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Donderdag 12 juni 2014

Professor dr. Gerard Mertens

Open Universiteit Nederland

Royal Ahold (Koninklijke Ahold) is one of the world’s largest international retail grocery and food service companies

At its peak in 2001, Ahold had 5,155 stores in 27 countries 250,000 employees €30.6 billion in market capitalization €66.6 billion in sales €1.1 billion in profits

Ahold was a successful family business under the Heijn family Founded in 1887 by Albert Heijn IPO in 1948

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Ahold underwent a transition to a management controlled firm in 1989 It generated more than 1,000% return for its shareholders Ahold became “Europe’s Enron”

Failed strategy Accounting scandal Firing of management Shareholder litigation Shareholders lost all returns since 1989

Policymakers were rethinking their approach to corporate governance Tabaksblat Committee Sarbanes-Oxley Act (using Ahold as an example)

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In the 1950s to mid 1980s Albert Heijn expaned its operations 1952: first self-service store 1955: first supermarket 1976: first operations outside the Netherlands (Spain, Cada

Diaz) 1977: first acquisition in United States (BI-LO, $60 million,

Souteastern board) 1981: second acquisition in United States (Giant Food, $35

million, Pennsylvania) 1981: purchase of Spanish sherry producer Luis Paez

In the mid-1980s Ahold evolved into a food company with a dominant position in the Netherlands, fragmented operations in other European countries and a solid base in the US

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Pierre Everaert (board member) found himself in a difficult situation The management board contained his rival Cees van der Hoeven

and the majority of the management board had voted for him as the successor of Ab Heijn

In December 1992 Pierre Everaert left for Philips Cees van der Hoeven became CEO but also retained his position of

CFO! Shareholder wealth maximization becomes central to Ahold’s

policy 1. Profit growth is the main target

Everaert introduced a 10% growth in EPS target and van der Hoeven sets an even higher target of 15% annual growth in EPS (10% from internal growth and 5% external growth)

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2. Investor relations becomes an important task for the management team Ahold won multiple investor relations awards From 1990 to 2003 Ahold won the award for best

company seven times at the “Day of the Share” 3. The corporate policy is revised

Under Ab Heijn the policy was based on a stakeholder approach where the interests of customers, employees, buyers, shareholders and other groups were balanced

In 1992, Cees van der Hoeven signs his first annual report as CEO and the corporate policy now is about the increasing the return earned by shareholders

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In 1996 the European Retail Alliance is dissolved Ahold sells its stakes in Argyll and Casino and Argyll and Casino

sell their stakes in Ahold Ahold places these shares with pension fund ABP,

bank/insurance companies Achmea, ING and Fortis Van der Hoeven also issues certified preferred financing shares

By 1997, 34% of Ahold’s shares are held by friendly institutional investors

The certificates are stripped of their voting rights Voting rights are controlled by Stichting Administratiekantoor

Preferente Financieringsaandelen Ahold (SAPFA) that is management controlled and controls about 60% of the votes on the general meeting (assuming normal turn-out)

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Under Cees van der Hoeven Ahold’s strategy is to Operate modern, competitive stores under their own name,

management and local identity Invest in supermarket technology and training Reach the greatest number of customers

Ahold tries to accomplish this by Maintaining its dominant position in the Netherlands Developing critical mass in the United States in order to

obtain synergies Considering other international opportunities

Ahold wants to be in the same league as Wal-Mart and Carrefour (number one and two ranked retail companies) whereas Ahold is currently a distant third

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Van der Hoeven’s stated growth objective of 15% annual EPS growth can only be sustained through active acquisitions

This puts significant pressure on Ahold to do deals As the base increases, Ahold needs bigger and bigger deals “Ahold is hooked on the acquisitions drug” (HSBC analyst report,

September 15, 2000) Since Ahold paid for the acquisitions in cash and raised cash

through equity issues, a high stock price is important The higher the stock price, the smaller the equity issue needed

to finance acquisitions (despite being listed on NYSE since 1993) As long as acquisitions immediately and sufficiently contributed

to EPS, Ahold could sustain the 15% EPS growth target

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Beginning 1996 Ahold started to expand outside the US and Europe 1996: Acquisition of Supermercados Brompreco (Brazil) 1996: Joint venture with China Venturetech Investment (50%, China) 1996: Joint venture with Kuok Group (60%, Malaysia and Singapore) 1997: Joint venture with Central Robinson Group (49%, Thailand) 1997: Acquisition of PT Putra Serasi Pioneerindo (70%, Indonesia) 1998: Joint venture with Velox Retail Holdings (50%, Argentina, Chile,

Equador, Paraguay, Peru) 1999: Joint venture with La Fragua (50%, El Salvador, Guatemala,

Honduras) 2002: Joint venture with CSU International Holding (33%, Costa Rica,

Nicaragua)

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Ahold used Dutch GAAP (Generally Accepted Accounting Principles) to its advantage Under Dutch GAAP goodwill purchased in an acquisition is

immediately charged against shareholders’ equity and does not impact earnings

US GAAP requires goodwill to be capitalized and amortized over over a maximum of 40 years

As Ahold pays more for its acquisitions relative to the book value of these companies the difference between Dutch GAAP and US GAAP is expected to widen over time

This became painfully clear in 2002 Ahold reported a 16% EPS growth according to Dutch

GAAP (earnings €1,113 million). Including these effects EPS declined 17% (earnings of €119.8 million)

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US GAAP changed in 2001; goodwill is subject to impairment test Ahold reported a goodwill impairment of €728 million related to

lower valuation of Disco joint venture Investors noted the large difference between Dutch GAAP and US

GAAP net income and became worried A footnote in the annual report also mentioned that smaller

acquisitions were counted as organic growth for years (Ahold was more dependent on external growth than previously believed?)

Investors lost confidence and the stock price declined by 9.6% on the news

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Ahold was required to buy the remaining stake in the Disco joint venture of the Peirano family for an inflated price

Jeronimo Martins, Ahold’s Portugese partner, and Ahold ended up disagreeing over the value of 300 stores. This ended their joint expansion plans

In 2002, the chairman of ICA Ahold went public with the shareholder agreement that showed that Ahold was obliged to buy him and ICA Forbundet out in April 2004 for an estimated price of €2.5 billion

The annual report of Ahold did not mention this obligation and the stock price dropped by -11.1%

In 2002, Cees van der Hoeven has to report the first quarterly loss in 29 years, acknowledge the failure of the 15% EPS growth target and issue a profit warning

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On Monday 23 February Ahold announced that earnings would be lower than previously reported end of year 2002

The vendor rebates (promotional allowances) paid by food vendors such as Sara Lee and Unilever to US Food Service for selling a certain amount of their goods had been book early

This lead to inflated earnings for 2000 and 2001 and the first 3 quarters of 2002

In addition, Ahold fully consolidated 4 subsidiaries (ICA, Disco, Bompreco and Jeronimo Martins Retail) while it not have full control according to secret comfort letters

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The consequences were dramatic In 2001 earnings dropped from a €1.113 billion profit to a

€254 million loss In 2002 losses started at €1.2 billion and ended with a €4.3

billion loss Cees van der Hoeven and the CFO, Michiel Meurs, were fired

and the chairman of the supervisory board (Henny de Ruiter) was now in charge of the day-to-day operations of the company until another CEO was found

The stock price collapsed (-59.4%), the bond price plummeted from near par to less than 63 eurocents

Standard & Poors downgraded Ahold from BBB to junk and Moody’s downgraded Baa3 to B1

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Van der Hoeven dominated the management board Voted for van der Hoeven over Everaert as CEO Forced Ab Heijn to retire Van der Hoeven was both CEO and CFO

By 1998 van der Hoeven was surrounded with managers that were loyal to him and that owed him for their positions

From 1998-2002 there was a 50% board turnover Management of former acquisitions were introduced

Grize (Stop&Shop), Miller (US Food Service) and Noodle (Giant Food Stores)

They had to monitor the subsidiaries they previously managed

Management board was not effictive in questioning Cees van der Hoeven

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OECD corporate governance principles: supervisory board must be independent, capable and devote sufficient time to the firm

Ahold’s supervisory board did not meet these requirements In 1987 five out of nine members were overcommitted In 1998 four out of seven members were overcommitted

De Ruiter (chairman of the supervisory board) has 17 other supervisory board positions and is the most powerful supervisory board person in the Netherlands

De Soet and Nelissen each with 18 directorships were overcommitted as well

These directors are too busy to monitor Ahold closely?

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Board members were not independent Nelissen (former CEO of ABN-Amro, Ahold’s house bank) was

also on the board of Ahold’s auditor Deloitte Sir Perry was from Unilever (a major supplier of Ahold) Former managers became supervisors (Ab Heijn, Bogomolny

(First National Supermarkets), Fahlin (ICA), Tobin (Stop&Shop)) Management board influences the composition of the supervisory board

“This is the habit in Ahold” (Smit, 2004) Politicians on the board were not qualified

Schneider, former US ambassador to the Netherlands,said “I do not feel responsible. I am not a businessperson” (Intermediair, June 12, 2003)

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Ahold started to reward managers with options in 1986 The number of people that qualify for the option plan explodes

from 150 in 1987 to 6,700 employees in 2001 Stock option grants were based on growth in net income where

US subsidiaries were set higher targets on their local performance Customers could participate in Ahold’s Vaste Klantenfonds Ahold’s management board was granted many options but they

sold the stock after exercising these options They were not long-term shareholders in the company

In June 2002 board members announced their intentions to purchase their shares in order to support the stock price

However, it was too little too late. Only Meurs, de Raad and Andreae (not van der Hoeven) bought shares by September 2002

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Several institutional shareholders (AEGON, Achmea, ING, Fortis, Aviva, Eureko) that own stakes of 5% or more in Ahold

Institutional investors qualify for tax exemption if they own more than 5% in a company

Combined stake amounts to more than 30% of Ahold’s shares Institutional shareholders owned certified financing preferred

shares and could not vote at general meeting Voting rights are controlled by Stichting Administratiekantoor

Preferente Financieringsaandelen Ahold (SAPFA) that is management controlled and controls about 60% of the votes on the general meeting (assuming normal turn-out)

Institutional investors were not active monitors of Ahold, which is surprising given the size of their shareholdings

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Nelissen (former CEO of ABN-Amro) sat on Ahold’s board and van der Hoeven sat on ABN-Amro’s board and as of 2001 on ABN-Amro’s audit committee

ABN-Amro lead managed several large equity and debt issues of Ahold and earned a significant part of the $384.2 million in gross fees

ABN-Amro’s annual report showed that Cees van der Hoeven had a personal loan of €5 million

Ahold has a weak internal control structure and a lack of knowledge about Dutch and US GAAP

Deloitte & Touche detected fraud at US Food Service at an early stage and was not informed about the conflicting comfort letters

In litigation they are held responsible for Ahold’s losses. But are they to blame?

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Corporate governance mechanisms were there in form not in substance

Management board left van der Hoeven unchecked Supervisory board was not independent and some members

were not qualified and ‘over’committed Incentive compensation focussed on EPS growth and provided a

direct motivation for focussing on growth rather than shareholder value

Institutional investors could not vote and were passive Financial analysts were optimistic until the end Ahold’s housebank ABN-Amro was passive Auditor caught the fraud early but internal audit controls within

Ahold were lacking Too few trained people that knew the difference between

Dutch and US GAAP

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