Monday, November 10, 2003

Streamlining Three news stories today illustrate the other part of perfecting the new oligopoly. We often concentrate on mergers and acquisitions as the most conspicuous way of building a competitive company. Nearly as important is knowing when to discard. De-acquiring is much harder to do. While expanding the company is always an ego massage for a conquering CEO, lopping off a limb is painful, however infected or unnecessary that limb may be. Worse, just like in a gin rummy game, there's the fear that some competitor will pick up your discards and use them to advantage. If you launch the de-acquired division as a new company, there's always the chance the new company will end up as a new competitor. In any case, here are three pertinent stories, plucked from today's news. McDonald's other restaurants McDonald's has a fundamental problem, in spite of its success. Can it sustain growth as a burger company, or does it need to diversify horizontally into other fast-food businesses in order to cover itself from the vulnerabilities of a narrow and mature market. After all, in light of issues ranging from mad cow threats to creeping vegetarianism and from low-carb fads to simple burger boredom, the basic McDonald's position is very vulnerable. For all of those reasons, McDonald's has invested in alternative restaurants, what it calls its Partner Brands. According to the Wall Street Journal (" McDonald's May Exit From Ventures", 11/09/03). McDonald's may be ready to retreat from some of those die-businesses. The company has announced it will take restructuring charges next quarter, and the clear indication is that they will dump some, if not all, of its other restaurant chains. The candidates for sell-off or spin-off are Chipotle Mexican Grill, Donatos Pizza, and Boston Market (which sells takeout dinners). These chains were brought our a few years ago by the company, hoping it could build winners by using their marketing and supply chain expertise (synergy!) But the losses (over $23 million last quarter) from these divisions are dragging down McDonald's results, especially after an unusual quarter of serious growth for the flagship hamburger chain. McDonald's Japan has already announced that it is pulling out of joint venture sandwich business, which it has set up with the United Kingdom's Pret A Manger. Ahold to trim divisions Dutch Ahold NV is the third largest supermarket company in the world (after Wal-Mart and French Carrefour). It is now in trouble, due to big cash flow problems, compounded by an accounting scandal. The company has recently announced a number of de-acquisitions and is hinting that more are to come. According to the WSJ ("Ahold Unveils Plan for Rights Issue and Asset Sales" ,11/19/2003) Ahold announced that it will sell off its Spanish subsidiaries. The company is in the process of selling its Asian and South American markets. And according to the article, "Analysts have identified operations in Poland and the Czech Republic as other possible disposal candidates." And here's the predictable announcement from new CEO Anders Moberg "the focus will be on those Ahold retail units which are the number one or two players in their respective markets - an indication that the businesses in eastern Europe and Asia are unlikely to be put up for sale, for now at least - and any units which do not meet this criteria will be sold, he said." (Food & Drink) Ahold also has problems with its US assets, at least in the supermarket field. Those operations are made up of likely candidates for sell-off. As the WSJ article says, "While U.S. Foodservice is a strong No. 2 supplier of food to institutions such hospitals, restaurants and hotels in the U.S. with an 11% share, it has seen market leader Sysco Corp. steal business this year, while suppliers have tightened payment terms. Ahold's U.S. supermarket business has been propped up by Stop & Shop and Giant-Carlisle, while its other chains are under heavy pressure from Wal-Mart." Ahold's US supermarket operations have no chance of being number one or number two. The onvious conclusion... Bayer to de-acquire chemicals Bayer SA, the German conglomerate, announced that it plans to concentrate ion a few key industries and get rid of a number of its divisions. The company is, of course, most famous for inventing aspirin, but its interests go far beyond pharmaceuticals and health-care. The company is involved besides in chemicals, polymers, material science, and agricultural chemicals. According to a Wall Street Journal story ("Bayer to Slim Down, Tighten Focus". 11/10/2002): The German company said it will split off its industrial-chemicals division and part of its polymers division into a new company with €5.6 billion ($6.46 billion) in annual revenue. The businesses it will retain, including health care, drugs, crop science and materials operations, bring in a total of €22 billion in revenue. The move will involve a stock offering. But according to the Journal, Bayer's pharmaceuticals operations have their own problems. It has had problems developing new drugs (including one cholesterol drug it had to withdraw when it caused patient deaths), and has been looking, unsuccessfully for a partner. Part of the problem is Bayer's limited presence in the profitable (no price controls) US market. Bayer's midsize-drug business could also find it hard to compete against such companies as GlaxoSmithKline PLC and Pfizer Inc., which possess far greater marketing heft. … Bayer manufactures drugs for the primary-care market in direct rivalry with some of the biggest pharmaceutical companies. Bayer's stockholders have long pushed the company to get rid of some of its businesses, if only to simplify the operation of the business. The firm did spin-off its Agfa photographic/graphic arts supplies division in 1999. There was no good reason for keeping the divisions together, according to the WSJ. "There's little question separation will benefit Bayer. The company's four businesses -- chemicals, pharmaceuticals, polymers, and agriculture -- have different clients, needs for capital, research priorities and returns. And the benefits aren't only theoretical. Two decades of examples have shown that splitting pharmaceuticals from chemicals creates value." It's not overall size that matters, but size in particular markets. Bayer's big problem that it still won't dominate in the areas it has left over after the spin-off. 8:18:38 PM

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