Canadian conglomerate Imasco Ltd. was unbundled recently when its shareholders overwhelmingly approved an $11-billion takeover offer from British American Tobacco PLC (BAT), which has held a controlling stake in Imasco since it was created nearly 30 years ago.
Imasco's bust-up has resulted in its well-known subsidiaries changing hands: Canada Trust Co. went to Toronto-Dominion Bank, Shoppers Drug Mart Ltd. was bought by Kohlberg Kravis Roberts & Co. and BAT regained full ownership of Imperial Tobacco Ltd.
On the day of the shareholder vote in late January, Imasco executives boasted that the firm had generated an average total return of more than 21 per cent a year since 1970. They added that profit had grown at a compound annual rate of nearly 14 per cent.
As a former member of Imasco's investor relations staff and as an MBA who wrote a thesis on the company's corporate strategy, I offer some revisionist history before the books are closed on this conglomerate.
Imasco created value for its shareholders through spurts of share price appreciation and regular dividend payments. It just didn't add enough value. Indeed, Imasco was a mistake that was built to last.
It was a conglomerate that managed to survive by relying on an immense cash flow from a virtual monopoly of the Canadian tobacco industry. Tobacco profits papered over numerous and consistent failures in both Imasco's diversification and operating strategies, wasting enormous amounts of shareholders' money throughout the 29 years of its existence.
When Imasco was formed in 1970, the founding chief executive officer thought there was only 10 good years left in the tobacco business, and that the firm's diversification efforts had to make an effective contribution to Imasco's earnings in a short time frame. It was to successive management's immense relief that this expectation proved wrong. Imperial Tobacco's success in introducing low-tar or light cigarettes dramatically extended the lifespan of the Canadian tobacco industry and Imasco.
In Imasco's early years, shareholder value went unrealized as a result of a surprising number of ill-conceived and failed attempts to diversify the earnings stream. From the 1970s through to the mid-1980s, shareholders had to endure consecutive futile investment efforts in such unrewarding initiatives as wineries, food processing, sporting goods, soft-drink retail distribution, natural resources, and magazine and cigarette retailing.
However, the true Achilles' heel of the company's diversification efforts was the persistent attempts to make Imasco into a North American (as opposed to Canadian) consumer goods company. The losses for shareholders piled up as Imasco attempted without success to build positions in fast-food (Hardee's Food Systems Inc.) and drugstore (Peoples Drug Stores) retailing in the United States.
Imasco's plan was to earn a return of 20 to 25 per cent from its investments. By my estimate, there is a $5-billion to $10-billion difference between what Imasco earned from its gradual divestment of Hardee's between 1996 and 1998 and what it should have earned from the money provided over 20 years to acquire and expand Hardee's.
Even this estimate of lost value to shareholders is modest. The above calculation does not take into account that, during most years, Imasco provided more funding to Hardee's than it obtained in operating earnings in return. Another humbling estimate of lost shareholder value could be obtained by examining the returns Imasco failed to earn on its $500-million investment in Peoples between 1984 and 1989.
Following the 1986 acquisition of Canada Trust, Imasco said its management style henceforth would be strategic monitoring and operational excellence. Again, shareholders paid a price.
For example, Shoppers Drug Mart was years behind schedule and millions of dollars overbudget in rolling out a centralized purchasing and distribution system in 1997. (Walgreen Co. had set the precedent in the United States in the 1980s.) Canada Trust sold First Federal Savings and Loan in Rochester, N.Y., that same year and then proceeded to sit on the substantial proceeds from this sale.
Effort was misallocated in addition to money. Over the years, thousands of hours of time for Imasco executives and directors were devoted to trying to right the Peoples and Hardee's disasters. It became more of an effort to preserve reputations than to create value.
As for strategic monitoring, Imasco witnessed the global consolidation of the tobacco industry and resisted acting. In 1989, BAT restructured its only other affiliate company besides Imasco, an Australian conglomerate known as Amatil in which it held a 41-per-cent interest. In a mirror of the Imasco strategy, BAT sold the diversified interests of Amatil and retained the tobacco company from which Amatil had expanded.
It's difficult to imagine a stronger signal management could ignore. It is plausible that a large portion of Imasco's stock appreciation throughout the 1990s was attributable to the smart money anticipating the company's ultimate demise.
The main question that BAT asked Imasco's other shareholders to decide was whether Imasco's executives added enough value to justify their positions. Even with shareholders having to accept Imasco's severance package of salary and accelerated vesting of stock options amounting to an exorbitant $350-million, the answer was still a resounding no.
If Imasco had been a conglomerate success like General Electric Co., it would have been difficult for BAT to stop such a value-creating train. Imasco's true record of questionable achievements led to the conclusion in Britain that even greater value could be realized by forcing the conglomerate's disassembly. Steve Deutsch is currently a product manager with one of the largest U.S. banks and a Level III candidate for the chartered financial analyst designation. Report on Business welcomes submissions of 800 to 900 words for its Personal View guest column. Those interested can leave a phone message at (416) 585-5432 or send a fax to (416) 585-5695. The e-mail address is email@example.com
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