EG Corporation had sales of just over $3.5 billion in 1998. The company was in three main lines of business— consumer products, food service, and furniture—with its Consumerco, Foodco, and Woodco divisions.
Consumerco manufactured consumer products and sold them through a direct salesforce to grocery and drugstores throughout the United States. It had a dominant market share (more than 40 percent) in the majority of its product lines, all of which had a strong branded consumer franchise.
Woodco was a mid-sized competitor in the highly fragmented furniture business. Woodco had been created through acquisitions and consisted of eight separate smaller companies acquired over 10 years. All served the mid- to lower priced end of the market with complementary product lines. The Woodco companies sold their products under their original brand names. As of early 1999, the companies were still operated as autonomous units, but EG had begun to combine the companies into one unit, consolidating separate administration, sales, and production functions to the extent feasible. EG also planned to establish an umbrella brand to tie together the wide range of Woodco product offerings and establish a base for adding new lines.
Thus far, the Woodco businesses had turned in uneven financial results. Management capability in the eight businesses varied widely. Moreover, Woodco’s business performance was to differing degrees dependent on keeping up with the latest in furniture styling and fashion. Some of the companies were skilled in this area, but the disastrous consequences of missing the trends had been brought home over the years by their uneven performance. Despite this, Woodco’s management was convinced that EG could build a large and successful business. The managers believed consolidation would reduce Woodco’s operating costs significantly and strengthen the company’s management control over the businesses. They thought the new common sales and marketing thrust would lead to increased volumes and higher margins. The Woodco management’s convictions were lent some credence by the existence of several other players in the industry that earned consistently high returns, achieved in part by rationalizing less-efficient companies that they had acquired.
Foodco, EG’s third main division, was in the food service business. Foodco operated a small chain of fast-food restaurants, as well as providing food service under contract to major corporations and other institutions around the country. It had been essentially built up from internal growth plus a few small acquisitions over the last five years. The former CEO had viewed Foodco as a major growth vehicle for EG and had backed aggressive expansion plans and the associated capital spending. As of early 1999, EG’s Foodco unit was earning a profit but was still in the early stages of its development plan. It was a small player in the restaurant business and had only a few institutional food service accounts. In both businesses, it faced formidable competition, but management believed that its operating approach and EG Corporation’s Consumerco name recognition, which was being used as the branding proposition for Foodco, would establish Foodco as a major factor in the industry.
Beyond Consumerco, Foodco, and Woodco, EG Corporation owned a few other smaller businesses: a property development company (Propco), a small consumer finance company (Finco), and several small newspapers (Newsco). No one currently employed by EG could recall why EG had acquired these businesses. They had been added to the portfolio in the 1970s. All were earning a profit, though they were small by comparison with EG’s three main divisions.
Overall, EG Corporation’s financial performance had been mediocre for the last five years. Earnings growth had not kept pace with inflation, and return on equity had been hovering around 10 percent. Part of the problem was that EG had been hit with unfavorable ”extraordinary items” that had depressed bottom line results. Beyond this, though, the company had failed to deliver on overall commitments for growth and operating earnings in its businesses for the last few years. From an investor’s standpoint, the company’s stock price had lagged the market for the last several years. Analysts bemoaned the company’s lackluster performance, especially in view of its strong brand position in Consumerco. They were disenchanted with the slow progress in building profits in other parts of the company. Some security analysts had gone so far as to speculate that EG would make a good breakup play. EG Corporation’s board and senior management were frustrated by their inability to convince the market that EG should be more highly valued.