upon arriving at Numico did not particularly see any sense of urgency among his managers, as much as that would seem to be called for by the company’s then-perilous situation. He made sure to bring that about, together with a much more hands-on management style that visited, inspected, and inquired about all manner of company operations - whose performance Van der Wielen had been content to monitor simply via periodic reports from the department head. These often barely-perceptible yet significant changes in operating style gradually but steadily started to better Numico’s performance and restore faith in the company on the part of both outside observers (most especially shareholders and potential shareholders) and those who were actually part of the organization. More broadly, the key changes could be categorized as follows: Keeping hold of the big picture: Jan Bennink realized that his top managers occasionally had to take a step back on a regular basis and contemplate larger issues, with periods longer than day-to-day. So he instituted at an early point a yearly-meeting calendar template that established as standard for each calendar-year two different “retreats,” designed to get managers to go off together for a few days to collectively “think big” in a relaxed environment. One such yearly meeting involved just the Executive and Supervisory Boards, undertaking a top-to-bottom review of company strategy: markets, budgets, competitors, potential acquisitions (and their priority) and potential acquirers, together with contingency plans to deal with all eventualities. The other such yearly "retreat" constituted a get-away to a more exotic location for the Executive Board and Numico's top-level managers, where the objective was to foster a common company culture, celebrate successes, and re-establish a proper focus for the future. To this end, the managers would examine "softer" data presented to them concerning attitudes, morale, capabilities, etc. within the company. (See appendix 4.) Recasting remuneration: Another preoccupation that needed to be removed from Numico managers' field-of-vision involved what they would be paid. Those questions of remuneration could turn into a distraction serious enough to hinder the company's very operations had been demonstrated in the case of Hans van der Wielen, but to some extent his complaints found justification in the distorted nature of the company's compensation system as it functioned during his time. That system had failed to keep pace conceptually with the growing multi-national nature of Numico's operations; country managers, for example, could take advantage of a bonus system that often returned to them an annual salary close to that of the CEO himself. To fix this, Bennink worked with the Supervisory Board's compensation committee (and with the advice of outside compensation consultants) to fashion a new system designed to foster a true performance culture among Numico's managers. It relied mainly upon the use of stock options and shared (awarded basically on a 50-50 basis) to provide the variable remuneration element that would reward managers, but only for achieving very ambitious, measurable targets (e.g. achieving at least second-place share in a defined market). Of course, this framework was consistent with the terms for his own compensation that Bennink had worked out with the Supervisory Board to replace the short-term "holding" contract he initially had while waiting for Van der Wielen to leave. But the purpose of this new system intended for all managers, all the way up to Jan Bennink himself, was to induce them to stay with the company and to strive continually to improve company fortunes by

8 In addition to the aforementioned Mehra and Huët, Bennink’s recruits to his new Management Board also included Chris Britton as President, Baby Food division; Rudy Mareel, President, Clinical Nutrition (replaced in 2006 by Flemming Morgan); and Ajai Puri, President, R&D and Product Integrity.

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achieving demanding targets, and so make Numico shareholders rich - since they could thereby gain a slice of those riches for themselves. Structural Improvement Programs: As explained above, within eleven months of his taking over at Numico, Jan Bennink had an entirely new Management Board, and even the top company ranks a few levels below also experienced during that time a marked shake-up and arrival of new personnel to replace the old. This meant plenty of “new eyes” taking a fresh look at the company’s various activities (manufacturing, selling, financing, distribution, etc.), coming up with programs to improve them, and implementing those. Among these, Jean-Marc Huët and his people can be credited with a vital effort towards bettering Numico’s financial situation by bargaining among banks to improve the terms and conditions of the company’s financing arrangements – in particular, the re-financing of €3 billion worth of company debt - and also for a successful campaign to reduce the money tied down in working capital from 22% to 5% of turnover; Niraj Mehra should be lauded for several initiatives towards rationalizing Numico’s production processes, including Project Focus (which cut the number of factories in operation), Project Laager (improving the efficiency of the firm’s logistics net), and Project Booster (gaining variable-cost savings in production processes); and the company’s IT experts get credit for a thorough-going overhaul of the reporting system (frequency, new types of data, plus new risk-management auditing) enabling top levels of management to track more closely just what was going on at all times. Re-conceptualization of lines-of-business: The most fundamental question about any company is “Based on our competencies, what businesses should we be in?” Numico urgently needed to address itself once again to that question but, first of all, it needed to deal with certain organizational clutter which got in the way of any such fundamental analysis. For under Van der Wielen, the company had been organized on a country/regional basis, with regional bosses responsible for the operation within their geographic units of all of Numico’s product lines. Jan Bennink changed this all around, back to a product line/division basis with divisions for baby food, clinical, etc. This move did add certain costly overheads, related to the new supervisory positions placed within the company’s structure. But at the same time it made possible a vital analytical focus upon and comparison between Numico’s main business activities. The analytical format chosen was the familiar “four-quadrant” model from the Boston Consulting Group:

Evaluating Numico’s Assets

- Clinical Nutrition

- Baby Food

High Growth/High Margin

- Start-up Operations

- Non-core Assets

High Growth/Low Margin

(on probation?)

-GNC

Low Growth/High Margin

- Unicity

- Rexall Sundown

Low Growth/Low Margin

This analysis was conducted within the context of the company’s Mission: that Numico was to be “a high-growth, high-margin specialized nutrition company.” It was easy to see which divisions did not make the cut. Clearly, a decision on what to do about the American nutriceutical holdings could not be put off much longer. Their problems were distracting considerable executive time and attention, to the detriment of the rest of the company’s operations. It was really only a question whether GNC’s higher

9

margins were enough to justify further management patience towards an eventual turn-around, something that both Rexall Sundown and Unicity9 probably did not merit.

It all eventually became a moot point as unsatisfactory performance numbers for all the American operations kept arriving over time. The numbers for the US businesses as reported in the 2002 Numico annual report were worrying: GNC turnover down 10.3% from the previous year, its EBITA down almost 39%; Rexall Sundown turnover down almost 22%; Unicity’s turnover down 20%.10 Investor confidence in Numico plummeted to new depths, as reflected in the record-low share price of €4.88 recorded in February 2003. Still, Numico management by this point had already entered into negotiations (from October 2002) with the American food-supplement firm NBTY Inc. to sell them both Rexall Sundown and GNC as a package deal. Those negotiations ultimately broke down over questions of price, but Rexall Sundown was finally sold, by itself, to NBTY in June 2003 for $250 million in cash, while the sale of GNC followed later on, in October, sold to the private equity firm Apollo Management for $750 million.

The grand vitamin experiment in the American market11 thereby came to an end. And at a considerable loss: the difference between the price originally paid for these assets in the 1990s and what they were sold off for amounted to around a negative €3 billion, and the loss-making disposal of these assets in fact temporarily made Numico’s net worth negative – quite apart from the estimated $1 billion in claims for damages that were expected to result from lawsuits over ephedra in the nutriceutical products.12 Still, the thinking was that, although difficult to swallow, these steps were ultimately necessary in order to pare Numico’s structure back down to only those divisions most likely to resume a high-growth financial trajectory. But how to make that in fact happen?

For the Clinical Nutrition division, the challenge was of a more traditional nature. Although operating in a very specialized market (with limited scope for the employment of traditional advertising, for example), Numico was actually starting to struggle with that market's increased commoditization and the attendant lowering of margins, which had slipped to 19% while sales growth had declined from 15% to 8% yearly. What was needed was further product innovation and specialization to justify to customers the continued factoring of healthy margins into product pricing.

The baby food division, at the core of Numico’s existence from the very beginning, did however face challenges of a new sort. These principally involved the slackening in demand presumed to be the result of negative demographic trends in Numico’s key markets. These concerns were already described above in the context of the situation in which the company had found itself in the late nineties; they in fact had been the principal reason why some sort of bold new move like the entry into American nutriceuticals had been thought essential.

Jan Bennink was well aware of the demographic trends from his previous position at Danone - but he was not convinced that they necessarily meant impending doom, if marketing efforts could be re-focused on what Bennink termed a child’s “share-of-stomach.” This was a concept that did not encompass only dairy-based products (which was basically Numico’s baby-food emphasis at that point) but on anything a child would be fed, calculated from his/her birth until about three years of age. Danone is striking performance both with dairy and non-dairy products for babies/small children within the French market – which of course Bennink’s past employment history ensured that he was quite familiar with – showed the way. Adopting the “share-of-stomach” concept there enabled Numico’s competitor to record double the sales in the infant/toddler food segment than what Numico was then achieving in one next-door market where its brands dominated, the UK. The potential for using this approach to multiply sales in less-developed countries, where resort to commercial products to feed the very young was very undeveloped compared to in the West, was even more explosive – and that was even before the effect of the faster population growth (i.e. more babies to feed) in those lands was factored in!

9 “Unicity” was the new name for what had been the Enrich Int. holdings, bundled together with another minor vitamin company, Rexall Showcase International. 10 Admittedly, some part of these reductions in turnover was due to the weakening of the US dollar during that time vis-à-vis the euro. 11 Although Numico continued to have minor holdings in Europe-based nutriceutical firms. 12 Ultimately, though, all ephedra claims were fully covered by the insurance that Numico had taken out to cover against such a possibility.

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The Danone lesson pointed to two specific different approaches for achieving such results: the already-mentioned widening of the target demographic beyond just infants (which meant a lengthening of the product-line along the dimension of age, i.e. to include toddlers), but also a broadening of that product-line, at every age-level, through the introduction of new products filling different niches. For example, where previously there had been but one food on the market for babies transitioning to solid food, Numico’s laboratories would develop a parallel product, designed for the same target demographic but of higher quality (and priced to capture more margin), designed to offer a new choice for those parents for whom nothing but the best was acceptable to feed their child. Geographical expansion through acquisition: There is little question that it was this revitalization of Numico’s core baby food business, via striving for a wider “share-of-stomach,” that most worked to turn company fortunes around at the most fundamental and effective level, and its financial results were showing a marked upturn as early as in 2003. In turn, the new financial strength this brought about put Numico in a position to achieve quantum-leap improvements in its business volume through intelligent acquisitions. And the company was better prepared than most to move swiftly on intelligent acquisitions. For one thing, Jan Bennink and his Management Board had started strategic thinking and planning along those lines just after his arrival at Numico as CEO, and Bennink had made sure to visit all competitors and potential acquisition targets within a 12-month time-span. From then on, the yearly planning/review sessions kept top management alert about the competitive environment and the latest contingency plans. Thus, Numico was able to act fast in June 2005 to buy up the Italian baby food concern Mellin when it came up for sale, and thus to entrench its position as #2 in an Italian baby food market where it had previously lacked much of a presence. But what was an even more significant deal was the acquisition in January 2006, of Dumex, a Danish baby food company with top market share in the entire Asian market. Numico paid a steep price for Dumex: around 33 times it’s EBITA. But at a stroke the company also finally managed to expand its decades-long foothold in the Indonesian market into the rest of Asia – particularly into the huge China market, where it even leaped ahead of Nestlé - with the local-market knowledge of inherited Dumex personnel now available to maintain strong market positions. The New Model Supervisory Board “A new broom sweeps clean,” runs the old English proverb – and the new broom that Jan Bennink and his team brought to bear on Numico did not leave even the company’s highest levels untouched. True, the Supervisory Board, as the representative of the shareholders, was a higher ultimate authority than the Management Board and in fact had been responsible in the first place for bringing Bennink to the company and approving his choices for the rest of his platoon of top managers. On the other hand, it followed that the Supervisory Board was also ultimately responsible for the company’s well-being or lack thereof, and in particular for the results of major strategic moves in pursuit of that well-being. The foray into American nutriceuticals certainly qualified as such, and its eventual failure greatly discredited that Supervisory Board which had initially approved that move.

Thus, just as with the Management Board and the top levels of Numico’s management ranks generally, the stage was set for a thoroughgoing exchange of new personnel for old. However, for the Supervisory Board things naturally could not proceed by CEO fiat. Rather, Bennink’s first task was building a consensus for the notion that new blood – in fact, quite a lot of it – on the Board was in the best interests of the company. That achieved, it was then a matter of using natural “attrition” to make the personnel changes, by taking advantage of the fixed terms of service of Board members to choose a new member when that time came up, rather than renewing the old member’s term. In this way, in the course of a mere 19 months the seven-person Numico Supervisory Board did indeed change its collective face (almost) entirely; refreshed with new members, several of them not from the Netherlands (and, as of 2006, including two women), the new Board could better exercise its oversight responsibilities with a broadened outlook and rich mix of collective business experience. The one constant – the Board figure for whom no replacement was deemed necessary - was the Chairman, Rob Zwartendijk. Some sort of continuity was still needed at top levels of Numico management, after all, to provide a link with the experiences and lessons of the past. As a member since 1994 and Chairman from 2001, Zwartendijk was Board continuity personified, but even then his influence came to exceed his mere job description. The key role he played in engineering the replacement of Hans van der Wielen has already been noted. From that point on he established a

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particularly close working relationship with Jan Bennink that did much to enhance cooperation between the two Boards. Not surprisingly, Zwartendijk’s tenure as Chairman came to me marked by a subtle but significant shift in that role: where before the Supervisory Board had essentially been a collective of seven equals, now the Chairman became the first point-of-contact with the Management Board, specifically with Bennink or his CFO, Jean-Marc Huët. For one thing, this meant the Chairman was usually available to represent the interests of the Supervisory Board as a whole when a crisis arose that required a quicker decision than the time needed to convene the Supervisory Board could provide. On a more day-to-day level, Zwartendijk began to liaise more closely with company management – and thus be privy to important company information earlier and to greater depth than his six colleagues- often with a view towards “preparing” the periodic Supervisory Board plenary meetings (six on average) scheduled within each calendar year.13 Nonetheless, that information supplied routinely to Supervisory Board members – mostly in briefing documents for such plenary meetings – also was the subject of a marked upgrade, one which was but a natural outgrowth of the improvements in type and flow of internal company information described in an earlier section. The aim was to bring about much more transparency in relations between the Management and the Supervisory Boards. The briefing documents provided to the Supervisory Board now featured more complete, more informative statistical presentations of key monitoring variables for the company’s various operations. Significantly, new attention was also paid to measuring actual company capabilities towards achieving the desired performance, things like culture, values, systems, and attitudes. For example, Numico began to run the MeyerMonitor™14 among its managerial ranks; the results were not only regularly reported to the Supervisory Board, but as of 2006 extracts from them were even published in the company annual report. Even the Supervisory Board itself was not immune to this new emphasis on capabilities. All Board members began to participate in another self-evaluation program run by an outside consultant. This was based upon extensive and very frank interviews – including an interesting “bottom-up” feature wherein members of the Management Board were asked to rate the performance of each Supervisory Board member - and designed to come to grips with issues such as how well the Board was functioning, how it cooperated with the Management Board, and what it needed to do to function even better in the future.15 ON THE HUNT By January 2004 Royal Numico N.V. was once again a prosperous and “clean” company: all ephedra-related lawsuits had been settled, the remaining operating divisions were posting healthy numbers, and a new leadership was in place across-the-board and functioning well. On the financial side, retained earnings were accumulating on the company balance sheet, while the stock price was headed upwards and already back above €35 per share. The time for defensiveness and desperate measures was past; where a few years earlier Jean-Marc Huët’s most pressing task had been converting €3 billion worth of maturing debt to various banks, now it was mergers and acquisitions. With Mellin Spa and Dumex, the company already had a pair of successful acquisitions under its belt, and was feverishly working to further develop the entries into the Italian and Chinese markets that they had made possible. But Numico’s growing financial muscle gave it an appetite for more – and the mid-summer strategic-review meetings ensured that there would never be any shortage of ideas about what to do next, nor any confusion as to the current state of play in the specialty-food industry.

13 Zwartendijk was also instrumental in making the change-over of Supervisory Board members happen. Again, Bennink’s objective was the near-total replacement of a body which formally functioned as his superior – which could only be accomplished, in effect, by gaining the agreement of that body for its own dissolution. Understandably, Rob Zwartendijk’s presence in driving this process was essential to its success; the unassailability and continuity of his own position proved very disadvantageous for the continual presence on the Board of his colleagues of 2002. 14 An on-line survey system designed to measure an organization’s capability to execute strategy - see Appendix 4 for actual Numico results and their explanation. 15 Another motive for embarking upon this program was likely the “Tabaksblat Code,” a voluntary corporate governance code put into effect for Dutch-based companies on 1 January 2004 which prescribed some sort of self-evaluation process for the Supervisory Boards of all Dutch public companies.

12

Such alertness was essential: things moved fast, and it was vitally necessary to stay vigilant as to the latest developments. So it was that Numico was not particularly taken by surprise by the April 2007 purchase by one of its main rivals, Nestlé, of Gerber, a baby food company then owned by Novartis, as well as Novartis’ clinical nutrition division. Numico officials had had their eye for some time on Gerber as an acquisition target themselves, especially because of its extensive American operations which could function (just as had Mellin and Dumex) as a bridgehead back into that market (after the nutriceutical retreat).16 But one problem was that Gerber was not really very profitable – it simply did not fit in with Numico’s high-growth, high-margin mission. On the other hand, because Nestlé was content with margins lower than those achieve by Gerber, for them the purchase had an accretive affect. In any case, Numico officials had a more enticing take-over target in mind.17 The Mead Johnson baby food company, a subsidiary of the American company Bristol-Myers-Squibb, seemed to be Numico’s perfect geographical complement, with the equivalent of around €1.8 billion turnover in baby food sales mainly in North and South America and in Asia (compared to Numico’s €2.6 billion turnover – not all gained from baby food, of course - in Europe and Asia). Furthermore, Numico had been in contact with Bristol-Myers-Squibb about Mead Johnson since September 2002, and as 2007 began indications were finally forthcoming that they would consider selling their subsidiary, if the price was right. It was time to act: the Management and Supervisory Boards convened for a series of extraordinary meetings in April and May of 2007 to consider a move for Mead Johnson, code-named “Globetrotter.” Naturally, the main draw was the entry into the American it would afford. On the other hand, the price Bristol-Myers-Squibb was asking made it a very much larger transaction than either of the previous Numico acquisitions. The price was so high that it needed to be denominated in Numico shares that Bristol-Myers-Squibb would acquire, which amounted to 30% of the company, plus two seats on the seven-member Supervisory Board.

Still, a good side effect of this was that it would make Numico invulnerable to takeover from any other company, as the large block of shares held by Bristol-Myers-Squibb would be out of reach of any corporate raider. Overall, the proposed deal’s commercial logic was very convincing, On 18 June 2007, a Monday, the Numico Supervisory Board voted to officially give the Management Board a mandate to pursue “Globetrotter,” whose negotiations were expected to last no longer than August. Both the Numico CFO, Huët, and the Corporate Secretary were dispatched forthwith to New York City to get the talks rolling. Danone Intervenes However, even as they left for the airport, there had already been a new behind-the-scenes development. On that very same Monday that he got the green light for “Globetrotter,” Jan Bennink received a telephone call from his former boss at Danone, Franck Riboud. The message: We are interested in acquiring your company. Bennink could only volunteer a “thanks, but no thanks,” but it mattered little: the telephone was merely a courtesy, whereas what really mattered was the registered letter, setting out Danone’s proposed terms in detail, that Riboud promised by the end of the week. That letter in fact crossed paths with the Numico New York delegation somewhere on the A4 highway out to Schiphol airport, arriving the next day. Of course, Numico executives had always been aware that their company might eventually be interesting as an acquisition target at least to any of the truly large international foodstuff firms. Still, the precise timing of Franck Riboud’s call was very interesting – and extremely awkward, in view of the

16 As usual, any attempted “greenfield” operation into the North American market would be sure to face prohibitive disadvantages, such as having to build up brands-awareness from scratch in the face of well-entrenched incumbents, which the purchase of an incumbent like Gerber would circumvent. This incumbent advantage was made even worse there by the Special Supplemental Nutrition Program for Women, Infants, and Children (usually just known as “WIC”), a Federal program designed to provide lower-income women and children with food via subsidized sales. Those sales had the potential to bring many millions of dollars in revenue, but they could only be made from approved manufactures off of a government-composed list. New companies had a hard time getting on that list; most incumbents were already on it 17 The following discussion of negotiations for a possible purchase by Numico of Mead Johnson is based solely on publicly-available information.

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momentum that had been building for the Mead Johnson acquisition. The telephone call by itself was enough to prompt Bennink only to alert Rob Zwartendijk of what was going on, but the arrival of Danone’s official letter meant it was time to start informing the other Supervisory Board members and top management personnel. The first of a series of emergency meetings for deciding upon a formal reaction to Danone’s offer was set for the following Saturday, 23 June. At the core of the Danone offer was a proposal to buy all Numico shares available at the price of €51, when at the time those shares were for sale via the Amsterdam (Euronext) Stock Exchange for around €39. That aspect alone made the Danone offer difficult to turn down; earlier analysis by CFO Huët, presented at the previous mid-summer strategy conference, had identified that any buy-out offer for Numico shares at €45 per share or higher would put Numico in a difficult situation for resisting the take-over. Of course, management could refuse any price Danone offered, except that most shares – i.e. the company’s actual ownership – were scattered among thousands of stockholders, so that Danone’s offer carried an implicit threat: Numico management could cooperate or else, failing that, Danone could go over the heads of Numico officials for a public, “hostile” takeover to buy up enough company shares to gain formal ownership that way. The terms proposed in Danone’s official letter reflected that company’s attitude that its eye-opening €51-per-share offer gave it a strong hand, for it included a couple requirements, namely 1) Exclusivity: That Numico would henceforth negotiate only with Danone about being acquired, and no one else; and 2) That Danone would be granted the time and access to Numico internal company information in order to complete a proper “due diligence” investigation to check on the true value of Numico as a business concern. At first blush, exclusivity was the last thing which Numico officials were willing to concede. In fact, now was precisely the time go through the various contingency plans on file to see whether some other company could be found to intervene as a “white knight” to rebuff the French offer and offer a better end-state for Numico. To this end, Bennink was able to enlist some assistance from analysts at that source of expertise that he had called upon in the past, Goldman Sachs. Unfortunately, such “white knight” prospects seemed meager. Perhaps the Anglo-Dutch soap-and-foodstuffs giant Unilever could be a candidate, but there were problems with that. Numico officials were familiar with the way Unilever’s operations in the Netherlands were structured, and it seemed certain that any fusion would necessarily result in substantial job-losses for Numico employees due to elimination of duplicate staffs and facilities.

At the same time, Danone was reported to be on the point of selling its global biscuit business to Kraft Foods. Of course, this development had its influence on the bid for Numico - the cash from that sale to Kraft was likely what had made Riboud so confident that he could advance such a tremendously high offer for Numico shares. Indeed, buying Numico offered him something to do with the cash from any Kraft transaction; he couldn’t just bank it, as Danone itself was already somewhat underleveraged and so risked being bought up by some even bigger company (rumors were circulating that the US corporation PepsiCo was interested in precisely that). In short, alternative plans to avoid Danone’s embrace through some sort of fusion with another company were not panning out. Still, Numico top management was at least not of a mind to say “Yes” to any first-time proposal. The formal response they composed to Danone made a number of points clear: first of all, €51-per-share was still too low an offer, and in addition to that, no one at Numico was inclined to cede any concessions about exclusivity or due diligence. Danone officials were not to be put off that easily. They sent off a new letter to Amsterdam reaffirming their serious intention to work out some deal, and proposing to start face-to-face negotiations. Such a sincere negotiating stance had to be dealt with in good faith by Numico – again, keeping in mind the possibility that Danone might simply “go hostile” if it felt its direct dealings with Numico were getting nowhere – but for now that meant dispatching a envoy (in fact, a banking adviser from Goldman Sachs) to Paris to sound out what Danone officials had in mind. His report made it clear that Danone did want to do a deal, and were willing to go the extra mile for it: they were willing to contemplate an even-higher per-share offer, and to water down their insistence on “due diligence” to merely being allowed to pose some questions to CFO Jean-Marc Huët. Further, they dropped any demand for the inclusion of the usual “annulling conditions” in the take-over contract, which ordinarily would function to cancel the deal if certain disadvantageous events occurred between its signing and implementation. They also dropped any insistence on exclusivity, but this particular concession was hollow in light of their demand that if a deal was to be done, that it be wrapped up in time for their own annual shareholders’ meeting – which was the very next Monday, 8 July!

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1

The flexibility that Danone had shown itself willing to extend could not be denied, nor could Franck Riboud’s evident determination to take Numico under his company’s wing. The stage was set for a very busy weekend for all top Numico management and Supervisory Board members to host at company headquarters delegates from Paris, and ultimately, if things went well, Franck Riboud himself on Sunday or Monday to put his signature on a final deal.

Still, the bargaining over the exact shape of a deal was sometimes antagonistic. Certain topics did find ready agreement, such as employment guarantees for certain Numico personnel and facilities (namely the Schiphol headquarters and the main research facility in Wageningen, the Netherlands).18 A more contentious point was the offered price-per-share. Numico had already indicated that they regarded €51 as inadequate; over the weekend, Danone raised the offer to €53, but the Numico side did not think much of that figure, either. As each side pressed the other to the brink, there was in fact a temporary break in the talks as late as that Sunday, which raised the prospect of having to continue the bargaining into Monday and thereby up to the very last deadline. The Numico Supervisory Board made use of that Sunday break to issue Bennink’s negotiators with renewed baseline bargaining instructions for that final-push period outlining what any acceptable deal would have to look like, namely a per-share offer above €53 together with the other conditions pertaining to employment, facilities, and the like.

It was not until noon on Monday that Bennink was able to report that Danone had raised its offer to €55 per share and met all other conditions. Gaining permission from the Supervisory Board to finalize the deal should then have been nothing more than a formality . . . except that everyone on that Board was well aware how Numico had succeeded in existing independently for more than 110 years! More poignantly, over the last five of those years the company had succeeded in pulling itself back from the brink of insolvency, in a manner that had attracted the admiration throughout the international business community. The challenges ahead were the sort of positive ventures any aggressive businessmen would want to undertake: how to rapidly expand the new footholds in both European and Asian baby food markets, how to crack the American market, how to further leverage what was becoming a dominant worldwide position in clinical nutrition. It was for certain that Danone had not been and would still not be interested in a Royal Numico in the state the company was in during the early 2000’s; rather, the company was about to lose its independence as an ironic sort of reward for its excellent performance since then!

Ultimately, the Supervisory Board members were responsible for safeguarding the interests of Numico’s shareholders. Of course, automatic approval of the take-over deal was forthcoming once Jan Bennink was able to announce a satisfactory conclusion to the negotiations. At close of business on that Monday, 9 June, Jan Bennink and Franck Riboud, together in Amsterdam, were able to announce to the world the successful conclusion of a deal whereby Danone would take over Royal Numico N.V.19 In the name of the Supervisory Board, Numico would be recommending, at an extraordinary shareholders’ meeting to be convened in October, that all shareholders take up Danone’s offer to buy their shares of Royal Numico common stock at €55 per share.

18 See a listing of the auxiliary points agreed reproduced in Appendix 5. 19 Trading in Numico shares on the Amsterdam (Euronext) Stock Exchange had already been suspended at 11:30 that day, as a flurry of rumors about the company had resulted in wild volatility in trading in those shares. With the disappearance of Numico as an independent entity, the Numico share would soon be removed from the AEX index of leading Amsterdam (Euronext) Stock Exchange shares, whose “basket” of shares Numico had been part of since 1996.

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Appendix 1: EBITA Data

€millions Net Result EBITA Total Comp. Infant Clinical Nutr. Consumer/Diet Vi2000 200 661 173 99 1102001 230 667 190 116 2242002 -1,642 588 180 131 2702003 -504 365 184 155 652004 -145 315 210 171 0

tamins247147700

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Appendix 2: Numico Financial Statements

ROYAL NUMICO N.V. CONSOLIDATED INCOME STATEMENT(All figures except EPS in € million) 2006 2005 2004 2003* 2002* 2001*Sales 2,623 1,988 1,722 3,151 3,966 4,339Other Revenues 21 20 19 59 74 85Total Revenues 2,644 2,008 1,741 3,210 4,040 4,424

ExpensesCost of raw materials & consumables (822) (614) (497) (1,038) (1,351) (1,627)Change in stocks of finished/semi-finished products (22) (8) 8 (125) (146) (41)Personnel costs (539) (432) (405) (706) (836) (829)Other operating costs (785) (587) (503) (881) (1,156) (1,148)Depreciation of property, plant & equipment (39) (25) (31) (95) (111) (112)Impairment of property, plant & equipment (19) --- (10) --- --- ---Amortisation of intangible assets (15) (10) (5) (856) (1,969) (224)

Other income 26 28 6 (93) 135 ---

Total(2,241

)(1,648

) (1,437) (3,794) (5,434) (3,981)

Operating Profit 429 360 304 (584) (1,394) 443

Finance costs (106) (91) (111) (164) (137) (158)Other financial income 16 30 19 --- --- ---Share in profit of joint venture 2 3 4 --- --- ---

Profit before tax 341 302 216 (748) (1,531) 285

Income tax expense (136) (101) (98) 363 (106) (125)

17

Result divestment group companies --- --- --- (112) --- ---

Profit from continuing operations 205 201 118 (497) (1,637) 160

Net loss from discontinued operations (2) --- --- --- --- ---

Earnings per share Basic EPS 1.07 1.15 0.68 (3.03) (9.88) 1.41Diluted EPS 1.04 1.11 0.67 (3.03) (9.88) 1.39

* Note: Financial statements prior to 2004 were prepared according to Dutch GAAP standards,While subsequent statements were prepared according to International Financial Reporting Standards (IFRS)

ROYAL NUMICO N.V. CONSOLIDATED BALANCE SHEET

(All figures in € million) 31-Dec-0631-Dec-05

31-Dec-04

31-Dec-03

31-Dec-02

31-Dec-01

Non-current assets Intangible assets 2,132 767 123 23 1,317 3,672Property, plant & equipment 438 336 314 258 648 741Investment in joint venture --- 9 6 --- --- ---Other financial assets 12 17 22 31 68 93Deferred income tax assets 303 362 374 438 93 60Derivative financial instruments --- 9 --- --- --- ---Sub-total 2,885 1,500 839 750 2,126 4,566

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Current assets Inventories 252 194 173 152 563 653Trade and other receivables 388 351 273 210 662 647Current income tax receivables 13 10 8 95 --- 36Derivative financial instruments --- 2 1 --- --- ---Cash and cash equivalents 280 1,457 220 409 256 513Sub-total 933 2,014 675 866 1,481 1,849

Non-current assets held for sale 23 22 --- ---Total assets 3,841 3,536 1,514 1,616 3,607 6,415

EquityCapital and reserves attributable to equity holders 869 680 (302) (469) 173 2,166Minority interest 4 2 17 25 25 23Total equity 873 682 (285) (444) 198 2,189

Non-current liabilities Borrowings 1,491 1,913 1,140 1,475 2,011 2,089Employee benefits obligations 101 110 97 --- 3 2Provisions 6 7 13 121 89 112Other financial liabilities 67 50 39 --- --- ---Deferred income tax liabilities 377 181 58 52 53 ---Derivative financial instruments 30 13 18 --- --- ---Sub-total 2,072 2,274 1,365 1,648 2,156 2,203

Current liabilities Trade and other payables 625 422 353 142 260 644Current income tax liabilities 80 73 46 --- 130 106Borrowings 171 62 1 270 863 1,273Provisions 14 22 34 --- --- ---

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Derivative financial instruments 6 1 --- --- --- ---Sub-total 896 580 434 412 1,253 2,023

Total liabilities 2,968 2,854 1,799 2,060 3,409 4,226

Total equity and liabilities 3,841 3,536 1,514 1,616 3,607 6,415

* Note: Financial statements prior to 2004 were prepared according to Dutch GAAP standards, While subsequent statements were prepared according to International Financial Reporting Standards (IFRS)

ROYAL NUMICO N.V. CONSOLIDATED CASH FLOW STATEMENT(All figures in € million) 2006 2005 2004 2003* 2002* 2001*Operating profit 429 360 304 (504) (1,642) 155

Adjustments for: Depreciation of property, plant & equipment 44 32 33 127 111 112Impairment of property, plant & equipment 19 --- 10 --- ---Amortisation of intangible assets 15 10 5 856 1,969 224Result of divestments --- --- 112 ---Stock option costs 26 11 5 --- ---Movement in provisions (19) (11) (5) 41 5 (44)Net change in working capital 54 (22) (53) 252 (11) (22)Other --- (1) --- --- 1Cash generated from operations 568 380 298 884 432 426

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Interest received 16 14 20 --- --- ---Interest paid (78) (75) (65) --- --- ---Income tax paid (109) (56) (39) (430) (8) ---Cash flow from operating activities 397 263 214 (430) (8) ---

Investing activities Proceeds of sale of property, plant & equipment 21 17 2 9 8 12Capital expenditures (132) (100) (124) (78) (110) (115)

Acquisitions - business combinations (1,207

) (198) --- --- ---Acquisitions - increase of shareholdings --- (95) --- --- ---Proceeds of divestments 10 16 14 845 4 665Dividends received --- --- 1 --- ---Long-term loans receivable from third parties (6) (5) --- (2) (1)Loan repayments received from third parties 4 4 7 --- 12 43Other --- --- --- (32) --- (53)

Cash flow from investing activities (1,310

) (361) (100) 742 (87) 552

Financing activities Issued shares for financing of purchases --- 541 --- --- --- 34Proceeds other issued shares - stock options 37 9 --- --- --- ---Repurchase of shares by subsidiaries --- (6) --- (1) --- ---Issued convertible debenture loans 1 2 1 347 1 1Redemption/repurchase of convertible debenture loans (2) (627) (503) (238) (43) (30)Issued senior notes (US private placement) --- 508 --- --- --- ---Proceed from other long-term bank loans 80 --- --- --- --- ---Redemption of other short-term loans (10) --- --- (1,152) (498) (265)Issued commercial paper 93 31 --- --- --- ---Use of credit facility 25 1,495 230 --- --- ---Redemption of credit facility (490) (635) --- --- --- ---

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Dividends to minority shareholders/Change minority shares --- (5) (2) --- 1 3Dividends paid to company shareholders (14) --- --- --- (73) (62)Cash flow from financing activities (280) 1,313 (274) (1,044) (612) (319)

Exchange rate differences on cash/equivalents/overdrafts --- (8) (23) 17 9 (12)

Change in cash/equivalents/overdrafts (1,193

) 1,207 (183) 169 (266) 647

Cash/equivalents/overdrafts 1 January 1,427 220 403 237 503 (144)

Cash/equivalents/overdrafts 31 December 234 1,427 220 406 237 503Bank overdrafts 46 30 --- --- --- ---Cash/equivalents 31 December 280 1,457 220 406 237 503

* Note: Financial statements prior to 2004 were prepared according to Dutch GAAP standards,while subsequent statements were prepared according to International Financial Reporting Standards (IFRS)

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Appendix 3: Numico Market Capitalization

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Appendix 4: Numico Organizational Capability Results June 2003 Numico Areas of Misalignment

"Information and Knowledge Sharing" (MM Gap 59) � "Transparency of Communication and Decision Making" � "Access to Knowledge"

"Innovation" (MM Gap 48) � "Reinvent for Growth" � "Continuous Improvement" � "Customer Value Creation" � "Adaptive and Open to Change"

"Promote for Performance" (MM Gap 39) � "Employee Value Creation" � "Assessment and Feedback" � "Meritocracy" � "Career Ownership" � "Professional Development"

"External image" (MM Gap 48) � "Dynamic Industry Player" � "Attractive Employer" � "Positive Media Profile"

"Rewards" (MM Gap 33) � "Good Financial Package" � "Lifestyle Benefits" � "Compensation Based on Contribution"

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Making Sense of MeyerMonitor™ Gap Analysis Results

� The Company Monitor™ measures 39 organizational capabilities, divided in seven sections: Quality of the Company, Culture of the Organization, Image, Quality of Management, Personal Empowerment, Personal Development, and Benefits & Rewards.

� For each element of the survey the respondents score "desired" (the aspiration level for their part of the business) and "current" (the actual state of affairs). Based on this difference between "desired" and "current" the MeyerMonitor™ calculates the performance gap, resulting in a MM-Gap Index.

� These three metrics ("Desired," "Current," and "MM-Gap") show to what extent an organization is strategically aligned, and so can become Key Performance Indicators for organizational improvement. Further, this data can be extensively benchmarked, both internally (e.g. among operating companies, management levels etc.) and externally (within industry, with other industries, among countries, with best in class, etc.).

� The Gap Analysis Results ( ‘bubble’ ) chart portrays a series of spheres, each one representing Company Monitor™ results for one company at one given point in time. Each sphere's diameter is proportional to its over-all MM-Gap; it is also placed within a grid whose horizontal axis represents "Current" and vertical axis represents "Desired." The ideal sphere, then, is as small and located as far in the upper-right corner as possible

� The coloured bubbles are Numico N.V., (other bubbles are benchmarked companies) so the chart depicts the improvement over time of Numico's MeyerMonitor™ results as the various turn-around measures enacted by Jan Bennink and his Management Board took effect.

� There is a direct relationship between the strength of a company’s organisational capability and its financial performance. (Eikelenboom, dr. B.) , “The power of organizational capabilities: The influence of organizational architecture on strategic performance of business units…”)

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Appendix 5: Business Strategy Provisions in the Danone Take-Over Agreement

(Note: In the following agreement terms “the Group” = Royal Numico N.V., while “the Offeror” =

Danone.) Business Strategy of the Company 1.The baby food division of the Group will be run as a separate division within the Offeror Group. 2.Bledina (the baby food division of the Offeror) will be organized under the baby food division of the Group. 3.The clinical nutrition division of the Group will be run as a separate division within the Offeror Group. 4.The headquarters at Schiphol Airport will become the divisional headquarters of the baby food and clinical nutrition divisions. 5.It is agreed that the Research Center of the baby food and clinical nutrition divisions, located in Wageningen, is of critical importance to the knowledge-based economy of The Netherlands and the Offeror has therefore agreed to continue to operate this facility in substantially the same way, with at least the same level of care, effort and financial commitment, as provided by the Group at the time of the Offer.

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