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Church and Dwight - CASE 32 Church& Dwight Builds a...

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Unformatted text preview: CASE 32 Church & Dwight Builds a Corporate Portfolio Roy A. Cook “CHURCH 8c DWIGHT Hits UNDERGONE A suns'rmmr. TRANSFORMATION IN THE PAST DECADE largely as a result of three major acquisitions which doubled the size of the total Company, cre- ated a well balanced portfolio of household and personal care businesses, and established a much larger international business.”1 As a new top management team worked to digest and integrate this series of acquisitions while scouting for new acquisition targets in consumer products, it struggled with maintaining market share in its historically core businesses. The top-line numbers looked good, but previously issued commitments to generate annual sales growth from historic core businesses of 15% had been lowered once to the 12%% — 15% range and then to the 10% — 12% range. Had the pieces finally been put in place for the company to compete successfully with other well—known giants in the consumer products arena, or would it remain in their shadows? For more than 160 years, Church & Dwight Co., Inc., had been working to build market share on a brand name that is rarely associated with the company. When consumers are asked, “Are you familiar with Church & Dwight products?” the answer is typically “No.” Yet, a variety of Church & Dwight consumer products can be found in 95% of all US. households. As the world’s largest producer and marketer of sodium bicarbonate—based products, Church & Dwight has achieved fairly consistent growth in both sales and earnings as new and expanded uses were found for its core sodium bicarbonate products. Although Church & Dwight may not be a household name, many of its core products bearing the Arm & Hammer name are easily recognized. M This case was prepared by Roy A. Cook of Fort Lewis College. Copyright © 2006 by Roy A. Cook. The copyright holder is solely responsible for case content. Reprint permission is solely granted to the publisher, Prentice-Hall, for the books Strategic Management Business Policy—1 1th Edition (and the International version of this book) and Cases in Strategic Management and Business Policy—11th edition, by the copyright holder, Roy A. Cook. Any other publi- cation of the case (translation, any form of electronics or other media) or sale (any fOrm of partnership) to another publisher will be in violation of copyright law, unless Roy A. Cook has granted an additional written permission. This case was revised and edited for SMBP—l 1th Edition. Reprinted by permission. 32- 1 a m SECTIOND Industry Eight—Beverage/Food " Exhibit 1 Consolidated Statements of Income: Church & Dwight Co., Inc. (Dollar amounts in thousands, except per share data) Management Shortly after its introduction in 1878, Arm & Hammer Baking Soda became a funda— mental item on the pantry shelf as homemakers found many uses for it other than baking, such as cleaning and deodorizing. The ingredients that can be found in that ubiquitous yellow box of baking soda in almost every refrigerator can also be used as a dentrifice, a chemical agent to absorb or neutralize odors and acidity, a kidney dialysis element, a blast medium, an environmentally friendly cleaning agent, a swimming pool pH stabilizer, and a pollution control agent. Finding expanded uses for sodium bicarbonate and achieving orderly growth had been consistent targets for the company. Over the past 30 years, average company sales had increased 10% to 15% annually. Although top—line sales growth had historically been a focal point for the company, a shift may have occurred in management’s thinking as more empha— sis seemed to be placed on bottom—line profitability growth. President and Chief Executive Officer James R. Craigie may have signaled this change when he stated, “Our long—term objective is to maintain the Company’s track record, and continue to achieve sustained earn- ings growth, which we currently define as 10—12% earning per share growth on an organic basis excluding acquisitions.”2 All of this happened as Church & Dwight appeared to be shift- ing roles from an acquirer to an operator. Craigie took over the helm of Church & Dwight from Robert A. Davies III in July 2004. Setting the stage to build on the successful legacy he inherited from his predecessor, Craigie proposed a new strategy of “building a portfolio of strong brands with sustainable competitive advantages.”3 The results of both Davies’ and Craigie’s efforts to reshape the company through acquisitions and organic growth can be seen in the financial statements shown in Exhibits 1 and 2. The historically slow but steady course Church & Dwight had traveled over the decades reflected stability in the chief executive office and a steady focus on long—term goals. The ability to remain focused might be attributable to the fact that about 25% of the outstanding Year ending December 31 2005 2004 2003 Net Sales $1,736,506 $1,462,062 $1,056,874 Cost of sales 1,099,506 928,674 738,883 ‘Gross Profit 637,000 533,388 317,991 Marketing expenses 183,422 161,183 88,807 Selling, general and administrative expenses 240,802 200,452 117,333 Income from Operations 212,776 _ 171,753 1 11,851 Equity in earnings (loss) of affiliates 4,790 15,115 28,632 Investment earnings 3,985 3,225 1,322 Loss on early extinguishment of debt (1,241) (22,871) (4,127) Other income (expense), net (1,329) 1,628 (313) Interest expense (44,098) (41,407) g20,400} Income before minority interest and taxes 174,883 127,443 116,965 Minority interest (91) 4 30 Income before taxes 174,974 127,439 1 16,935 Income taxes 52,068 38,631 35,974 Net Income $ 122,906 $ 88,808 $ 80,961 Exhibit 2 Consolidated Balance Sheets: Church 8: Dwight Co., Inc. (Dollar amounts in thousands) CASE THIRTY—TWO Church & Dwight Builds a Corporate Portfolio mmlmlmm Year ending December 31 2005 2004 2003 Assets Current Assets Cash and cash equivalents $ 126,678 $ 145,540 $ 75,634 Accounts receivable 187,863 166,203 107,553 Inventories 156,149 148,898 84,176 Deferred income taxes 11,217 7,600 14,109 Notes receivablewcurrent 1 ,150 1 ,015 942 Net assets held for sale — 13,300 — Prepaid expenses 1 1,381 1 1,240 6,808 Total Current Assets 494,438 493,796 289,222 Property, plant and equipment (net) 326,903 332,204 258,010 Notes receivable 6,134 7,751 8,766 Equity investment in affiliates 10,855 13,255 152,575 Long-term supply contract 4,094 4,881 5,668 Trade names and other intangibles 541,970 474,285 119,374 Goodwill 523,676 51 1,643 259,444 Other assets 54,047 40,183 26,558 Total Assets . $1,962,117 $1,877,998 $1,] 19,617 Liabilities and Stockholders’ Equity Current Liabilities Short—term borrowings $ 105,563 $98,239 $ 62,337 Accounts payable and accrued expenses 255,438 242,024 148,958 Current portion of long—term debt 15,719 5,797 3,560 Income taxes payable . 32,990 11,479 17,199 Total Current Liabilities . $ 409,710 $ 357,539 $ 232,054 Long-term debt 635,261 754,706 331,149 Deferred income taxes 124,882 308,216 61,000 Deferred and other long-term liabilities 40,823 39,384 33,164 Pension, postretirement and postemploy'ment benefits 54,305 57,836 23,459 Minority interest 258 287 297 Stockholders” Equity Common Stock—$1 par value 69,991 69,991 69,991 Additional paid-in capital 65,110 47,444 27,882 Retained earnings 618,071 510,480 435,588 Accumulated other comprehensive income (loss) (454) (3,110) ( 13,962) 752,718 624,805 519,588 Less common stock in treasury, at cost . (55,840) (64,775) (81,094) Stockholders’ Equity Total 696,878 560,030 438,494 Total Liabilities and Stockholders’ Equity $1,962,117 $1,877,998 $1,119,617 shares of common stock were owned by descendants of the company’s co—founders. Dwight C. Minton, a direct descendant of Austin Church, actively directed the company as CEO from 1969 through 1995 and remained on the Board as Chairman Emeritus. He passed on the duties of CEO to the first non—family member in the company’s history, Robert A. Davies 111, in 1995. During his almost 10 years of leadership, Davies tripled the size of the company. Next, the future direction of the company was in the hands oflames Craigie, who was serving as Chairman. Exhibit 3 shows the 13 board members, of whom three are inter— nal members. M r ti i ”m SECTION D Industry Eight—Beverage/Food ., ? Exhibit 3 Board of ~ Directors= Church T. Rosie Albright — Retired President 8‘ Dwight 0°" Inc. Carter Products Division Carter—Wallace, Inc. Director since 2004 James R. Craigie — President and Chief Executive Officer Church & Dwight Co., Inc. Director since 2004 Robert A Davies, III —— Chairman Church & Dwight Co., Inc. Director since 1985 Rosia B. Dixon, MD — Physician and Consultant Director since 1979 J. Richard Leaman, Jr. — Retired President and Chief Executive Officer S. D. Warren Company ' Director since 1985 Robert D. LeBlanc — Consultant, retired President and Chief Executive Officer Handy & Harman Director since 1998 John D. Leggett, III, PhD — President Sensor Instruments Co., Inc. Director since 1979 John F. Maypole — Managing Partner Peach State Real Estate Holding Co. Director since 1999 Robert A. McCabe —— Chairman Pilot Capital Corporation _ Director since 1987 I Dwight C. Minton — Chairman Emeritus Church & Dwight Co., Inc. Director since 1965 Lionel L. Nowell, III — Senior Vice President and Treasurer PepsiCo, Inc. Director since 2003 Burton B. Staniar —— Chairman Knoll, Inc. Director since 1999 John 0. Whitney — Lead Director Professor Emeritus of Management Columbia Business School Director since 1992 Many companies with strong brand names in the consumer products field have been sus— ceptible to leveraged buyouts and hostile takeovers. However, a series of calculated actions had spared Church & Dwight’s board and management from having to make last—minute deci— sions to ward off unwelcome suitors. Besides maintaining majority control of the outstanding common stock, the Board amended the company’s charter, giving current shareholders four votes per share but requiring future shareholders to buy and hold shares for four years before receiving the same privilege. The Board of Directors was also structured into three classes with four directors in each class serving staggered three—year terms. According to Minton, the CASE THIRTY—TWO Church & Dwight Builds a Corporate Portfolio Milliilmli objective of these moves was to “give the Board control so as to provide the best results for shareholders.”4 As a further deterrent to would-be suitors or unwelcome advances, the company entered into an employee severance agreement with key officials. This agreement provides severance pay of up to two times (three times for Mr. Craigie) the individual’s highest annual salary and bonus plus benefits for two years (three years for Mr. Craigie) if the individual was terminated within one year after a change in control of the company. Change of control was defined as the acquisition by a person or group of 50% or more of company common stock; a change in the majority of the board of directors not approved by the pro—change board of directors; or the approval by the stockholders of the company or a merger, consolidation, liquidation, dis— solution, or sale of all the assets of the company.S As Church & Dwight pushed more aggressively into consumer products outside of sodium bicarbonate-related products and into the international arena, numerous changes were made in key personnel and positions, especially in the marketing area. These changes can be seen by reviewing Exhibits 4 and 5. Comparing these two exhibits, which present rosters of key officers along with their ages, positions, and original dates of employment for the years 2002 and 2005, shows many changes. Although Davies had retired because of age, Casper, Kornhauser, and Koslow, who had been brought in for their marketing exper- tise, were no longer with the company..To fill this void, several of the newer additions to a streamlined management team, including Craigie, Fleming, Huns, and Tursi, brought extensive marketing experience to the top management team from organizations such as Spalding Sports Worldwide, Johnson & Johnson, Vlasic Foods, and Carter-Wallace. In addition, Fleming and Huns along with Siracusa brought significant international experience to the team as an increasing emphasis was placed on markets outside the United States. In addition to the many changes that had taken place in key management positions, changes had also been made in the composition of the Board of Directors. Six of the 10- member Board had served for 10 years or more; three had served for three years or less. Two women served on the board and ages of members ranged from 52 to 78. Although in a less active role as Chairman Emeritus,-Dwight Church Minton, who became a board member in 1965, continued to provide leadership and a long legacy of “corporate memory.” Changing Directions Entering the 2lst century, “Management recognized a major challenge to overcome... was the Company’s small size compared to its competitors in basic product lines of house- hold and personal care. They also recognized the value of a major asset, the Company’s pris- tine Balance Sheet, and made the decision to grow.”" According to Craigie, “Church & Dwight has undergone a substantial transformation in the past decade largely as a result of three major acquisitions which doubled the size of the total company, created a well bal- anced portfolio of household and personal care businesses, and established a much larger international business.”7 The Mentadent, Pepsodent, Aim, and Close-Up brands of tooth— paste products were purchased from Unilever in October of 2003; the purchase of the remaining 50% of Armkel, the acquisition vehicle that had been used to purchase Carter— Wallace’s consumer brands such as Trojan, was completed in May of 2004; and Spinbrush was purchased from Procter & Gamble in October of 2005. The numbers spoke for them- selves, as these acquisitions had pumped up total revenues. In 1995 total company sales were less than $500 million; in 2001, they had jumped to over $1 billion; and in 2005, they reached $1.7 billion. ‘flm SECTIOND Industry Eight—Beverage/Food _, Exhibit 4 Key Office’s! Anniversary Management Name Age Position Date Positions, and Tenure with Robert A. Davies, III 66 President & Chief Executive Officer 1995 Companv— 2003 Raymond L. Bendure, PhD. 58 Vice President Research and Development 1995 Mark A. Bilawsky 54 Vice President, General Counsel and Secretary 1976 Bradley A. Casper 42 Vice President, President, Domestic Personal Care 2002 Mark G. Conish 49 Vice President Operations 1993 Steven P. Cugine 39 Vice President Human Respirces 1999 Zvi Eiref 63 Vice President Finance and Chief Financial Officer 1995 Henry Komhauser 69 Vice President Creative Services 1997 Dennis M. Moore 51 Vice President Arm & Hammer Division sales 1980 Joseph A. Sipia, Jr. 53 Vice President, President and Chief Operating Officer/Specialty Products . Division 2002 i1 John R. Burke 50 Vice President Financial Analysis and Planning for the Arm & Hammer Division 1985 Robert J. Carroll 43 Vice President MIS 1989 Kenneth S. Colbert 46 Vice President Logistics 1979 Anthony J. Falotico 47 Vice President Research and ' Development, Household Products 1980 Alfred H. Falter 52 Vice President Procurement 1979 W. Patrick Fiedler 53 Vice President Basic Chemicals, Specialty Products Division 1995 Roger Fingerhut 59 Vice President Manufacturing 2001 Gary P. Halker 51 Vice President, Controller and Chief Information Officer 1977 Jaap Ketting 50 Vice President International Finance, ' Specialty Products Division 1987 Allison Lukacsko 51 Vice President Research and Development Personal Care . 2001 Larry B. Koslow 50 Vice President Marketing, Arm & Hammer Division 1995 Ronald D. Munson 59 Vice President Animal Nutrition, Specialty Products Division 1983 Source: Church & Dwight Co., Inc., Notice ofAmzual Meeting ofStock/rolders and Proxy Statement (2001), pp. 5—7. Explosive growth through acquisitions transformed a once-small company focused on a few consumer and specialty products into a much larger competitor, across not only a broader range of products, but also geographic territory. Consumer products now encom— passed a broad array of personal care, deodorizing and cleaning, and laundry products, whereas specialty products offerings were expanded to specialty chemicals, animal nutrition, and specialty cleaners. And, international consumer product sales, which had been an insignificant portion of total revenue at the turn of the century, now accounted for 17% of sales. Still, in the face of consumer products behemothssuch as Procter & Gamble and Colgate-Palmolive with 2005 sales of $61.7 billion and $11.4 billion, respectively, Church & Dwight was not a major market force and struggled to retain market share. Exhibit 5 Key Officers, Management Positions, and Tenure with Company — 2005 Consumer Products CASE THIRTY—TWO Church & Dwight Builds a Corporate Portfolio miiiiii'iiill Name James R. Craigie Mark G. Conish Steven P. Cugine Jacquelin J. Brova Zvi Eiref Bruce F. Fleming Susan E. Goldy Joseph A. Sipia, Jr. Gary P. Halker Adrian J. Huns Paul A Siracusa Louis H. Tursi Age 52 53 43 52 67 48 52 57 55 58 49 45 Position President & Chief Executive Officer Vice President, Global Operations Vice President, Global New Products Innovation Vice President, Human Resources Vice President Finance and Chief Financial Officer . . Vice President and Chief Marketing Officer Vice President, General Counsel and Secretary Vice President, President, and Chief Operating Officer, Specialty Products Division Vice President, Finance and Treasurer Vice President, President International Consumer Products Vice President, Global Research and Development Vice President, Domestic Consumer Sales Anniversary Date 2004 1975 1999 2002 1995 2006 2003 2002 1977 2004 2005 2004 Source: Church & Dwight Co., Inc, Notice ofAnnual Meeting ofStockholderr & Proxy Statement (2006), pp. 9—10. Prior to its acquisition spree, the company’s growth strategy had been based on finding new uses for sodium bicarbonate. Using an overall family branding strategy to penetrate the con- sumer products market in the United States and Canada, Church & Dwight introduced addi- tional products displaying the Arm & Hammer logo. This logoed footprint remains significant as the Arm & Hammer brand controls a commanding 85% of the baking soda market. By cap- italizing on its easily recognizable brand name, logo, and established marketing channels, Church & Dwight moved into such related products as laundry detergent, carpet cleaners and deodorizers, air deodorizers, toothpaste, and deodorant/antiperspirants. This strategy worked well, allowing the company to promote multiple products using only one brand name, but it limited growth opportunities “in highly competitive consumer product markets, in which cost efficiency, new product offering and innovation are critical to success.”3 From the company’s founding until 1970, it produced and sold only two consumer prod- ucts: Arm & Hammer Baking Soda and a laundry product marketed under the name Super Washing Soda. In 1970 under Minton, Church & Dwight began testing the consumer products market by introducing a phosphate—free, powdered laundry detergent. Several other products, including a liquid laundry detergent, fabric softener sheets, an all-fabric bleach, tooth powder and toothpaste, baking soda chewing gum, deodorant/antiperspirants, deodorizers (carpet, room, and pet), and clumping cat litter, had been added to the expanding list of Arm & Hammer brands. However, simply relying on baking soda extensions and focusing on niche markets to avoid a head-on attack from competitors with more financial resources and mar— keting Clout limited growth opportunities. Church & Dwight faced the same d...
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