American Home Products Corporation

HarvardBusinessSchool9-283-065Rev.January24,1989Thiscasewaspreparedasabasisforclassdiscussionratherthantoillustrateeithereffectiveorineffectivehandlingofanadministrativesituation.Copyright©1983bythePresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685orwriteHarvardBusinessSchoolPublishing,Boston,MA02163.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,usedinaspreadsheet,ortransmittedinanyformorbyanymeans—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.1AmericanHomeProductsCorporationIjustdon’tliketoowemoney,”saidWilliamF.Laportewhenaskedabouthiscompany’salmostdebt-freebalancesheetandgrowingcashreserves.1Theexchangetookplacein1968,fouryearsafterLaportetookoveraschiefexecutiveofAmericanHomeProducts(AHP).Thesubsequent13yearsdidnotimprovehisopinionofdebtfinancing.DuringLaporte’stenureaschiefexecutive,AHP’sabstinencefromdebtcontinued,whilethegrowthinitscashbalanceoutpacedimpressivegrowthinbothsalesandearnings.Attheendof1980AHPhadalmostnodebtandacashbalanceequalto40%ofitsnetworth.In1981,after17yearsaschiefexecutive,Laportewasapproachingretirement,andanalystsspeculatedonthepossibilityofamoreaggressivecapitalstructurepolicy.TheCompanyAHP’s1981salesofmorethan$4billionwereproducedbyover1,500heavilymarketedbrandsinfourlinesofbusiness:prescriptiondrugs,packaged(i.e.,proprietaryorover-the-counter)drugs,foodproducts,andhousewaresandhouseholdproducts.Consumerproductsincludedadiversityofwell-knownbrandnames,suchasAnacin,PreparationH,Sani-Flush,ChefBoyardee,Gulden’sMustard,Woolite,andtheEkcolineofhousewares.AHP’slargestandmostprofitablebusiness—prescriptiondrugs—includedsizablemarketsharesinantihypertensives,tranquilizers,andoralcontraceptives.AHP’ssuccessintheselinesofbusinesswasbuiltonmarketingexpertise.Whethertheproductwasanoralcontraceptiveoratoiletbowlcleaner,“theysellthehelloutofeverythingthey’vegot,”saidonecompetitor.2AHP’sCorporateCultureAHPhadadistinctivecorporateculturethat,intheviewofmanyobservers,emanatedfromitschiefexecutive.Thisculturehadseveralcomponents.Onewasreticence.ApollofWallStreetanalystsrankedAHPlastincorporatecommunicabilityamong21drugcompanies.AsecondelementofAHP’smanagerialphilosophywasfrugalityandtightfinancialcontrol.Reportedly,allexpendituresgreaterthan$500hadtobepersonallyapprovedbyWilliamLaporte,evenifauthorizedinthecorporatebudget.1Forbes,September1,1968,p.87.2WallStreetJournal,December28,1981,p.1.283-065AmericanHomeProductsCorporation2OtherimportantcomponentsofAHP’sculturewereconservatismandrisk-aversion.AHPconsistentlyavoidedmuchoftheriskofnew-productdevelopmentandintroductioninthevolatiledrugindustry.Mostofitsnewproductseitherwereacquiredorlicensedaftertheirdevelopmentbyotherfirmsortheywerecopiesofnewproductsintroducedbycompetitors.AsubstantialnumberofAHP’snewproductswerecleverextensionsofexistingproducts.AHPthusavoidedriskygamblesonR&Dandnew-productintroductionsanduseditsmarketingprowesstopromoteacquiredproductsandproductextensions.Whentrulyinnovativeproductswereintroducedbycompetitors,AHPrespondedwith“me-too”productsandreliedonitsmarketingclouttoerodecompetitors’headstart.Finally,anintegralpartofAHP’scorporatephilosophywasthefirm’slong-standingpolicyofcentralizingcompleteauthorityinthechiefexecutive.Thecurrentincumbentwasdescribedbyaformercolleagueasa“brilliantmarketerandtightfistedspender.”3Laporte’smanagementstylewascharacterizedasmanagementfromthetop,unparalleledinanyfirmofcomparablesize.Thoughreticentindiscussingoperations,Laportewasemphaticinstatingtheobjectiveunderlyinghisuseofthisauthority:“Werunthebusinessfortheshareholders.”4TheauthorofaBusinessWeekarticleonthefirmcommented,“Oneofthemostcommonbusinessplatitudesisthatacorporation’sprimarymissionistomakemoneyforitsstockholdersandtomaximizeprofitsbyminimizingcosts.AtAmericanHome,theseideasareadogmaticwayoflife.”5AHP’sPerformanceThemanagerialphilosophydescribedaboveproducedimpressiveresults.AHP’sfinancialperformancewascharacterizedbystable,consistentgrowthandprofitability.Thefirmhadincreasedsales,earnings,anddividendsfor29consecutiveyearsthrough1981.Thisgrowthhadbeenconsistentandsteady,ranginginrecentyearsbetween10%and15%annually(seeExhibit1for10years’reviewofAHP’sperformance).UnderLaporte’sstewardship,AHP’sreturnonequityhadrisenfromabout25%inthe1960sto30%inthe1980s.Becauseofitspassionforparsimony,AHPhadbeenabletofinancethisgrowthinternallywhilepayingoutalmost60%ofitsannualearningsasdividends.DuringLaporte’sreignaschiefexecutive,AHP’sprice/earningsratiohadfallenbyabout60%,reflectingthemarketwidecollapseofP/Eratiosofgrowthcompanies.Nonetheless,AHP’smorethansixfoldgrowthinearningspersharehadpushedupthevalueofitsstockbyafactorofthreeduringhistenure.AHP’sstockwaswidelyheldbymajorinstitutionalinvestors.Itspopularityamonginvestorsreflectedanalysts’assessmentofAHP’smanagement.Intheopinionofoneanalyst,“WhenyouthinkofAmericanHomeProducts,youthinkofthebest-managedcompanyinthewholepharmaceuticalfield.”6Nevertheless,AHP’sexc