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THE COMPANY

Blue Wood is a midsize producer of bulk chocolate for use in other final products (e.g., candy bars, cereals, cookies, cakes, and desserts) and also has a small business supplying specialty private-label products to a variety of companies. The company has grown steadily from being a small local producer serving local retailers in its home state when it was founded 50 years ago to a midsized international company. However, growth has been unsteady, with many peaks and troughs along the way.

The company was founded by John Ferguson Senior, now in his mid-eighties. He named the company after a distinctive blue-painted barn that was on his family property and where he used to play as a child. Ferguson retains the role of chairman, but after a heart attack scare five years ago, he reluctantly passed the day-to- day running of the business to his son, John Ferguson Junior. Ferguson Senior is still a dominant and feared figure around the company. Much to the irritation of his son, he is frequently seen around the office questioning people about what they are doing and often berating them for one thing or another. At board meetings his approach is to steamroller any opposition. Woe betide the board member who has not got all his or her facts straight. He believes that the company should stick to its knitting, which brought success when he ran things, and is suspicious of what he considers "newfangled theories like ERM coming from schoolkids just out of diapers."

Customers are retail businesses, distributors, and food processors that include chocolate in their final products. Around 75 percent of sales are to the domestic U.S. market. The main international customers are located in Canada (8 percent of sales), Mexico (3 percent), the United Kingdom (4 percent), and Eurozone countries (10 percent). Almost all of these sales are denominated in local currencies.

All production is carried out at the company's two plants in Illinois and Indiana. There are local subsidiaries with sales and accounting offices in Canada, Mexico, the United Kingdom, and Ireland that each have a small sales force, deal with distribution, and collect sales revenues. These offices retain amounts sufficient to cover local expenses, and the remainder is converted to U.S. dollars with local banks and remitted to the head office monthly. Any shortfall for local expenses, including expansion of distribution networks and promotional costs, is financed by short-term borrowings from local banks. These borrowings are guaranteed by the parent company.

Blue Wood sources cocoa beans from large producers in Brazil, Ecuador, Costa Rica, and the Dominican Republic, as well as U.S.-based importers. Other main ingredients used in manufacturing the company's products are sugar and milk, which are sourced from U.S. producers. More minor ingredients include nuts, raisins, lecithin (an emulsifier processed from cellular organisms, including soybean and sunflower oils), vanilla, and other flavorings. These are all sourced domestically. Purchases are denominated in U.S. dollars.

The company's facilities are considered to be in a good state of repair, although they are not up to the standards of the best state-of-the-art facilities used by some of the largest producers. In recent years, there has been no agreement at the board level about investing in new equipment, so excess cash has been paid out in dividends, which was in keeping with the short-term focus of most of the company's investors.

The workforce is unionized and had a history of good industrial relations until two years ago when there was a strike over a change in shift patterns imposed without consultation. The strike was settled after three days by awarding increased shift allowances to affected workers. By chance, inventories were at a high level due to overproduction, resulting from errors in the budgeting and planning processes. This resulted in the strike having no significant effect on customers. However, the unions have since been adopting a noticeably tougher stance in negotiations with management.

Blue Wood is privately owned by the founder, John Ferguson Senior, and family (20 percent), other senior employees (5 percent), a pension fund (20 percent), three private equity funds (15 percent each), and certain private investors (10 percent). The outside investors were brought in as the company needed cash to expand. The pension fund made its investment around 15 years ago. The private equity funds came in seven years ago as a group with the expectation that they would be able to exit through either sale of the company or an initial public offering (IPO) and bond issue within a maximum of five years. Projections were favorable and there was a plan to prepare the company for this outcome, including a focus on improving corporate governance and risk management as well as reinvesting funds in improved sales and production. However, implementation of the plan was halfhearted at best. Funds continued to be paid out in dividends rather than reinvested internally. Little was done on the governance and risk management side, and fairly weak financial performance precluded marketability of an IPO/bond issue as well as making any possible sale price highly unattractive for the fund managers. Additionally, the rating agencies had indicated that they would not be able to give Blue Wood a favorable rating under the current circumstances.

The private equity funds would like to exit their investment but consider that they would not receive full value. They are of the view that value could be substantially improved and are pushing for a strategy to maximize profitability in the short term. This could make the company a takeover target for a larger producer. However, the private equity funds are concerned about succession. They consider Ferguson Junior to be a weak CEO who is dominated by his father and unable to make major decisions without his father's approval.

The pension fund sees its investment as a long-term growth prospect and would like to see a stabilization and steady improvement in performance. It considers the steady and significant dividends paid by Blue Wood as a stable and important flow of cash, reflective of a good investment. The pension fund favors a conservative strategy with possible retrenchment in the domestic market and withdrawal from European markets that have not been profitable in the recent past.

Ferguson Junior is in his early sixties and would like to monetize the family holdings and retire. However, given Blue Wood's recent results, he does not believe the family would obtain full value for its holdings. He would face the additional difficulty of having to dispose of the family holdings "over his father's dead body." Proud of his role in developing the company, he is frustrated that profitability has not been better and blames operating and financial staff for forays into new foreign markets and what he sees as fads like fair trade[1] and organic products.

  • [1] "Fair trade" products are food products that are marketed under the auspices of a Fair Trade organization. A core objective of the organization is to promote better prices and working conditions, and secure the rights of food producers and workers in developing countries. The food is packaged with the distinctive Fair Trade logo. This branding has become popular among consumers having a social conscience.
 
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