Hibbit is a manufacturer of small household appliances – coffee makers, mixers, blenders, toasters, and humidifiers. Their revenues had stalled at around R350 million and operating margins slid to under 10% for the first time in memory.
The competitive pressure was getting tighter. Larger appliance makers (most of them subsidiaries of diversified companies) were selling a wider range of products and pricing them more aggressively, thus cementing their positions with high-volume discounters. Meanwhile, a number of start-up companies were producing trendy (and expensive) electronic appliances and were not only winning the business of young urban consumers but also giving Hibbit’s well-established brand names a slightly outdated image.
Hibbit enjoyed reliable and long term relationships with many prestigious retailers, and its reputation among the 50+ consumer segment was safe. It also had a management team of sound competence and a very good R&D department and staff.
Management had developed a plan to put Hibbit back on a growth path. It was expanding the product line be developing food processors, a toaster griller designed to outperform anything on the market, and home security systems. The company had neglected its R&D for almost five years, but the 2002 operating budget had increased spend in this area.
At the same time, it was redeveloping the design and appearance of its core products. The company had signed a contract with an upmarket and trendy PR consultancy, which proposed an aggressive countrywide campaign to re-establish the positioning of Hibbit’s flagship coffee-maker line and to launch a new oven.
Senior management knew from the start that it would take several years for the strategy to show an ROI. But it hadn’t anticipated the stock market crash in September; just six months after Hibbit had issued new shares to help finance the plan. A Hibbit share selling for R24 a year ago now was now valued at about R15. With 68% of its shares publicly traded, Hibbit was vulnerable to a hostile takeover.
There was good reason to be concerned. In March, LeMieux S.A., the largest French appliance maker, which was making inroads with its fancy coffee grinders and cappuccino machines, disclosed that it was looking at acquiring control in a competitor.
Two months later, a Japanese company bought a small locally based producer of home appliances at a large premium, catching the market by surprise.
Hibbit’s directors needed no further warning signals. In early May, the full board established a committee to study the company’s strategic options and recommend a course of action.
The committee consisted of Stephen Hibbit, Jr., 65 (son of the founder), who still was an active director and held 18% of the company; Roger Small, 53, Stephen’s successor as CEO, Chris Hibbit, Stephen’s 41-year-old nephew, who had inherited 6.5% of the company but chose a career in law over an active role at Hibbit; and Carol de Sousa, 49, the first woman partner at the local investment bank that had taken Hibbit public 19 years ago.
Stephen and Roger met for breakfast before the committee meeting.
“Sorry I’m late,” said Stephen in greeting. “Carol spent a lot of time producing the financials, but they didn’t help me with my decision making.”
“Decision making about what?’ asked Roger.
“About what to do with this whole situation. If we paid more attention to running our own business properly and less attention to everyone else’s, we’d be fine. You start looking over the fence and your own garden gets full of weeds.”
“I agree, Stephen. Our current strategy makes sense, and it will see us through to the next decade. Our task now is execution, but we can’t ignore what is happening in the market currently.”
Roger responded animatedly. “We’ve got to preserve the integrity of our business and if we don’t start producing our new products now, we’ll never get another chance. We’re not the only chaps producing ovens. We’ve got to leverage the Hibbit brand before our competitors climb in and wipe us out.”
Stephen answered: “The analysts say I’m too attached to the current range. That may be true but that’s not why I say we should keep expanding. It’s makes financial sense”
Roger: “But we’ve also got to make sure we retain voting control of our own company”
Stephen asked: “So what are our options?”
Roger: “The best way to stay in control is to buy the shares back and retain the majority. We’ve done the calculations and it really looks feasible.”
Stephen: “We’ve only got R31 million on the balance sheet. How are we going to handle the interest on few hundred million?”
“We can buy sufficient shares for R230 million. Our cash flows are still good. We can get financing at prime plus 1, so the interest payments shouldn’t be a problem.”
Roger: “Maybe we could consider selling off the blender division. We could also lower our labour costs by closing down the Akron plant and shifting production to Johannesburg.
Roger and Stephen walked into the boardroom and sat down. Stephen started talking before the others had even settled in. “I know we agreed that this would be a discussion session and that we would not rule out any options. But I’m not about to sit here and watch the company that my father and I built be taken over by some outsider or cut into little pieces and sold off. I would not be able to watch this company or this community go broke.”
Carol responded directly. “None of us wants that, Stephen. I’ve been working the numbers in a lot of detail, and I agree that hiving off a few pieces isn’t going to fix the company. But it’s something that needs to be done. It would give us more leeway to do what needs to be done.”
“Leeway to do what exactly?” Chris asked.
“To do those things we have to do for this company to survive,” she answered crisply.
“You’ve seen the figures…. John Stubbs says we’re month away from a final prototype on the new oven. When we’re ready to launch, we’re going to be pouring millions into advertising. And we’re going to have to buy retailer shelf space in order to get the visibility we need. The big wholesalers can outlast and outspend us in every area.”
“You could say the same for any new product,” Stephen snapped. “That’s the commitment you have to make when you launch a new product.”
Carol replied. “Our margins are lower than the competition’s and still falling, we’re losing market share in humidifiers, and we’re not addressing the high income market. We don’t have the channels, products or brand strength to get there yet.
“That’s precisely why we must continue with what we’re doing,” Stephen said. “We need to get our core products and services back to being competitive. We need to start on the high income market and bring out some really good new products. If we invest, we should get a good return.”
“But can we really make it on our own?” Carol asked. “Our larger competitors have much broader reach than we have and have more leverage over the retailers…” All I’m saying is that we have tough competition in a market that’s getting tougher every day. Why risk millions to develop and market new products when we can outsource them?”
“But who or what are we going to outsource?” Roger objected. “I know this industry a lot better than you do. The people we could outsource to make cheap and nasty products.
Carol: “There are lots of options out there. I’m sure we could find a suitable partner that would consider doing business with us.
Chris: “We would not get anything close to what we need by selling off a couple of product lines.”
Carol: “It’s clear that we need to reorganise our balance sheet. With what we currently have, we can make a sound business case for R100 million in additional debt without making any acquisitions. We can borrow the money and buy back our shares.”
Chris: “Our P/E is pretty low for our industry. Who could we possibly acquire without diluting our EPS (earnings per share)?”
Carol: “Yes I agree, the EPS would be knocked back for a while. But if we consolidate marketing, IT and R&D, we should recover in a couple of years and because we control the shares, we would no longer be vulnerable to market sentiment.”
Chris: “Our shareholders definitely won’t be happy in the short term and anyone who wants to sell their shares will be stuck with a depressed share price.”
Stephen turned to his nephew. “Here we go again with the share price.
Chris: “The market has changed, and we have to recognise and accept that. Share price is hardly ‘trivial’”
Roger: “If you allow the market to dictate to you, you’re always pandering to the whims of the fund managers.”
Carol: “It’s all about our strategy.”
Stephen: “We’re a manufacturing company, not a holding company.”
Roger said. “Wait, I heard that a number of the managers in our company are prepared to buy shares and delist the company but it does mean taking a long term view.”
Chris: “What kind of price are we talking about?”
Roger “We have been offered R22 a share. It’s a lot of money, but they think it’s worth it. They think this company has a future and in any case, they would be more committed if they own part of the company.” “Stephen and I have already discussed this, and he wants to retain his shares.”
Chris: “If we’re going to sell we should not just accept the first offer that comes along, even if it is from our own staff. It’s also R2 less than our share price last year and I’m sure there are plenty of buyers who would love to own this business – like all the foreign companies trying to break into our market without starting from scratch. With the Rand exchange rate where it is, the Japanese or the Germans could pay a big premium without blinking.
Stephen: “If we do that how long do you think our HQ would survive? This whole community would be devastated. We fund the community development programmes? Do you think the Japanese or the Germans would be prepared to do the same?”
Carol: “As members of the board, we have to ask an investment bank do an analysis, so that we can honestly say we have done our fiduciary duty.”
Roger “I’m sure there is a win-win here. We can do a press release that says the board has received a buyout offer from management and that it will take 60 days to evaluate the proposal? Let’s not market the company but take time to see if anyone makes a better offer based on what they know.”
Stephen “So far I haven’t heard anything I can live with, while we are about it, why don’t we just cancel the pension plan!”
“That could work,” Chris said. “I mean it. If we offer the shares to the pension fund as a viable investment. We’ve got 6% in our Employee Share Ownership Plan (ESOP) now. We could issue new shares and boost the ESOP holdings to about 20%. With the price so low, Hibbit shares are a real bargain. Everybody wins. Retirees get a good investment. Our employees have a much bigger stake in the business. And with the ESOP, my holdings, and the stock controlled by Chris and the rest of the family, we’d have 52% and majority control of the company.”
Chris: “Who will sit idly by and watch us dilute earnings, while making ourselves immune to outside intervention? Investors will dump the shares and frankly, I wouldn’t blame them.”
Roger: “Listen, it does solve all our problems and we can get even more commitment from the employees. It’s not like we’d be the first company to consider this option.”
Three hours later, with the group no closer to agreement, Carol recommended they meet the following week.
She brought the calculations showing the implications of each option to this meeting. The analysis showed that each of the proposed alternatives was feasible. But again, no consensus was reached.
At the third meeting in as many weeks, the committee still was at an impasse.
Finally Chris made a proposal: “Let’s face it; we’re not going to agree on a way forward. I suggest we go present the options and analysis to the rest of the board, and put it to a vote.”