MAVES: Strategic alliance

ELSEVIER MAVESA: Strategic Alliance John C. Ickis INCAE In this case, MA VESA, a major Venezuelan agribusiness firm, must decide what actions to take in the face of tumultuous economic and political change. The lowering of trade barriers, the deregulation of the currency, and the promotion of foreign investment have opened the Venezuelan economy to global competition. Political uncertainty in the aftermath of an aborted coup d'etat has depressed the Caracas stock exchange and placed financial pressure on the company. The president, Juan Fernando Roche, faces an intimidating array of options that include offers from three multinationals to form different types of alliances. The crisis of a local company facing global competitors in a policy environment of trade liberalization is a story repeated many times in Latin America. The MA VESA case, though, has some unique elements. One such element is innovation. As the case traces the company history from its beginnings in 1949, the reader may detect numerous instances of innovative achievement, from its professional Board of Directors to its marketing strateff~es. From the outset, it is clear that MAVESA is not just another importsubstitution industry, dependent on tariff protection for its survival. Latin American firms, and even those of the United States and Europe, have lessons to learn from the MA VESA experience described in these pages. Another element of the MAVESA case is the interplay that we observe among national policy, industry structure and behavior, and corporate strategy during several distinct periods of Venezuelan history. It is seldom that a company, even in Latin America, is exposed to such wide swings in government policy or to such unexpected events as the aborted coup or the massive housewives' protests against the elected president. The case offers insights into the impact of macro policies on industry behavior. It also enables us to evaluate the evolving strategy of an industry leader. One of the most unique elements of the MA VESA case is the way in which corporate strategy takes advantage of a changing and often hostile political environment. The case centers around MAVESA's search for a strategic partner. This raises the fundamental question of why an innovative, successful company that has dominated its local market for over 40years should want to share its success with a newcomer to the Venezuelan market. The purpose of strategic alliance is a question that many Latin American and U.S. companies should explore as they "go global." In evaluating the array of options that confront him, Mr. Roche must of course push the numbers to understand the economic implications qf different courses of action. The quantitative analysis required is daunting: Address correspondence to John C. Ickis, INCAE, P.O. Box 960-4050, Alajuela, Costa Rica. Journal of Business Research 38, 77-87 (1997) © 1997 Elsevier Science Inc. 655 Avenue of the Americas, New York, NY 10010 operating synerg~es, discounted cash flows, and projected share prices all come into play. It is clear that the successful Latin American managers of the future must be increasingly sophisticated in the use of analytic techniques as they face the investment bankers from the North. But the responsible managers must also see beyond the numbers, to consider the various stakeholders in the situation. Although the case does not focus on the internal organization, it is clear that MAVESA has a strong corporate culture that has contributed to its success. Could such a culture be preserved under the ownership of a Unilever or a Kraft? How do we assess the operational and financial implications of an eroding culture? The dilemma confronting MAVESA is not an isolated one. As the economies of Latin America are opened to international trade and investment, many companies that previously enjoyed protection in their local markets must compete with, or ally themselves with, the leader multinationals in their industries. Strateff~c alliances, if forged out of operating synergy and mutual understanding, may bring advantages to both parties. © 1997 Elsevier Science Inc. j BUSNRES 1997. 38.77--87 ('(" P T "~ he choice is simple. Either we become the junior partners in an alliance with an agribusiness multinational or we sell off core businesses as the price of our independence." In these words Juan Fernando Roche, executive president of MAVESA, summed up the situation to the Board of Directors in May 1993. MAVESA was one of Venezuela's largest manufacturers, marketers, and distributors of branded consumer processed food products and laundry soap. In fiscal 1992 it had sales of 15,420 million bolivars (U.S.$223 million) and total assets of 21,670 million bolivars (Tables 1 and 2). The company's products were sold through a distribution system that serviced over 54,500 stores throughout Venezuela, representing 90% of all outlets that sold consumer food products and soap. Most of its products had gained a dominant share of the national market (Table 3). However, the changing Venezuelan business environment had confronted MAVESA with new challenges from global competitors, some of whom were proposing alliances. Faced with an array of alternatives, Mr. Roche was aware that the I ISSN 0148-2963/97/$17.00 PII S0148-2963(96)00120-8 78 J Busn Res 1997:38:77-87 J.C. Ickis Table 1. MAVESA, S.A., Consolidated Income Statement (thousands of bolivars, except for per share amounts) Year Ended October 31, Net sales Cost of sales Gross income Selling, general and administrative expenses, net operating income Interest expense, net Income tax Income before equity in affiliates and extraordinary item Equity in results of affiliates Income before extraordinary item Extraordinary item Net gain from sale of shares Effect on income tax of prior-year loss carryforwards Net income Income per share, before extraordinary item (bolivars) Net income per share (bolivors) 1992 1991 1990 15,419,923 11,376,299 4,043,624 2,024,424 2,019,200 1,111,032 88,998 819,170 37,708 856,878 345,595 1,202,473 1.46 2.05 12,327,469 9,132,693 3,194,776 1,356,212 1,838,564 803,056 47,968 987,540 2,377 989,917 18,683 1,008,600 1.68 1.72 9,854,289 7,204,606 2,649,683 1,077,048 1,572,635 650,353 77,871 844,411 28,162 872,573 77,697 950,270 1.48 1.62 Table 2. MAVESA, S.A., Consolidated Balance Sheet (thousands of bolivars) October 31, Assets Current assets Cash Short-term investments Accounts and notes receivable Inventories Spare parts and prepaid expenses Reacquired capital stock Deferred income tax, current portion Total current assets Property, plant and equipment Long-term investments Deferred income tax Deferred charges and other assets Total assets Liabilities and shareholders' equity Current liabilities Bank loans Current portion of long-term loans and debentures Accounts and notes payable Income tax Current portion of accrued employees termination benefits Total current liabilities Debentures Accrued employee termination benefits Long-term loans Provision for contingencies Total liabilities Shareholders' equity (see accompanying statement) Total liabilities and shareholders' equity 1992 1991 1990 402,875 4,683,798 2,675,286 3,527,243 775,123 3,243,333 32,189 15,339,847 462,678 3,648,395 3,369,686 2,485,103 355,956 27,536 9,439,354 206,031 2,466,109 1,753,205 2,112,470 304,812 14,422 6,857,049 4,434,308 167,027 114,127 1,614,468 21,669,777 2,470,619 131,425 97,629 936,209 13,985,236 2,471,818 104,723 506,418 9,940,008 9,368,419 608,230 2,149,265 50,412 60,285 12,236,611 3,317,940 48,408 1,590,048 31,737 46,995 5,028,128 2,930,223 120,356 766,429 37,477 31,748 3,886,233 1,423,800 928,000 382,675 173,167 15,144,253 2,000,000 723,404 214,710 413,516 8,379,758 1,000,000 482,806 339,425 439,666 6,148,130 6,525,524 21,669,777 4,605,478 12,985,236 3,791,578 9,940,008 MAVESA: Strategic Alliance J Busn Res 1997:38:77-87 79 Table 3. MAVESA: Sales and Market Share by Product Margarine MAVESA metric tons MAVESA market share Kraft GRASVAL COPOSA Edible oils MAVESA metric tons MAVESA market share GRASVAL FACEGRA COPOSA Laurak Others Mayonnaise MAVESA metric tons MAVESA market share Kraft Laurak Hellmann's Others Laundry Soaps MAVESA metric tons MAVESA market share FACEGRA GRASVAL Others Cheese spreads MAVESA metric tons MAVESA market share Kraft Others (%) (%) (%) (%) (%) 1986 1987 1988 1989 1990 1991 1992 38,842 91 5 5 42,595 92 4 4 43,255 91 4 4 1 41,562 85 2 8 5 43,038 85 2 8 5 47,144 89 2 4 5 43,136 87 2 5 7 63,680 30 15 12 18 7 10 71,537 32 17 11 17 7 8 50,187 27 19 14 15 8 12 61,588 29 17 ]6 16 7 12 67,259 38 13 12 15 7 11 70,082 40 1] 11 15 7 11 79,740 42 10 11 14 7 10 5,856 24 20 21 4 32 7,358 24 17 20 3 37 8,587 30 19 18 3 31 10,015 32 17 18 2 31 11,039 33 20 16 1 30 12,319 36 22 16 1 25 13,186 36 16 17 31,780 72 17 9 2 38,950 75 20 4 1 33,670 72 21 6 0 35,976 75 20 5 1 40,090 76 18 3 3 46,352 79 15 4 3 40,597 75 10 4 12 74 7 93 0 658 28 72 0 1,049 38 60 2 1,755 42 56 2 1,988 47 53 0 1,651 46 53 1 30 Industry Profile • GRASVAL. A family-owned firm that was strong financially and had a good market position with well-known name brands in margarine (Estancia) and cooking oil (Diana). It had little capability in research and development and little raw material production, though it had planted 2,000 hectares (1 hectare = 2.5 acres) of African palm in 1990. It was not known as an aggressive marketer, and its sales force was less than half that of MAVESA. Its cooking oils had achieved fair distribution, but its margarine appeared in only 26% of food stores and its soap (Carey brand) in only 7% of retail channels that carried laundry soaps. • FACEGRA. This company was known for its good managers and its strong brands, especially in sesame oil (El Rey). Its salesforce was only a fourth of that of MAVESA, and its cooking oils were sold in only 28% of the food stores (vs. 48% for MAVESA), but these stores accounted for 62% of all cooking oils sold. The company also had excellent plant facilities. It had little agricultural production except for 2,000 ha of African palm that it had recently planted. It was in very poor financial condition, and in 1991 its owners sold the company to Unilever, at reportedly much more than its market value. • COPOSA. This was a consortium of cotton producers whose major strength was its captive source of raw materials. Its farmer base had also given it a strong lobbying position with the government. It had a sales force of 60, roughly equal to that of • GRASVAL. It was considered in the industry to be weak in marketing, and its Mirasol brand margarine was distributed in only 7% of food stores, versus 59% for MAVESA brand. • Laurak. This was one of the smaller firms in the industry. Up until its purchase by Cargill in 1990 it had been a family firm with wellregarded brands of cooking oil, mayonnaise, capers, and olives (Torre del Oro). Like GRASVAL and FACEGRA, it had planted around 2,000 ha of African palm. However, its small volumes made it difficult to achieve scale economies, and consequently, the business suffered cash flow problems that prompted it to sell to Cargill at twice its book value. • Kraft. This multinational's major strengths were its high-quality brand image, long-standing presence in the market, product development capability, and financial capacity. It did not have integrated manufacturing facilities and its costs were believed to be higher than those of MAVESA. It was also believed by MAVESA management that its international organizational structure reduced its flexibility and responsiveness to changes in the market. It pursued a differentiated marketing strategy and was thought to be uncomfortable in price competition. 80 J Busn Res 1997:38:77-87 decision on a strategic partner was the most important in the company's history. Setting Venezuela is the sixth largest South American country, with a land area of 912,000 km 2 and a population of 20.7 million (1993), of which 88% were literate and 40% lived in cities of over a half million, the result of rapid urbanization process that took place after 1945. Caracas, the capital and the largest city, had a population of 2.8 million. Valencia, a major industrial city of over 1 million inhabitants and the site of most MAVESA plants, was located approximately 2 hours by fourlane highway to the west of Caracas. Venezuelan history following independence from Spain in 1830 was marked by long periods of dictatorial rule punctuated by brief but unstable experiments in democracy and continued civil conflicts. Democracy finally took hold in 1958 after the ousting of a military dictator by the founders of the Democratic Action (AD) Party, which has contested national elections with COPEI, the Christian Democratic Party. Both were centrist parties with similar platforms, although AD (at least until recent years) advocated a stronger state role in the economy and tended toward more populist rhetoric. Since the 1920s, the Venezuelan economy had been highly dependent on oil revenues, and the economic fortunes of the country swung widely with variations in world crude oil prices. Following the formation of OPEC and the first oil increases in 1973-74, there was a burst of investment and growth, though much was absorbed by large-scale public investment projects that later proved difficult to sustain. By the early 1980s a combination of lower oil prices, capital flight, and erratic government policies led to a balance-ofpayments crisis. In 1984, fixed investment had fallen to 16.4%, as compared to 42.5% in 1976. By 1988 Venezuela's foreign exchange reserves were practically exhausted. An orthodox stabilization program was begun in 1989 that had a severe impact on the purchasing power of Venezuelan consumers, leading to rioting in the streets. A windfall gain from sharply higher oil revenues in 1990 alleviated the foreign exchange situation and reignited economic growth, but continuing popular dissatisfaction with economic adjustment policies produced political instability and uncertainty about the future (Table 4). Company History MAVESA was founded in 1949 by Alberto T. Phelps, son of a wealthy U.S-born Venezuelan importer and distributor, as a professionally managed company using modem technology to produce margarine from imported vegetable oils as a new product in the Venezuelan market (Austin and lckis, 1991). He invited Andr4s Boulton, who brought expertise in distribution; Angel Cervini, knowledgeable of Venezuelan politics; J.C. Ickis and William F. Coles, a well-known corporate lawyer to form one of the first nonfamily boards of directors in a Venezuelanowned company. After its advertising and promotion efforts had succeeded in overcoming the resistance of Venezuelan consumers to margarine, MAVESA grew rapidly through policies of aggressive pricing and mass distribution. The first general manager, a veteran of the Spanish Civil War, organized campaigns in military style to conquer new markets. From the beginning it was a strongly market-oriented company, a rare thing in Venezuela at the time. In the early 1950s the company expanded into vegetable oils under the VATEL brand, and in 1956 it purchased the dominant laundry soap manufacturer, Las Llaves. Demand grew vigorously, and agreements among the six vegetable oil producers not to compete with one another were common. In 1961 Mr. Phelps sold 30% of the shares of MAVESA to Proctor & Gamble, whose president had been Phelps's classmate at Yale, as part of an agreement in which P&G refrained from entering the fats and oils business and MAVESA agreed not to enter the market for detergents and cosmetic soaps. The deal, in which the price of the shares was reportedly $1.6 million, was the only instance in which P&G became a minority shareholder in a joint venture. The growth of MAVESA was interrupted by government controls imposed on raw material imports by President Carlos AndrCs P4rez in 1974. All purchases had to be made through a public marketing corporation, the CMA, which distributed crude soybean oil and other inputs according to market share and set prices for cooking oil based on the import price of raw materials plus processing costs. The dozen or so participants in the Venezuelan fats and oils industry, mostly small and inefficient in comparison with MAVESA, formed ASOGRASAS as an association to negotiate prices with the government. "Gone were the days of the vacas gordas," recalled one compa W veteran. CVacas gordas," or "fat cows," refers to the period of rapid market expansion with virtually no government regulation and very little competition, during which executive compensation and benefits were commensurate with high company profits.) The first P4rez administration was recalled, not fondly, as the CMA period because "it controlled our purchase quantities and prices, our margins, our selling prices.., there was little left to manage." During the CMA period MAVESA played an active role as ASOGRASAS spokesman in the negotiations with government. "We saw our role as that of educating the government with respect to the industry," explained one MAVESA executive. Management shared industry cost data and argued vociferously on behalf of the smaller, less efficient producers. The marketing function was deemphasized, and sales levels were stagnant as the company sought to increase its share of raw material imports to void the higher prices of local agricultural products. "It was marketing in reverse," the company executive commented. MAVESA: Strategic Alliance J Busn Res 1997:38:77-87 81 Table 4. Venezuela:Selected Macroeconomiclndkatom 1987 Real growth rate (%) Gross domestic product (GDP) Agriculture, forestry, fishing Petroleum Manufacturing Price indicators (% increase) Consumer prices in Caracas Consumer food prices Salaries in real terms Public finances (% GDP) Fiscal revenues Fiscal expenditures Fiscal surplus (-deficit) 1988 1989 1990 1991 1992 4.5 nd 5.2 2.5 6.2 4.6 4.1 6.9 -7.9 -5.1 0.0 -11.8 6.9 -1.5 17.9 6.0 9.7 2.4 9.5 9.7 6.8 2.7 2.0 2.6 40.3 60.5 -15.1 35.5 52.1 -8.8 81.0 102.9 -15.8 36.5 40.0 -7.9 31.0 32.4 -8.2 31.9 31.3 3.8 27.5 32.0 -4.5 23.9 32.5 -8.6 29.0 30.1 -1.1 33.5 33.3 0.2 34.0 33.3 0.7 23.8 29.9 -6.1 nd nd nd 34,680.0 74.3 3,866.0 - 1.6 -27.4 34,845.0 59.6 2,768.0 -28.4 -60.4 32,479.0 79.1 17,882.0 546.0 373.3 33,273.0 69.7 29,317.0 63.9 25.1 34,372.0 65.3 19,874.0 32.2 -48.6 nd nd 10,437.0 -8,870.0 1,567.0 991.0 -2,238.0 -1,619.0 -91.0 -1,390.0 - 16.0 0.0 283.0 267.0 - 1,628.0 1,357.0 0.0 2,985.0 10,082.0 - 12,080.0 - 1,998.0 970.0 -2,863.0 -1,771.0 - 147.0 -5,809.0 21.0 0.0 - 1,923.0 -1,902.0 -4,594.0 3,731.0 0.0 8,325.0 12,915.0 -7,283.0 5,632.0 1,113.0 -2,029.0 -2,368.0 - 187.0 2,161.0 77.0 - 158.0 -5,148.0 -5,229.0 - 1,650.0 -1,095.0 964.0 1,519.0 17,444.0 -6,807.0 10,637.0 1,374.0 -2,675.0 -774.0 -283.0 8,279.0 96.0 13,579.0 - 18,231.0 -4,556.0 1,981.0 -4,843.0 1,900.0 -4,924.0 14,968.0 -10.131.0 4,837.0 1,437.0 -3,591.0 -598.0 -349.0 1,736.0 1,769.0 192.0 -420.0 1,541.0 1,761.0 -2,445.0 221.0 -3,985.0 13,955.0 -12,266.0 1,689.0 1,497.0 -4,476.0 -1,719.0 -356.0 -3,365.0 545.0 61.0 1,523.0 2,129.0 - 1,638.0 1,214.0 - 183.0 2,669.0 Finance Caracas Stock Exchange Share Price Index (197 = 100) As % of change As % of change in real terms Total foreign debt (U.S.$millions) as % of GDP Foreign trade (U.S.$millions) Merchandise exports FOB Merchandise imports FOB Trade balance Exports of services Imports of services Net inflows/outflows Net transfers (private + official) Current account balance Direct investment Portfolio investment Other capital Capital account balance Overall balance (T errors, omissions) Financing: reserves Use of IMF credit Other sources The state interventionist policies of Carlos Andres Perez combined with declining oil prices from the boom years of the 1970s had produced a crisis of fiscal deficits, inflation, foreign debt, and recession by 1980. His successor, Luis Herrera Campins from the opposing COPEI party, reduced government subsidies, eliminated the CMA, and sought to liberalize the economy, but was unable to halt inflation or capital outflows, and devaluation appeared inevitable. When he relaxed import quotas, vegetable oil producers rushed to fill their storage tanks. Oversupply in a recessionary economy ignited a price war that led to the demise of several MAVESA competitors. Devaluation from 4.3 to 14 bolivars to the dollar caused further financial constraints in the industry, including that experienced by ALACA, a new oils and mayonnaise factory in the western city of Valencia, whose construction was financed with foreign loans. In the aftermath of the price war, MAVESA moved its vegetable oil and margarine operations from Caracas to Valen- cia, where it had acquired four additional plants, including the ALACA plant whose assets were acquired in a stock swap. As part of this transaction Mr. Anibal Rojas, the eldest brother of the family owners, was invited to join the Board in accordance with the unwritten "5% rule." Anyone owning more than 5% of the outstanding shares was entitled to one seat on the Board, except for the Phelps family, which was entitled to two seats. By 1984 there was a severe foreign exchange crisis in Venezuela. The COPEI party had been turned out of office by a large margin, and the new president, Jaime Lusinchi of Perez's AD party, sought to establish strong controls through a system of differential exchange rates. The system was to be administered by a government agency, RECADI, that would allocate scarce foreign exchange at the still official rate of 4.3 for all essential imports, while all other transactions would be made at a parallel rate now around 18 to the dollar. Jonathan Coles, son of co-founder William F. Coles and company president 82. J Busn Res 1997:38:77-87 since 1982, was concerned by the broad discretion of RECADI in the administration of exchange controls. It was rumored that the president of a MAVESA competitor, COPOSA, had strong influence with the new government. In 1986 the Ministry of Agriculture issued a new regulation by which the allocation of preferential dollars for oilseed imports would be contingent on each company's production or financing of local oilseed producers, in the same proportion. At the time MAVESA purchased 7% of its raw materials in the local market and did not provide financing to farmers. The contingency regulation, as it came to be called, placed strong pressure on the company for vertical integration. It took three actions with the goal of increasing local inputs to 50% within 7 years: (1) it organized OLEOAGRO as a subsidiary to finance, provide technical assistance, and purchase sesame and sunflower seeds from farmers in western Venezuela; (2) it invested U.S.$30 million to establish PALMONAGAS, a 10,000-ha African palm plantation and processing plant in the eastern part of the country; and (3) it formed a joint venture with a U.S. biotechnology company and an international agribusiness consulting firm to increase the productivity of local sesame and sunflower seeds. The funds for crop financing were borrowed by MAVESA at 8.5%, as mandated by the government's banking laws that required banks to fill lending quotas to agriculture at preferential rates. MAVESA had use of these funds until it relent them to farmers at the same borrowing rate. By thus financing palm oil to smallholders, MAVESA negotiated the use by the company of 1 acre of rent-free agrarian reform lands for every 2 acres financed. The evolving company strategy rested on three pillars in the late 1980s: (1) leadership in the fats and oils industry; (2) vertical integration; and (3) product diversification. To maintain industry leadership MAVESA had extended its product lines to include low-fat margarine and specialty oils and had further strengthened its national distribution network. Vertical integration included several projects, including vegetable oil refining, PALMONAGAS, and the manufacture of PVC containers for its cooking oils. MAVESA had even purchased machines for producing PVC pellets. With respect to diversification, the company sought opportunities for joint ventures in nonrelated agribusiness ventures for export that would generate foreign exchange and hence enable the company to circumvent RECADI. It founded a subsidiary, Siembramar, to cultivate shrimp and planned to cultivate macadamia. It formed a joint venture, DANIMEX, with a Danish firm to process egg whites, a mayonnaise by-product, for export in powder form. It joined with a Mexican partner to form Sesatech for the cultivation, processing, and export of sesame seeds to Japan. A New Competitive Environment In 1989 Carlos Andrds Perez was returned to power, but his policies bore little resemblance to the state interventionism J.C. Ickis of the 1970s. Instead, he imposed a program of structural adjustment that included liberalized trade, the elimination of price and foreign exchange controls, a reduced role for the state, privatization of telecommunications and other state enterprises, and the encouragement of foreign investment. Tariffs on agricultural imports would be reduced from 50% to 20% from 1990 to 1993, in 10% increments, as part of a policy to make Venezuelan agriculture more competitive in world markets. To implement this policy, he chose Jonathan Coles, President and CEO of MAVESA, as his Minister of Agriculture. As Mr. Coles took a leave of absence to go to the Ministry in June 1990, the Board appointed Juan Fernando Roche to the chief executive position. Mr. Roche, an MBA from the University of Wisconsin who had joined the company in 1982 as a marketing executive, was concerned about the impact of structural adjustment policies on MAVESA. He questioned the advantages of vertical integration in an environment of liberalized trade and international competitiveness, and he wondered whether the company should be devoting so much time and managerial energy to export projects when there were no longer foreign exchange restrictions. He was also concerned about new competitive threats to MAVESA's core businesses as global agribusiness companies responded to the changing investment climate of Venezuela. These concerns were soon borne out. In September 1990 one of MAVESA's local competitors in margarine and mayonnaise, Laurak, was purchased by Cargill, the privately held international grain trader, at a price that was reportedly twice its book value. Later in the same year a small, but efficient, competitor in cooking oils, FACEGRA, was purchased by the European agroindustrial giant, Unilever. In October 1991 Proctor & Gamble, which had never played an active role in MAVESA other than occasionally lending its support in negotiations with foreign suppliers, announced its decision to sell its entire share of ownership in MAVESA which totaled 28.3%. Though ostensibly part of a strategic divestiture of its food businesses, some observers surmised that P&G needed the capital gain from the sale to show a satisfactory operating profit in the current fiscal year ending December 31. P&G Venezuela made known its intention to sell the shares to Cargill and assumed that MAVESA shareholders would follow suit. "It was the best possible time to sell," recalled one industry observer. "Venezuela was booming. There was unbounded confidence in the country's future. Foreign investment was entering at an unprecedented rate. The Caracas stock market was reaching record highs and Venezuelan securities were soaring." Therefore P&G was astounded when MAVESA announced that it would exercise its option to purchase their full block of shares, an action that would require the company to borrow heavily and would pit it against the world's agribusiness giants. P&G's investment bankers had valued its client's shares at $140 million. MAVESA offered $60 million, backing this figure with analysis prepared by its own financial department and MAVESA: Strategic Alliance reviewed by a team of international management consultants. During tense weeks of negotiation P&G made a firm offer of $90 million and MAVESA raised its counteroffer to $70 million. The transaction was eventually concluded on February 2, 1992, for the amount of $80 million, equivalent to 36 bolivars per share, of which MAVESA would borrow $60 million and use $20 million of its own funds to make payment on the stipulated date of April 1. MAVESA management intended to divide the P&G shares into two packages: the largest, 20% of the company, would be sold to a strategic partner who could offer manufacturing and product development technology, and the remaining 8.3% would be sold in an initial public offering (IPO) on the Caracas stock exchange, providing transparency in the value of the shares and instant liquidity to current stockholders who might wish to sell some of their shares in the company. Enthusiasm was running high. On that very day, February 2, the Caracas stock exchange hit an all-time high of 36,000 points on the index. Mr. Roche estimated that at current market prices of its shares, MAVESA easily stood to gain over $30 million on the IPO. Two days later, on February 4, several army battalions staged a military coup to oust President Carlos Andrds Pdrez. The coup failed, but amid the death and destruction, investors panicked and the Caracas index dropped to 27,000 points. "Under the circumstances, we thought it best to postpone our road show," Juan Fernando Roche recalled. In the weeks that followed it became clear from reactions to the military coup that there was widespread discontent with the Pe,rez government. The policies of structural adjustment had taken a heavy toll on an urban population long accustomed to subsidized prices. "We're willing to sacrifice," said one irate taxi driver, "but not while the politicians line their pockets." In a sign of protest, housewives staged "noches de cacerolas" in which they beat on pots and pans late into the night. At a given hour, urban dwellers in all major cities throughout the country switched their apartment lights on and off to demand President Perez's resignation. The stock exchange continued tumbling, to a low of 18,000 points. Meanwhile, MAVESA's consultants had persuaded the International Finance corporation of the World Bank to consider a modest equity investment in the company. The IFC, more interested in the fundamentals of the business than in sensationalist reporting of events in Venezuela, was sufficiently impressed with company management and operations to buy a 2.6% interest in MAVESA at 45 bolivars per share. The IPO was finally launched in May 1992, but rumors about the company's future had soon depressed prices to around 40 bolivars per share. Notwithstanding, MAVESA cleared a 25% margin in dollars on the 8.3% of the shares sold to the public (which included the 2.6% sold to the IFC). But the company still held 20% of the shares in treasury and was paying interest on a total debt of $82 million, which included: $52 million still out- J Busn Res 1997:38:77-87 83 standing of the $60 million borrowed to purchase the P&G shares; $20 million in business debt; and $10 million for the financing of noncore projects in African palm and shrimp. Commented Mr. Roche: We discovered that we had been very naive in thinking that we could find a company willing to buy a 20% share of the company and to provide us with technology. Of all the companies located by our consultants, we contacted 30 with the profile that we were looking for. Eighteen showed interest and we finally sat down at the table with eight of them. But all these companies wanted either majority control or a clear path to control in the near future. As the months passed, the serious candidates for strategic partner were reduced to three: Unilever, Kraft, and Cargill. Mr. Roche formed a top management team of himself, Financial Vice President Manuel Sucre, and Corporate Planning Vice President Ronald Hirschl to review the three candidates. "We were a balanced team," recalled Mr. Sucre. Juan Fernando's experience was in marketing and Ronald had a strong technology background. I was worried about the financial aspects. And initially each of us favored a different company." The Unilever Offer Unilever, based in London, was one of the world's largest agribusiness companies in 1990. Among its major products were margarines and cooking oils. It had recently acquired vegetable oil companies in Mexico in a series of privatization transactions, and London headquarters was now looking at the large Andean market. The purchase of FACEGRA by Unilever was interpreted by MAVESA executives as an opening bet in a high-stakes game. One industry observer commented that "MAVESA stands as an obstacle to Unilever's grand strategy for the Andean region. One way or another they will get MAVESA to the negotiating table." Unitever representatives in Caracas made known the cornp a w ' s desire to acquire a controlling interest in all company operations, but the MAVESA Board of Directors demurred, believing that current share prices were influenced by political events and did not reflect underlying company value. Some members of the founding family were against ceding control to a multinational at any price. Unilever countered with an offer to form a j oint venture in which MAVESA would contribute all of its core business assets and the debt associated with those assets, valued in this transaction at $289 million (net book value) and Unilever would contribute assets with a net book value of $95 million plus a cash payment of $65 million in exchange for a 45% share in the venture. For an additional cash payment of $30 million, Unilever could acquire an additional 10% of MAVESA shares convertible in 5.5% of the joint venture within 3 years. Noncore assets currently valued at $20 million (less $10 million project financing) would continue to be owned 100% by MAVESA. (Note: certain amounts, 84 J Busn Res 1997:38:77-87 percentages, and terms of the offers by Unilever and Kraft have been altered to protect confidentality agreements.) A joint venture with Unilever would enable MAVESA to protect and develop all its products, incorporate new formulation technologies, segment its brands and increase its prices for additional revenues that company management estimated at $11 million. The joint venture could extend the Las Llaves laundry soap line and introduce personal care products, detergents, and other food products such as ice cream or tomato sauces and pastas. The new joint venture would also have expanded geographic coverage, sourcing and marketing products throughout the Andean region. There were also significant operating synergies: MAVESA and Unilever could consolidate warehouse marketing, reducing distribution costs by $4.5 million. MAVESA's sales and marketing costs would be cut by an estimated $5 million, and the reduction of administrative overlap would provide savings of an additional $7.5 million. A joint venture would also enable MAVESA and Unilever's FACEGRA to concentrate production in only two plants, gaining production efficiencies of up to $15 million. This strategic alliance also had defensive value in that Unilever would not enter the margarine market, and it practically eliminated the possibility of a price war in edible oils, since the new joint venture would have a 50% market share, twice that of its nearest competitor. The Kraft Offer Kraft, a subsidiary of Philip Morris, had entered Venezuela to process and market margarine, mayonnaise, and cheese spreads. It had invested little in manufacturing operations, preferring to import refined vegetable oils and other highquality raw materials. By 1980 it had captured 15% of the margarine market and dominated the mayonnaise market with over 60% market share. It was virtually the sole producer of cheese spreads. By 1989 aggressive price competition with MAVESA had reduced its share in the margarine market to 3.8%, and its position in mayonnaise was eroded to under 50%. Moreover, MAVESA had introduced a non-dairy cheese spread, Rikesa, that now rivaled Kraft with roughly 45% market share each. Kraft was not interested in cooking oils. Its objective was to maintain leadership in high-value-added products such as margarine, avoiding destructive price wars. Kraft proposed a joint venture in the combined margarine, mayonnaise, and processed cheese spread business that would be formed of U.S. $165 million of MAVESA assets and $75 million of Kraft assets. Kraft would make a cash payment of $95 million for 66.7% of the shares in the new venture. This transaction would not affect MAVESA's ownership and control of its soap, edible oils, and other businesses. MAVESA would continue to carry $82 million of debt on its books. A strategic alliance with Kraft would enable the new joint venture to build a dominant position in cheese spreads (95% market share), mayonnaise (82%), and margarine (90%). The J.C. Ickis deepened market penetration and combined muscle would give the joint venture the ability to increase prices by an estimated $0.8 million and eliminate price discounts of $7.7 million. It also offered the possibility of introducing other food products (such as tomato products) and an alliance to expand to Colombia. The alliance would result in savings of $2.5 million through cheaper sourcing. It would permit the closing of at least one production facility, with production savings of $2.5 million and one-time gains from the sale of fixed assets. It would also be possible to merge the distribution network, eliminating distribution centers and reducing inventories for savings of $0.5 million. The sales force could be rationalized with savings of $1.1 million, and administrative overlap could be eliminated with savings of $2 million. The alliance would have strong defensive value, as Kraft was committed to regaining market share in the margarine business and had shown willingness to engage in price wars to preserve market share in mayonnaise. The Cargill Offer Cargill was the largest privately owned company in the world, with headquarters in a wooded area outside Minneapolis, Minnesota. Its principal business was the purchase and sale of grain, with distinctive competence in logistics and distribution. It had also become a low-cost vegetable oils refiner and processor, with highly efficient plants operating in the southern United States. Cargill seldom dealt in branded products and did not boast marketing expertise. In Venezuela, Cargill distributed pastas made from wheat. It had entered this business in search of high-volume outlets for agricultural commodities. During the RECADI years when foreign exchange for raw material imports in Venezuela was controlled, competition between Cargill and other industry giants, such as Continental Grain of the U.S. and Bunge of Argentina, was fierce. MAVESA had traditionally been a major client of Cargill. With the purchase of Laurak, Cargill obtained 7% of the Venezuela cooking oils market but at the expense of its oilseed sales to MAVESA, which reduced its purchases from Cargill from 50% to 20% of its total import requirements. A strategic alliance with Cargill would strengthen MAVESA's edible oils business, with market penetration that would provide price increases estimated at $7.5 million and fewer price discounts, with savings of $9.5 million. Such an alliance would prevent Cargill from entering oils and margarines. There were synergies in building operations of scale that could generate cost savings of up to $10 million, with production operations shifted to larger, more specialized factories. The merging of distribution centers could result in the closure of many centers with savings of $3 million, and the significant reduction in sales force and other marketing costs would yield savings of $1.5 million. Elimination of administrative overlap would yield an additional savings of $2 million. However, Cargill was not seen as adding long-term strategic value to the majority of MAVESA's businesses, nor did it open MAVESA: Strategic Alliance J Busn Res 1997:38:77-87 85 Table 5. Projected Cash Flows, MAVESA Oils and Shortenings 1993 Premises Average exchange rate Inflation rate (%) Corporate t a x rate (%) Discount rate (%) Growth of cash flow in perpetuity (2.5% real growth) Gross sales (millions of bolivars) Edible oil Industrial oils Shortenings Cost of sales Edible oils Industrial oils Shortenings Gross margin Edible oils Industrial oils Shortenings Fixed costs Edible oils Industrial oils Shortenings Net income Edible oils Industrial oils Shortenings Total -taxes -change in working capital =free cash flow Cash flow adjusted for inflation 1994 1995 1996 1997 1998 1999 88.2 34.1 10.0 12.9 114.7 35.0 10.0 12.9 146.3 32.6 10.0 12.9 183.0 30.1 10.0 12.9 224.4 27.6 10.0 12.9 269.5 22.6 10.0 12.9 317.0 17.6 10.0 12.9 8,611.0 307.0 672.0 12,135.0 427.0 940.0 16,752.0 584.0 1,292.0 22,647.0 782.0 1,743.0 30,045.0 1,028.0 2,308.0 38,446.0 1,298.0 2,935.0 47,308.0 1,572.0 3,581.0 6,517.0 219.0 581.0 9,162.0 305.0 812.0 12,747.0 417.0 1,116.0 17,222.0 558.0 1,506.0 22,827.0 732.0 1,994.0 29,186.0 924.0 2,535.0 35,894.0 1,117.0 3,094.0 2,094.0 88.0 91.0 2,973.0 122.0 128.0 4,005.0 167.0 176.0 5,425.0 224.0 237.0 7,218.0 296.0 314.0 9,260.0 374.0 400.0 11,414,0 455.0 487.0 1,524.0 23.0 41.0 2,091.0 33.0 62.0 2,791.0 45.0 80.0 3,728.0 59.0 109.0 4,884.0 78.0 143.0 6,169.0 99.0 183.0 7,500.0 119.0 222.0 570.0 65.0 50.0 685.0 68.5 141.0 475.5 475.5 882.0 89.0 66.0 1,037.0 103.7 51.0 882.3 573.5 1,214.0 122.0 96.0 1,432.0 143.2 23.0 1,265.8 554.6 1,697.0 165.0 128.0 1,990.0 199.0 70.0 1,721.0 527.0 2,334.0 218.0 171.0 2,723.0 272.3 95.0 2,355.7 522.2 3,091.0 275.0 217.0 3,583.0 358.3 134.0 3,090.7 530.4 3,914.0 336.0 265.0 4,515.0 451.5 169.0 3,894.5 550.7 opportunities to develop new products or expand geographically. Cargill suggested breaking the MAVESA business along vertical lines to form two separate joint ventures: one for consumer lines in which MAVESA would have a majority share, and the second for procurement, refining, and processing in which Cargill would be majority partner. There were, however, a number of unresolved issues such as the allocation of MAVESA's debt. In the ensuing discussions between MAVESA's and Cargill's management, a novel idea arose. Instead of forming two joint ventures, the companies might establish two separate businesses, each with 100% ownership. MAVESA would sell Cargill all assets necessary for the processing of raw materials and the bottling of cooking oils, including its original Vatel brands, as well as its industrial oils and its branded shortening products. Projected cash flows from these businesses are presented in Table 5. Cargill, in turn, would sell MAVESA its mayonnaise, vinegar, and mustard, including the brand name Torre del Oro and the equipment necessary for their production. Projected cash flows for these businesses are shown in Table 6. Under this modified Cargill offer, MAVESA would retain high-value-added products with dominant market shares and would relinquish price-sensitive products that were subject to import restrictions and price controls. However, by relinquishing a high-volume business, MAVESA's distribution channels would be significantly underutilized. The company would have to make an effort to fill these channels, either through alliances with other companies or as sales representatives of foreign companies. With respect to manufacturing, MAVESA could consolidate all operations in two plants--one for soaps and the other for food products. Low-cost vegetable oils for use in margarine and mayonnaise could be obtained through a supply contract with Cargill, which would take over oil refining operations. However, the labor aspects of this option were highly sensitive. Some 800 workers, affiliated with two labor unions, worked in the refining plants and morale was already suffering amid rumors of sale to a multinational. Uncertainty had spread to the management ranks. Said one plant manager, "can it still be MAVESA without VATEL?" The Sunny Day Option MAVESA did not rule out the option of doing nothing. This meant holding onto its shares in treasury and continuing to meet the financial burden of its $82 million debt, waiting for 86 J BuSh Res 1997:38:77-87 J.C. Ickis Table 6. Projected Cash Flows, Cargill Mayonnaise, Vinegar, and Mustard 1993 Premises Average exchange rate Inflation rate (%) Corporate tax rate (%) Discount rate (%) Growth of cash flow in perpetuity (2.5% real growth) Gross sales (millions of bolivars) Mayonnaise Vinegar Mustard Cost of sales Mayonnaise Vinegar Mustard Gross margin Mayonnaise Vinegar Mustard Fixed costs Mayonnaise Vinegar Mustard Net income Mayonnaise Vinegar Mustard Total -taxes -change in working capital =Free cash flow 1995 1996 1997 1998 1999 88.2 34.1 10.0 12.9 114.7 35.0 10.0 12.9 146.3 32.6 10.0 12.9 183.0 30.1 10.0 12.9 224.4 27.6 10.0 12.9 269.5 22.6 10.0 12.9 317.0 17.6 10.0 12.9 3,287.0 377.0 299.0 4,766.0 524.0 413.0 6,718.0 716.0 562.0 9,253.0 960.0 750.0 12,513.0 1,231.0 981.0 16,275.0 1,593.0 1,232.0 20,310.0 1,930.0 1,486.0 2,756.0 240.0 225.0 3,973.0 334.0 310.0 5,619.0 456.0 423.0 7,723.0 611.0 564.0 10,420.0 773.0 738.0 13,523.0 1,015.0 928.0 16,846.0 1,230.0 1,118.0 531.0 137.0 74.0 793.0 190.0 103.0 1,099.0 260.0 139.0 1,530.0 349.0 186.0 2,093.0 243.0 2,752.0 578.0 306.0 3,464.0 700.0 368.0 479.0 66.0 15.0 690.0 91.0 21.0 928.0 124.0 27.0 1,252.0 165.0 37.0 1,657.0 215.0 48.0 2,111.0 269.0 61.0 2,580.0 323.0 52.0 71.0 59.0 182.0 18.2 6.0 157.8 103.0 99.0 82.0 256.0 25.6 10.0 220.4 171.0 136.0 112.0 382.0 38.2 17.0 326.8 278.0 184.0 149.0 563.0 56.3 25.0 481.7 436.0 243.0 195.0 815.0 81.5 40.0 693.5 641.0 309.0 245.0 1,129.0 112.9 57.0 959.1 884.0 377.0 295.0 1,488.0 148.8 79.0 1,260.2 a "sunny day" to realize maximum value from the sale of its shares or the negotiation of a strategic alliance. Proponents of the sunny day option favored comparing the value of MAVESA as an independent business against the various proposals that had been received from multinationals. For this purpose, a stand-alone valuation of MAVESA was conducted by a well-known investment bank in March 1993 which resulted in a discounted cash flow (DCF) value of $262 million, as follows (in millions of U.S.$): Margarine business Soap Cooking oils and shortenings Processed cheese spread Mayonnaise Noncore assets (African palm; shrimp) Less: debt 1994 127 117 42 29 9 20 -82 By exercising this option, MAVESA shareholders would retain a going concern with a 1993 equity value of $262 million. It would enable the stockholders to retain control, with no dilution of their shares. However, the impact of burdensome financial costs on profitability made this difficult. Lending rates in bolivars were rising (Table 7) as exchange rates slid against the dollar (Table 8). 458.0 73.0 The sunny day option might be enhanced through programs of cost reduction. The payroll had recently been cut by 10%, benefits and training programs had been reduced, strict controls had been placed on travel and representation costs, lower cost formulations had been used, cheaper sourcing sought, and idle assets were sold off. However, all these measures were considered necessary by MAVESA management just to maintain current profitability in a situation of greater competition, in which slimmer margins were expected. An opportunity for significant cost savings was in the specialization of plants. A detailed project for consolidating soap production and oil refining had been developed by the opera- Table 7. Annual Interest Rates in Venezuela (%) Average for Year Lending Savings 1987 1988 1989 1990 1991 1992 12.62 12.69 37.20 35.87 37.35 41.25 8.64 8.95 35.09 29.37 31.56 36.27 Average for Month Lending Savings Jan. 93 Feb. 93 Mar. 93 Apr. 93 May 93 53.09 52.65 55.71 64.78 66.65 48.53 47.39 49.49 64.94 51.10 MAVESA: Strategic Alliance J Busn Res 1997:38:77-87 Table 8. Foreign Exchange Rates in Venezuela (bolivars/U.S.$) Ending 1987 1988 1989 1990 1991 1992 30.70 39.30 43.05 50.58 61.65 79.55 Average 28.09 33.84 38.95 47.44 57.32 69.03 Jan. 93 Feb. 93 Mar. 93 Apr. 93 May 93 Table 9. MAVESAPrice per Share (bolivars) Ending Ending 81.65 83.45 84.90 85.95 87.85 Jul. 92 Aug. 92 Sep. 92 Oct. 92 Nov. 92 Dec. 92 tions department. This project would result in cost savings of $8 million per year, but it required an initial investment of $15 million. An investment of this magnitude would mean leveraging the corapany even further, which in the opinion of management was "highly risky." One means of reducing the financial risk inherent in the sunny day option would be to seek a "bridge option" to reduce leverage and pressure. Several Venezuelan banks and financial institutions had expressed interest in acquiring MAVESA's treasury shares. They would expect a return of 25% to 30% 87 Ending 30.53 31.43 30.00 29.51 29.96 30.75 Jan. 93 Feb. 93 Mar. 93 Apr. 93 May 93 28.88 29.81 27.38 24.68 26.25 that, given the current political uncertainty as reflected in share prices on the Caracas exchange, would mean that MAVESA could expect an offer of around 28 bolivars per share (Table 9). This mechanism would enable MAVESA to reduce its debt burden by U.S.$31 million, but the Financial Department advised Mr. Roche that it would result in an accounting loss of 1,600 million bolivars. Reference Austin, J. E., and Ickis, J. C., MAVESA, Harvard Business School Monograph N9-391-164, Harvard University, Cambridge. 1991.