Scripps Network Interactive (E.W. Scripps spinoff)

(History of E.W. Scripps here instead)

Public Company
Incorporated: 1890 as Scripps-McRae League
Employees: 4,800
Sales: $728.66 million (2011)
Stock Exchanges: New York
Ticker Symbol: SSP

The E.W. Scripps Company is a U.S. media company focused on newspaper publishing and television. Scripps operates daily and community papers in 13 markets, as well as 19 broadcast television stations, and Scripps Howard News Service. The group owns syndication rights to the 150 news features and comic strips of United Media, which it outsourced to Universal Uclick in 2011. A restructuring the same year refocused Scripps on its original strength, local news. Looking forward, the company is committed to becoming an innovator in delivering content to mobile devices.

“PENNY PRESS” ORIGINS

The E.W. Scripps Company began life in 1878 as Scripps and Sweeney Co. when 24-year-old Edward Willis Scripps, with his cousin John Sweeney and other family members, founded his first newspaper, the Cleveland Penny Press. Scripps had $10,000 in capital and owned 20 percent of the paper. The rest was owned by his half-brothers George Henry and James Edmund Scripps (each of whom received 30 percent stakes in the company) and other partners.

E. W. Scripps was a populist who thought that most newspapers were geared toward the rich. He wanted his newspaper to keep the poor informed through short, simple stories that could be understood by those without extensive education. He got many of these ideas from James E. Scripps, an English immigrant who started theDetroit Evening News in 1873. E. W. also added his interest in personal stories to the mix, later giving a raise to an editor who published the fact that he had been fined $10 for riding a horse while intoxicated.

At the time the Cleveland Penny Press was founded, most newspapers had a party affiliation. They also sold for more than a penny, and many contemporaries were skeptical that the Press would succeed. E. W. Scripps’s formula proved successful, however, and within weeks the Cleveland Penny Press had a circulation of approximately 10,000. It was not a profitable operation, however, until James E. Scripps ordered E. W. to run the paper for $400 a week.

As soon as the Penny Press was making money, E. W. persuaded his brothers to buy the St. Louis Chronicle.

He then spent a year in St. Louis managing the paper. E. W. bought a 55 percent interest in the Penny Post, part of which was already owned by James E., went to Cincinnati to manage it, and changed the paper’s name to the Cincinnati Post. He subsequently began taking on political corruption and winning circulation.

From 1887 to 1889 James E. Scripps was in Europe receiving medical treatment while E. W. managed theDetroit News. Although E. W. expanded advertising and circulation, James E. was angry with the changes his brother made. Upon his return, James E. removed E. W. from every position he could. In 1890 E. W. started his own paper, the Kentucky Post, in Covington, across the Ohio River from Cincinnati.

PARTNERSHIP WITH MILTON MCRAE

Also in 1890 E. W. Scripps entered into a partnership with his business manager, Milton McRae. The two called their newspaper company the Scripps-McRae League. McRae handled day-to-day management of the papers and received one-third of the profits, while Scripps set editorial guidelines and long-term policy. In 1890, with his business running smoothly, Scripps began building a ranch outside of San Diego, California.

In 1894 George Scripps joined Scripps-McRae. This gave the group a controlling interest in the Cleveland Press. Later in the 1890s the group started the Akron Press and Kansas City World. As his chain expanded, E. W. Scripps chose young, growing towns to start new newspapers. He invested as little in machinery or plants as possible, usually buying old presses and renting run-down buildings. He would then hire young ambitious editors who were given a minority stake in their paper. Many of them became rich if their newspapers succeeded. With E. W. Scripps spending most of his time in California, McRae often exceeded his authority and put editorial pressure on newspaper editors. Scripps would periodically venture out of California, discover what McRae was doing, and reverse it.

Scripps next began a series of West Coast newspapers unassociated with the Scripps-McRae League group. They included papers in Los Angeles, San Francisco, Fresno, Berkeley, and Oakland, California, as well as Seattle, Tacoma, and Spokane, Washington. In 1900 George Scripps died, leaving his stock to E. W. James E. Scripps contested the will, however, and James E. and E. W. settled out of court. E. W. was forced to give all of his stock in the Detroit newspapers to James E., who in return gave E. W. all of his stock in newspapers outside Detroit.

In 1902 Scripps started the Newspaper Enterprise Association (NEA), a service for exchanging and distributing illustrations, cartoons, editorials, and articles on such specialized subjects as sports and fashion. Newspapers in the Scripps chain paid a monthly fee and received information and illustrations none of them could have afforded individually. Although the NEA was originally only for Scripps papers, demand for its services was so great that it soon became available to any newspaper. In 1906 Scripps entered another period of expansion, buying or starting papers in Denver and Pueblo, Colorado; Evansville and Terre Haute, Indiana; Memphis and Nashville, Tennessee; Dallas, Texas; and Oklahoma.

WIRE SERVICE

In 1907 Scripps combined the NEA, the Scripps McRae Press Association, and Publishers Press into the United Press Association wire service in order to provide 12,000 words of copy a day by telegraph to 369 subscribers in the United States. A similar service, the Associated Press (AP), already existed and was far larger and better financed. Scripps viewed AP as monopolistic and too close to the establishment and deliberately set out to oppose it. AP was also geared toward morning newspapers, while most of Scripps’s were evening newspapers. Scripps therefore had each of his papers send out stories from their area during the day and combined them with information gathered at offices set up in important news producing cities such as Washington, D.C., and other world capitals.

In 1908 E. W. Scripps retired from active management, appointing his son James G. Scripps chairman of the board. During World War I, E. W. was a passionate advocate of U.S. intervention on the side of the Allies and moved to Washington, D.C., to push his cause. Shortly thereafter, a family crisis erupted, during which Scripps’s son James detached the five West Coast newspapers and the Dallas Dispatch from the chain. In 1918 United Press caused a storm of controversy when it reported the end of World War I four days before it actually ended. E. W. Scripps’s health started declining during the war, and by its end he was largely living on his yacht. In 1920 he gave direct control of the chain to

his son Robert and Roy W. Howard and in 1922 incorporated all of his stock, news services, and newspapers into The E.W. Scripps Company, based in Cincinnati. The profits went to the Scripps Trust, set up for his heirs.

Despite his semiretirement, Scripps had the energy to direct a last burst of expansion in the 1920s. He made Roy Howard chairman and business director in 1921. Howard had played an important role in building the United Press. By 1924, he was placed in full charge of both business and editorial by E. W.’s son Robert. The newspaper chain was renamed the Scripps Howard League. Beginning in 1921, newspapers were bought or started in Birmingham, Alabama; Indianapolis, Indiana; Baltimore, Maryland; and Pittsburgh. Sales for 1925 came to about $28 million. In 1926 the Denver-based Rocky Mountain News and Times were bought.

DEATH OF FOUNDER

At the time of E. W. Scripps’s death in 1926, the Scripps Howard League was the second-largest newspaper chain in the United States, after William Randolph Hearst’s. E. W. Scripps was one of the most successful newspaper owners of the era of the so-called Press Barons. Because of his reclusive personality, however, he was one of the least known. He stood up for the working class but in many ways despised them. In addition, he encouraged his newspapers to crusade for female suffrage but considered women inferior to men.

In all, Scripps started 32 newspapers. Some of them did not stay in business long. Some were unsophisticated but remained fiercely independent. Their emphasis on human interest stories was welcomed by new immigrants who had lost their former communities.

Roy Howard’s stock holding in the company was small, but with his strong personality he influenced the Scripps heirs and took working control of the company, managing it as if it were his own and bringing his own family into the company hierarchy. In 1927 Scripps Howard bought the New York Telegram. Four years later, it purchased the New York World and merged the two newspapers into the World-Telegram. In 1936 Howard gave up his position as chairman of the chain and became president.

In the 1930s United Press built a network of bureaus in South and Central America and in the Far East, although its coverage was weaker in Europe, and it remained smaller than AP. Also that decade the newspaper chain began to shrink as less profitable papers were sold or consolidated and six-day evening papers began to lose their appeal. During World War II Ernie Pyle came to fame as a Scripps Howard columnist reporting from the European battle theater, before losing his life on a Pacific battlefield.

POSTWAR GROWTH

After World War II Scripps Howard’s sales grew dramatically, from nearly $50 million in 1940 to more than $100 million in 1948 and $140 million in 1952. Profits, however, were not increasing. Due to the rising cost of labor, newsprint, and printing machinery, profits were hovering around $10 million, according to an October 1953Forbes article. In 1953 E. W. Scripps’s grandson Charles E. Scripps became company chairman at the age of 33, and Roy Howard’s son Jack R. became company president at the age of 42.

By this time Scripps Howard had 19 newspapers with a total circulation of four million. The company was also expanding into broadcasting and owned radio and television stations in Cleveland and Cincinnati as well as in Knoxville and Memphis, Tennessee. The Scripps family trust still owned nearly 75 percent of the company. Management was decentralized with general operations conducted in New York, editorial policy in Washington, and finances in Cincinnati.

In 1958 United Press merged with the Hearst Corporation’s troubled International News Service to become United Press International (UPI). Hearst gained 5 percent ownership of UPI, but most former International News Service employees were laid off. Also that year Scripps bought the Cincinnati Times-Star and merged it into the Post, giving the company control of all of Cincinnati’s daily newspapers. The Cincinnati Enquirer, which had been acquired in 1956, was carefully kept separate from the other papers to diminish possible charges of a monopoly. In 1964, however, the U.S. Department of Justice accused Scripps Howard of owning a monopoly and ordered it to sell the Enquirer. The Enquirer was far stronger financially, but the trust’s lawyers advised the firm that it would be better off selling it, rather than trying to sell the Post.

EXPANDING THE BROADCAST DIVISION

In the meantime, Scripps continued building its broadcast division, buying WPTV in West Palm Beach, Florida, for $2 million in 1961. In 1963 the broadcast properties were taken public under the name Scripps Howard Broadcasting Company. The initial offering quickly sold out, leaving The E.W. Scripps Company with two-thirds ownership.

Roy Howard died in 1964. One of the problems Jack Howard (who had succeed Roy Howard as president in 1953) faced was that the company was still run for the beneficiaries of the E.W. Scripps trust, and the trustees’ lawyers sometimes had a large role in significant corporate decisions. More importantly, with the rise of television after World War II, evening newspapers across the United States found their circulations declining: People read the newspaper in the morning and watched the news on television in the evening.

In addition, management of Scripps had become so conservative that critics charged it had no long-range plans and did little beyond preserve its assets. More and more Scripps newspapers took advantage of a law that allowed newspapers in danger of failing to partially merge with stronger rivals, keeping only editorial departments separate. By 1980, eight of the 16 remaining Scripps dailies were in such arrangements, a higher percentage than any other major chain.

In 1976 Jack Howard retired as president of E.W. Scripps but remained a director of E.W. Scripps and chairman of Scripps Howard Broadcasting. Edward Estlow became E.W. Scripps’s first CEO who was not from the Scripps or Howard families. He had been the chain’s general business manager.

Scripps slowly began to change in the 1970s. In 1977 the company bought for $29 million the 90 percent of Media Investment Co. that it did not already own. Media Investment had holdings in some of Scripps’s newspapers and radio and television stations. The purpose of acquiring the investment company was to permit employees to own shares in the diversified E.W. Scripps Company.

REFOCUSING AND GOING PUBLIC

UPI losses were continuing to increase: $24 million between 1975 and 1980. In addition some of Scripps’s newspapers were operating in the red, including the flagship Cleveland Press. In 1980 Scripps sold the Pressfor an undisclosed amount to Cleveland retailer Joseph E. Cole. The chain then had 16 daily newspapers, making it the seventh largest in the United States. Scripps continued a policy of not reporting financial data, but the Wall Street Journal in November 1980 cited its sales at approximately $550 million.

In 1981 The E.W. Scripps Company began looking for a buyer for UPI. Estlow said that part of the reason was the possibility that the beneficiaries of the Scripps trust fund might bring legal action forcing the closing or selling of the wire service. In 1982 the firm found a buyer for UPI: Media News Corporation, a private firm started for the purpose of buying UPI, which had 224 bureaus and 2,000 employees. The purchase price was not disclosed, but industry analysts felt it could not have been much more than the value of UPI’s assets, which the New York Times, in a June 1982 article, estimated were worth about $20 million.

In the early 1980s Scripps began funneling money into its chain of weekly business journals. The publications were losing readership and advertising revenue, and some criticized them as lacking hard news. In 1985 Lawrence A. Leser became president of Scripps and quickly began making changes. He sold many of the weeklies, as well as a videotape publishing business, and concentrated on building the cable, broadcast, and daily newspaper operations, particularly in the rapidly growing South and West.

In 1986 the company bought two television stations from Capital Cities Communications and the American Broadcasting Co. Scripps paid an estimated $246 million for WXYZ in Detroit and WFTS in Tampa. The company was also building a string of cable television systems. In 1986 Scripps merged with the John P. Scripps newspaper chain, which comprised six California newspapers and one Washington newspaper.

PREPARING FOR PUBLIC OWNERSHIP

These purchases, along with a cable system being built in Sacramento, left the company with millions of dollars in debt. Partly in an effort to pay off this debt, the Scripps family members who controlled the Scripps trust fund decided to take the company public. In 1987, as a prelude to its stock offering, the firm officially released financial data for the first time, reporting operating income of $150 million on sales of $1.15 billion. It owned 20 daily newspapers and nine television stations and cable systems in 10 states. The 1988 stock offering left the Scripps trust with approximately 75 percent ownership of the company.

In December 1988 The E.W. Scripps Company formed Scripps Howard Productions to produce and market television programs. In February 1989 it sold the six-day Florida Sun-Tattler for an undisclosed amount and bought Cable USA’s system in Carroll County, Georgia. Profits for 1989 were $89.3 million on sales of $1.27 billion.

In 1990 Scripps began the SportSouth Network to provide regional sports programming on cable television in six southern states. Most of the firm’s revenue continued to come from newspapers, but it believed that future growth would come from cable television. As of the early 1990s, the firm had 672,000 cable subscribers, making it one of the 20-largest cable system operators in the United States.

The E.W. Scripps Company also negotiated to buy WMAR-TV in Baltimore from Gillett Holdings for $154.7 million. Scripps backed out of the deal at the last minute and was sued by Gillett. The firms settled out of court, and Scripps bought the station for $125 million in cash. In late 1991 the company announced a modernization of the Pittsburgh Press delivery systems. The modernization, which would cause hundreds of layoffs, resulted in a crippling strike that lasted well into 1992. The newspaper was sold on December 31, 1992.

INCREASED EMPHASIS ON TELEVISION

In 1993 The E.W. Scripps Company sold its Pharos Books and World Almanac Education units to K-III Communications and also sold its four radio stations, its television station in Memphis, Tennessee, and newspapers in Tulare, California, and San Juan, Puerto Rico. These moves occurred at the same time that the company was shifting to an increased emphasis on television and specifically on television content as opposed to simply broadcasting. In March 1994 The E.W. Scripps Company purchased Cinetel Productions, a leading independent producer of cable-television programming.

Ownership of Cinetel helped the company launch a new cable network, Home & Garden Television (HGTV), in late 1994. HGTV, which was available in 48.4 million cable homes by early 1999, marked the beginning of the company’s cable narrowcasting strategy, which it called “category television.” The aim was to become the predominant player in particular cable television categories. HGTV’s category was that of home decorating, improvement, and maintenance; landscaping; and gardening.

In 1994 Charles E. Scripps retired as company chairman, having served in that position since 1953, and was succeeded by Leser. Two years later, William R. Burleigh was named president and CEO. Meantime, The E.W. Scripps Company continued to de-emphasize its broadcasting side when it sold its cable systems to Comcast Corporation in November 1995 for $1.58 billion. On the newspaper side, the company divested its Watsonville, California, daily in 1995 and spent $120 million in 1996 to acquire the Vero Beach Press Journal, a daily.

In August 1997 The E.W. Scripps Company traded its daily newspapers in Monterey and San Luis Obispo, California, to Knight-Ridder, Inc. for the Daily Camera, a newspaper in Boulder, Colorado. In October of that same year the company paid $775 million in cash, the firm’s largest acquisition in history, for the media assets of Harte-Hanks Communications Inc., which included five daily newspapers in Texas and one in South Carolina, a group of community newspapers in Texas, and a television and radio station in San Antonio.

This purchase immediately led to the company’s acquisition of a second cable category network as the television and radio station were traded for a 56 percent controlling interest in the Food Network, a cable network featuring programming on food and nutrition. In early 1999 The E.W. Scripps Company sold the community newspapers it gained via Harte-Hanks to Lion-heart Holdings LLC, a community newspaper group based in Fort Worth, Texas.

In May 1998 the company sold Scripps Howard Productions, and later that year Cinetel Productions changed its name to Scripps Productions. E.W. Scripps Company launched its third cable category network, Do-It-Yourself, in 1999. The company’s category television unit was its fastest-growing operation, with revenues reaching $148.6 million in 1998, an increase of 76.5 percent over the previous year.

2000 AND BEYOND

As it entered the 21st century, the company’s 10 broadcast television stations (six ABC, three NBC, and one independent) reached an estimated 10 percent of all U.S. homes. Scripps was one of the largest independent operators of ABC affiliates, and the company’s cable television networks experienced fast and continuous growth as well. HGTV climbed to more than 78 million subscribers in the early years of the 2000s, while the Food Network had more than 75 million subscribers.

During this time, E.W. Scripps named a new leader. Ken Lowe first became president and then CEO of the company. Lowe had joined E.W. Scripps in the 1980s, working in the radio broadcast department. He moved on to the cable operations in the 1990s and there conceived and implemented his idea for the home and garden network HGTV. Scripps’s revenues in 2001 reached $1.4 billion, with the majority (51 percent) generated from the newspaper business. Nineteen percent of 2001 revenues came from broadcast television, 24 percent from category television, and the remaining 6 percent from licensing and other media.

Scripps’s subsidiary Shop at Home Network, LLC (acquired in whole in 2002), launched a website during this time, allowing program viewers and Internet surfers to shop electronically. Shop at Home Network programming also continued to be transmitted via satellite to cable television systems, direct broadcast satellite systems, and television stations. Sales for Shop at Home Network in 2002 were $195.8 million.

By 2002 Scripps newspapers were serving 20 markets in the United States, spanning Washington State to Florida. Readership totaled 1.4 million daily and 1.7 million on Sunday, making Scripps the ninth-largest publisher of newspapers in the United States. Two hundred fifty Scripps newspapers sponsored the annual Scripps Howard National Spelling Bee, a tradition since 1940, in which by the early years of the 2000s some 10 million students participated annually.

Also during this time, the company launched the Fine Living Network, dedicated, in the words of a company spokesperson, “to the pursuit of personal passions and the art of getting the most from every moment in life.” Programs ranged in subject matter from travel and financial planning to yoga instruction and party planning. In 2004, due largely to its cable programming operations, and the advertising dollars it generated, Scripps announced higher than predicted profits, prompting a two-for-one stock split for its shareholders.

SNI SPIN-OFF

Scripps built up its interactive holdings before deciding to spin them off and return to a focus on local news. Online comparison-shopping service Shopzilla was acquired in June 2005, followed by uSwitch, a homeservices comparison-shopping site in the United Kingdom.

The Scripps group had continued to acquire newspapers, adding Boulder’s Colorado Daily at the end of September 2005. However, there were closures as well. The Birmingham Post-Herald was shut down in September 2005. The Cincinnati Post and Kentucky Post ceased publishing after their joint operating agreement with the Cincinnati Enquirer expired at the end of 2007.

Scripps sold the cable assets of Shop at Home to Jewelry Television in June 2006. Three months later, the remaining five broadcast television affiliates were divested for $170 million.

Scripps Networks Interactive, Inc. (SNI) was spun off to Scripps shareholders in July 2008. Its shares were traded on the New York Stock Exchange. The newly independent company included the five cable networks and the new comparison shopping services. Following the spin-off, an emphasis on local information again became the primary focus of The E.W. Scripps Company. The group had 10 television stations, daily newspapers in 15 markets, and United Media’s licensing and syndication business.

In July 2008 Richard A. Boehne became president and CEO. He had been an executive with the company for about a dozen years. He was a reporter and editor with the Cincinnati Post before joining the group’s corporate communications staff in 1988.

Scripps shut down the Rocky Mountain News on February 27, 2009, after failing to find a buyer for it. Scripps lost $199 million on revenues of $732 million in 2009. In June 2010 Scripps sold United Media Licensing to Iconix Brand Group for $175 million. This included syndication rights for Dilbert and Peanuts and character licensing rights for other United Media comics. The next year the syndication of United Media’s remaining comics was outsourced to Universal Uclick, a division of Andrews McMeel Universal (the Dilbert and Peanutsstrips had already transferred their syndication to Universal).

RENEWED FOCUS ON LOCAL NEWS

Scripps posted a consolidated loss of $16 million on revenues of $729 million in 2011, which was an off year for political advertising. Newspapers accounted for more than half (57 percent) of total revenues. At the end of the year the group acquired McGraw-Hill Broadcasting, Inc., paying $212 million for nine television stations, including five Azteca America stations serving Spanish-speaking communities in Colorado and California.

All the group’s digital operations were merged into a single unit in September 2011. Scripps was at the forefront of broadcasting local news content to smartphones and tablets. In late 2011 the group launched its own iPad app for its television stations. It was training its journalists to produce multimedia content with a “hyper-local” focus.

The E.W. Scripps Company’s 2011 restructuring refocused it on its original strength, local journalism. Digital content had emerged as a category of its own, and one in which Scripps innovated, working at the forefront of live broadcasting to mobile devices. With a media empire incorporating several television stations in addition to newspapers, the group remained relevant to the daily lives of millions across the United States.

KEY DATES

1878:

Edward Willis Scripps establishes the Cleveland Penny Press.

1907:

United Press wire service is established.

1922:

Company changes name to The E.W. Scripps Company.

1940:

Scripps takes over National Spelling Bee from a Louisville, Kentucky, newspaper.

1982:

Company sells UPI wire service to Media News Corporation.

1988:

Company goes public.

1994:

Home & Garden Television (HGTV) cable network is launched.

2008:

Scripps Networks Interactive (SNI) is spun off to shareholders.

2010:

United Media Licensing is sold to Iconix Brand Group.

2011:

Nine television stations are acquired from McGraw-Hill; syndication of United Media comic strips is outsourced to Universal Uclick.

Advanced Micro Devices

Public Company
Incorporated: 1969
Employees: 16,420
Sales: $6.01 billion (2007)
Stock Exchanges: New York
Ticker Symbol: AMD
NAICS: 334413 Semiconductor and Related Device Manufacturing

Advanced Micro Devices, Inc., (AMD) is one of the world leaders in the microprocessor industry, designing chips marketed in the computing and graphics markets. AMD sells single-core and multicore microprocessors for servers, workstations, laptops, and desktop personal computers. The company also sells embedded processors and other semiconductors for communications and networking applications as well as consumer electronics devices. AMD markets its products in North America, Europe, and Asia, deriving 40 percent of its annual revenue from sales to manufacturers based in China.

FINDING OPPORTUNITY: 1969-74

In 1968 Jerry Sanders (who had previously worked for Intel founder Robert Noyce) left his position as director of worldwide marketing at Fairchild Semiconductor. By May 1969 he and seven others officially launchedAdvanced Micro Devices, Inc. The company was incorporated with $100,000 with the purpose of building semiconductors for the electronics industry.

Although the company was initially headquartered in the living room of one of the cofounders, John Carey, it soon moved to two rooms in the back of a rug-cutting company in Santa Clara, California. By September of that year, AMD had raised the additional money it needed to begin manufacturing products and moved into its first permanent home, in Sunnyvale. In May 1970, AMD ended its first year with 53 employees and 18 products, but no sales.

The firm initially acted as an alternate source of chips, receiving products from other firms such as Fairchild and National Semiconductor and then redesigning them for greater speed and efficiency. Unlike other second-source companies, however, AMD was one of the first Silicon Valley firms to stress quality above all else, designing its chips to meet U.S. military specifications for semiconductors. At a time when the young computer industry was suffering from unreliable chips, this gave AMD an advantage. The firm began to cater to customers in the computer, telecommunications, and instrument industries who were growing quickly and who valued reliability highly enough to pay for it. AMD avoided producing chips for such inexpensive consumerPage 13  |  Top of Articleitems as calculators and watches, determining that these were only short-term markets.

THE INFLUENCE OF JERRY SANDERS

Sanders, the driving force behind AMD, also began instituting price incentives, relying heavily on salesmanship to keep the company afloat. To do this, he kept the company decentralized, breaking it into several product profit centers. As a result, engineers and designers were more aware of the business implications of their work than were their counterparts.

A flamboyant leader who flaunted his love of materialism, Sanders used his personality to push his small company into the public eye, giving it a larger presence than its size merited. While attempting to motivate employees through the desire to be as rich as he was becoming, Sanders stressed respect for those low on the company’s totem pole. He threw extravagant Christmas parties for everyone in the company and one year held a raffle, awarding $12,000 a year for 20 years to the winning employee, and showed up with a camera crew to record the prize delivery. These practices contrasted markedly with those of AMD’s more conservative competitors, including Intel and National Semiconductor, and quickly gave the firm an aggressive reputation.

IPO IN 1972

In September 1972 the company went public, selling 525,000 shares at $15 a share, bringing in $7.87 million. In January of the following year, the company’s first overseas manufacturing base, located in Penang, Malaysia, began volume production. By the end of AMD’s fifth year, there were nearly 1,500 employees making over 200 different products, many of them proprietary, and bringing in nearly $26.5 million in annual sales. To commemorate its five-year anniversary in May 1974, AMD began what was to become a renowned tradition, holding a gala party, this one a street fair attended by employees and their families, in which televisions, ten-speed bicycles, and barbecue grills were given away.

DEFINING THE FUTURE: 1974-79

AMD’s second five years gave the world a taste of the company’s most enduring trait, tenaciousness. Despite a dogged recession in 1974-75, when sales briefly slipped, the company grew during this period to $168 million, representing an average annual compound growth rate of over 60 percent. Part of the success of the period was due to the implementation of a 44-hour work week for the company’s staff. This was also a period of tremendous facilities expansion.

In 1975 the company received an infusion of cash ($30 million for 20 percent of its stock) from Siemens AG, a huge West German firm who wanted a foothold in the U.S. semiconductor market. In 1976 the company signed a cross-license agreement with Intel. Two years later the company formed a joint venture, called Advanced Micro Computers (AMC), with facilities in both Germany and the United States, to develop, produce, and market microcomputer products. The venture was dissolved a year later, in March 1979, and the company purchased the net assets of the domestic operations of AMC. Also in 1978, the company reached a major sales milestone of $100 million in annual revenue. In 1979 the company’s shares were listed on the New York Stock Exchange for the first time under the ticker AMD; that same year, production began at AMD’s newly constructed Austin, Texas, facility.

FINDING PREEMINENCE: 1980-83

The early 1980s were defined for AMD by two now famous corporate symbols. The first, called the “Age of Asparagus,” represented the company’s drive to increase the number of proprietary products offered to the marketplace. Like this lucrative crop, proprietary products take time to cultivate, but eventually bring excellent returns on the initial investment. The second symbol was a giant ocean wave. The “Catch the Wave” recruiting advertisements portrayed the company as an unstoppable force in the integrated circuit business, and unstoppable it was, at least for a time. AMD became a leader in research and development investment and by the end of fiscal 1981 the company had more than doubled its sales over 1979. Plants and facilities expanded with an emphasis on building in Texas. New production facilities were built in San Antonio, and more fabrication, or fab, space was added to the Austin plant as well. AMD had quickly become a major contender in the world semiconductor marketplace. In 1981 AMD’s chips went into space aboard the space shuttleColumbia. The following year, AMD and Intel signed a technology exchange agreement centering on the iAPX86 family of microprocessors and peripherals. That same year, in a minor setback, a group of engineers left the company to found Cypress Semiconductor. In 1983 the company introduced INT.STD.1000, the highest quality standard in the industry, and incorporated AMD Singapore.

WEATHERING HARD TIMES: 1984-89

In 1984 the Austin facility added Building 2, and the company was listed in a new book titled The 100 Best Companies to Work for in America. The following year, AMD made the Fortune 500 list for the first time, and Fabs 14 and 15 began operation in Austin. AMD celebrated its 15th year with one of the best sales years in company history. In the months following AMD’s anniversary, employees received record-setting profit sharing checks and celebrated Christmas with musical groups Chicago in San Francisco and Joe King Carrasco and the Crowns in Texas.

By 1986, however, the tides of change had swept the industry. Japanese semiconductor makers came to dominate the memory markets (up until then a mainstay for AMD) and a fierce downturn had taken hold, limiting demand for chips in general. AMD, along with the rest of the semiconductor industry, began looking for new ways to compete in an increasingly difficult environment. In September 1986, Tony Holbrook was named president of the company; the following month, weakened by the long-running recession, AMD announced its first workforce restructure in over a decade. In April 1987, AMD initiated an arbitration action against Intel. Later that year, the company merged with Monolithic Memories, Inc., acquiring the latter’s common stock in exchange for over 19 million shares of its own, a trade valued at $425 million. By 1989 AMD Chairman Jerry Sanders was talking about transformation: changing the entire company to compete in new markets, a process which began in October 1988, with the groundbreaking on the Submicron Development Center.

MAKING THE TRANSFORMATION: 1989-94

Finding new ways to compete led to the concept of AMD’s “Spheres of Influence.” For the transforming AMD, those spheres were microprocessors compatible with IBM computers, networking and communication chips, programmable logic devices, and high-performance memories. In addition, the company’s long survival depended on developing submicron process technology that would fill its manufacturing needs into the next century.

By its 25th anniversary, AMD had put to work every ounce of tenaciousness it had to achieve those goals, growing to be either number one or number two worldwide in every market it served, including the Microsoft Windows-compatible business. AMD became a preeminent supplier of flash, networking, telecommunications, and programmable logic chips as well.

In May 1989, the company established the office of the chief executive, consisting of the top three company executives. In March 1991, AMD introduced new versions of the Am386 microprocessor family, breaking the Intel monopoly. A mere seven months later, the company had shipped its millionth Am386. That year, Siemens sold off its interest in AMD.

In February of the following year, the company’s five-year arbitration with Intel ended, with AMD awarded full rights to make and sell the entire Am386 family of microprocessors. Early in 1993, the first members of the Am486 microprocessor family were introduced, and AMD and Fujitsu established a joint venture to produce flash memories, a new technology in which memory chips retained information even after the power was turned off. In July the Austin facility broke ground on Fab 25. In January 1994, computer reseller Compaq Computer Corporation and AMD formed a long-term alliance under which Am486 microprocessors would power Compaq computers. A month later, AMD employees began moving into One AMD Place in Sunnyvale, the company’s new headquarters, and Digital Equipment Corporation became the foundry for Am486 microprocessors. In March 1994, a federal jury confirmed AMD’s right to use Intel microcode in 287 math coprocessors, and the company celebrated its 25th anniversary with Rod Stewart in Sunnyvale and Bruce Hornsby in Austin.

FROM TRANSFORMATION TO TRANSCENDENCE: 1994-97

In January 1996, the company purchased Milpitas, California-based NexGen, Inc., a smaller semiconductor manufacturer founded in 1989. For fiscal 1998, the company posted net sales of $2.54 billion, a 7.9 percent increase, but also recorded a painful net loss on income of $104 million. In mid-1999, Hillsboro, Oregon-based Lattice Semiconductor Corp. purchased AMD’s semiconductor manufacturing unit Vantis Corp. for $500 million in cash.

With Microsoft holding the software market in one fist, and Intel holding the microprocessor market in another, companies including National Semiconductor bowed out of the microprocessor manufacturing business in the late 1990s, refocusing their efforts instead on core competencies. Other companies, according to Kathleen Doler’s August 1999 editorial in Electronic Business, “lost money six out of … nine fiscal quarters.” Indeed, AMD reported a 1999 second-quarter loss of $162 million. With “68 percent of its revenue derived from microprocessors and related products,” Doler said, it seemed only prudent that AMD would diversify into other products in order to stay alive in the 21st century.

NEW LEADERSHIP IN 2002

The race between AMD and its archrival, Intel, defined AMD’s progress during the first decade of the 21st century. On AMD’s side, the battle for market share would be led by a new face, as Sanders’s more than 30-year reign of command came to an end, ushering in a new era of leadership at the Sunnyvale company. Hector de J. Ruiz was appointed chief executive officer in 2002 and chairman two years later. Born in Piedras Negras, Mexico, Ruiz earned bachelor’s and master’s degrees in electrical engineering from the University of Texas before earning his doctorate degree in electrical engineering from Rice University in 1973. He joined Texas Instruments after completing his education, the beginning of a career that would be largely spent at Motorola. Ruiz spent 22 years at Motorola, eventually becoming president of the company’s semiconductor products division. He joined AMD as president and chief operating officer in 2000, quickly convincing Sanders that he had the skills and vision to lead AMD’s fight against Intel.

AMD enjoyed the technological upper hand over Intel as Ruiz took the helm. The company developed a way for chips to handle data in both 32-bit and 64-bit allotments, which increased chip performance substantially. The Athlon 64 processor line debuted in 2003, causing considerable unease at Intel’s headquarters. Intel followed AMD’s lead, admitting in 2004 that it was working on a clone of the Athlon 64, and the company also followed AMD’s lead in another important area. For years, AMD had maintained chip performance could be increased and energy consumption could be reduced by designing chips with more than one processing core. The company’s Opteron chip featured two processing cores, a dual-core processor that caught Intel napping, enabling AMD to claim another technological victory over its rival. Intel, which had looked for performance increases by increasing clock speeds, embraced AMD’s approach, revamped its micro-architecture, and, significantly, released its quad-core processor in November 2006, nearly a year before AMD released its first quad-core processor.

AMD FALTERS

After enjoying a technological advantage over Intel, AMD began to struggle, both financially and in keeping pace with Intel’s product launches. AMD stumbled with the release of its quad-core processor, code-named Barcelona, and it experienced problems with profitability that were exacerbated by a massive acquisition it completed in 2006. AMD acquired Canadian graphics chip firm ATI Technologies, a $5.4 billion deal that helped contribute to a numbing $3.3 billion loss in 2007. The company received some relief in November 2007 when Abu Dhabi’s Mubadala Development Co. paid $622 million for an 8.1 percent ownership stake, but the crux of its problems was its failure to execute in the market. Intel had cut costs, restructured its operations, and succeeded in beating AMD to market on several occasions with products that drew the applause of industry pundits. To keep pace with its larger rival, AMD needed to end a worrisome pattern of delayed and glitchy product launches and demonstrate the technological and marketing shrewdness that had underpinned its success for 40 years.

Company Perspectives

Over the course of AMD’s three decades in business, silicon and software have become the steel and plastic of the worldwide digital economy. Technology companies have become global pacesetters, making technical advances at a prodigious rate—always driving the industry to deliver more and more, faster and faster. However, “technology for technology’s sake” is not the way we do business at AMD. Our history is marked by a commitment to innovation that’s truly useful for customers—putting the real needs of people ahead of technical one-upmanship. AMD founder Jerry Sanders has always maintained that “customers should come first, at every stage of a company’s activities.” Our current CEO, Hector de Jesus Ruiz, continues to carry the torch, saying, “Customer-centric innovation is the pre-eminent value at AMD. It is our reason for being and our strategy for success.”

Key Dates

1969:

With $100,000 in start-up capital, Advanced Micro Devices (AMD) is founded.

1972:

AMD completes its initial public offering of stock.

1985:

AMD is included in the Fortune 500 list for the first time.

1994:

AMD moves into its new headquarters facility.

2002:

Hector de J. Ruiz is appointed chief executive officer, replacing founder Jerry Sanders.

2003:

AMD becomes the first company to release a 64-bit processor for Windows-based personal computers.

2006:

AMD acquires ATI Technologies in a $5.4 billion deal.

2007:

Mubadala Development Co. acquires an 8.1 percent stake in AMD for $622 million.

Merck & Co.

Public Company
Incorporated: 1927
Employees: 59,800
Sales: $24.2 billion (2007)
Stock Exchanges: New York Philadelphia
Ticker Symbol: MRK
NAIC: 325412 Pharmaceutical Preparation Manufacturing; 325199 All Other Basic Organic Chemical Manufacturing; 325411 Medicinal and Botanical Manufacturing; 325413 In-Vitro Diagnostic Substance Manufacturing; 325414 Biological Product (Except Diagnostic) Manufacturing; 541710 Research and Development in the Physical, Engineering, and Life Sciences

Merck & Co., Inc., is one of the largest pharmaceutical companies in the world. Among the company’s most important prescription drugs are Singulair, a treatment for asthma and allergies; Cozaar, Hyzaar, Vasotec, and Vaseretic, hypertension medications; Vytorin, Zetia, and Zocor, used to modify cholesterol levels; Cosopt and Trusopt, used to treat glaucoma; Fosamax, for the treatment and prevention of osteoporosis; Primaxin and Cancidas, antibacterial/antifungal products; Januvia and Janumet, treatments for type-2 diabetes; Crixivan, a protease inhibitor used in the treatment of HIV; Maxalt, a migraine treatment; and Propecia, a hair loss remedy.Merck also produces a number of vaccines, including ProQuad, M-M-R II, chicken pox vaccine Varivax, and Gardasil, designed to prevent most cervical cancer caused by human papillomavirus.

In addition, Merck develops, manufactures, and markets pharmaceuticals through a number of joint ventures, including: a partnership with Johnson & Johnson that concentrates on designing and commercializing over-the-counter versions of prescription medications, such as Pepcid AC and Pepcid Complete; a venture with Schering-Plough Corporation that develops and markets prescription medications in the areas of cholesterol management (including Vytorin and Zetia) and allergy/asthma treatments (including a combination of Singulair and Schering-Plough’s Claritin); a venture with Sanofi Pasteur S.A., a unit of Sanofi-Aventis, focusing on the European vaccine market; and another partnership with Sanofi-Aventis concentrating on animal health and poultry genetics.

Merck spends around $5 billion each year on pharmaceutical research and development and maintains research laboratories in Rahway, New Jersey; West Point, Pennsylvania; Boston; Seattle; San Francisco; Montreal, Canada; Hoddesdon, United Kingdom; Pomezia and Rome, Italy; Riom, France; Madrid, Spain; and Tokyo, Tsukuba, Menuma, and Okazaki, Japan. Merck products are sold in more than 140 countries around the world. About 40 percent of the company’s sales are generated outside the United States, with about 21 percent originating in Europe, the Middle East, and Africa and 6 percent in Japan.

GERMAN ORIGINS

Merck’s beginnings can be traced back to Friedrich Jacob Merck’s 1668 purchase of an apothecary in Darmstadt, Germany, called “At the Sign of the Angel.” Located next to a castle moat, this store remained in the Merck family for generations.

The pharmacy was transformed by Heinrich Emmanuel Merck into a drug manufactory in 1827. His first products were morphine, codeine, and cocaine. By the time he died in 1855, products made by his company, known as E. Merck AG, were used worldwide. In 1887 E. Merck sent a representative, Theodore Weicker, to the United States to set up a sales office. Weicker (who would go on to own drug powerhouse Bristol-Myers Squibb) was joined by George Merck, the 24-year-old grandson of Heinrich Emmanuel Merck, in 1891. In 1899 the younger Merck and Weicker acquired a 150-acre plant site in Rahway, New Jersey, and started production in 1903. Weicker left the firm the following year.

The manufacture of drugs and chemicals at this site began in 1903. This same location housed the corporate headquarters of Merck & Co. and four of its divisions, as well as research laboratories and chemical production facilities, into the 1990s. (The company headquarters were shifted 20 miles west to Whitehouse Station, New Jersey, in 1992.) Once known as “Merck Woods,” the land surrounding the original plant was used to hunt wild game and corral domestic animals. In fact, George Merck kept a flock of 15 to 20 sheep on the grounds to test the effectiveness of an animal disinfectant. The sheep became a permanent part of the Rahway landscape.

The year 1899 also marked the first year the Merck Manual of Diagnosis and Therapy was published. In 2006 the manual entered its 18th edition. A New York Times review once rated it “the most widely used medical text in the world.” By the early 21st century, a number of other Merck manuals were available, including a home edition, The Merck Manual of Health and Aging, and The Merck Veterinary Manual, as well as online versions of the manuals.

In 1917, upon the entrance of the United States into World War I, George Merck, fearing anti-German sentiment, turned over a sizable portion of Merck stock to the Alien Property Custodian of the United States. This portion represented the company interest held by E. Merck AG, thereby ending Merck & Co.’s connection to its German parent. At the end of the war, Merck was rewarded for his patriotic leadership; the Alien Property Custodian sold Merck shares, worth $3 million, to the public. George Merck retained control of the corporation, and by 1919 the company was once again entirely public-owned.

GROWTH THROUGH MERGERS AND R&D

By 1926, the year George Merck died, his son George W. Merck had been acting president for more than a year. The first major event of the younger Merck’s tenure, which would last 25 years, was the 1927 merger with Philadelphia-based Powers-Weightman-Rosengarten, a pharmaceutical firm best known for anti-malarial quinine. Following the merger, Merck incorporated his company as Merck & Co., Inc. The merger enabledMerck & Co. to increase its sales from $6 million in 1925 to more than $13 million in 1929. With the resultant expansion in capital, Merck initiated and directed the Merck legacy for pioneering research and development. In 1933 he established a large laboratory and recruited prominent chemists and biologists to produce new pharmaceutical products. Their efforts had far-reaching effects. En route to researching cures for pernicious anemia, Merck scientists discovered vitamin B12. Its sales, both as a therapeutic drug and as a constituent of animal feed, were massive.

The 1940s continued to be a decade of discoveries in drug research, especially in the field of steroid chemistry. In the early 1940s, a Merck chemist synthesized cortisone from ox bile, which led to the discovery of cortisone’s anti-inflammation properties. In 1943 streptomycin, a revolutionary antibiotic used for tuberculosis and other infections, was isolated by a Merck scientist.

Despite the pioneering efforts and research success under George W. Merck’s leadership, the company struggled during the postwar years. There were no promising new drugs to speak of, and there was intense competition from foreign companies underselling Merck products, as well as from former domestic consumers beginning to manufacture their own drugs. Merck found itself in a precarious financial position.

A solution arrived in 1953 when Merck merged with Sharp & Dohme, Incorporated, a drug company with a similar history and reputation. Sharp and Dohme began as an apothecary shop in 1845 in Baltimore, Maryland. Its success in the research and development of such important products as sulfa drugs, vaccines, and blood plasma products matched the successes of Merck. The merger, however, was more than the combination of two industry leaders. It provided Merck with a new distribution network and marketing facilities to secure major customers. For the first time, Merck could market and sell drugs under its own name.

At the time of George W. Merck’s death in 1957, company sales had surpassed $100 million annually. Although Albert W. Merck, a direct descendant of Friedrich Jacob Merck, continued to sit on the board of directors into the 1980s, the office of chief executive was never again held by a Merck family member.

DIVERSIFICATION, THEN A REEMPHASIS ON RESEARCH

Henry W. Gadsen became CEO in 1965 and, as was fashionable at the time, initiated a program of diversification. Among the businesses acquired in the late 1960s and early 1970s were Calgon Corporation, a supplier of water treatment chemicals and services; Kelco, a maker of specialty chemicals; and Baltimore Aircoil, a maker of refrigeration and industrial cooling equipment. Many of these businesses were quickly divested after it was discovered that profits were hard to come by, but Calgon and Kelco remained part ofMerck into the early 1990s. Under Gadsen’s emphasis on diversification, Merck’s pharmaceutical operations suffered.

In 1976 John J. Honran succeeded the 11-year reign of Gadsen. Honran was a quiet, unassuming man who had entered Merck as a legal counselor and then became the corporate director of public relations. However, Honran’s unobtrusive manner belied an aggressive management style. With pragmatic determination Honran not only continued the Merck tradition for innovation in drug research but also improved a poor performance record on new product introduction to the market.

This problem was most apparent in the marketing of Aldomet, an antihypertensive agent. Once the research was completed, Merck planned to exploit the discovery by introducing an improved beta-blocker called Blocadren. Yet Merck was beaten to the market by its competitors. Furthermore, because the 17-year patent protection on a new drug discovery was about to expire, Aldomet was threatened by generic manufacturers. This failure to beat its competitors to the market is said to have cost the company $200 million in future sales. A similar sequence of events occurred with Indocin and Clinoril, two anti-inflammation drugs for arthritis.

Under Honran’s regime, the company introduced a hepatitis vaccine, a treatment for glaucoma called Timoptic, and Ivomac, an antiparasitic for animals. In addition, while Honran remained strongly committed to financing a highly productive research organization, Merck began making improvements on research already performed by competitors. In 1979, for example, Merck began to market Enalapril, a high-blood-pressure inhibitor, similar to the drug Capoten, which was manufactured by Squibb. Sales for Enalapril reached $550 million in 1986. Honran also embarked on a more aggressive program for licensing foreign products. In 1982 Merck purchased rights to sell products from Swedish firm Astra AB in the United States; a similar arrangement was reached with Shionogi of Japan. Two years later the Merck-Astra agreement was transformed into a joint venture, AstraMerck Inc.

Honran’s strategy proved very effective. Between 1981 and 1985, the company experienced a 9 percent annual growth rate, and in 1985 the Wall Street Transcript awarded Honran the gold award for excellence in the ethical drug industry. He was commended for the company’s advanced marketing techniques and its increased production. At the time of the award, projections indicated a company growth rate for the next five years of double the present rate.

In 1984 Honran claimed Merck had become the largest U.S.-based manufacturer of drugs in the three largest markets: the United States, Japan, and Europe. He attributed this success to three factors: a productive research organization; manufacturing capability that allowed for cost-efficient, high-quality production; and an excellent marketing organization. The following year, Honran resigned as CEO. In 1986 his successor, Dr. P. Roy Vagelos, a biochemist and the company’s former head of research, also was awarded the ethical drug industry’s gold award.

SURVIVING VARIOUS DIFFICULTIES

Although Merck’s public image was generally good, it had its share of controversy. In 1974 a $35 million lawsuit was filed against Merck and 28 other drug manufacturers and distributors of diethylstilbestrol (DES). This drug, prescribed to pregnant women in the late 1940s and up until the early 1960s, ostensibly prevented miscarriages. The 16 original plaintiffs claimed that they developed vaginal cancer and other related difficulties because their mothers had taken the drug. Furthermore, the suit charged that DES was derived from Stilbene, a known carcinogen, and that no reasonable basis existed for claiming the drugs were effective in preventing miscarriages. (A year before the suit, the Food and Drug Administration [FDA] banned the use of DES hormones as growth stimulants for cattle because tests revealed cancer-causing residues of the Page 272  |  Top of Articlesubstance in some of the animals’ livers. The FDA, however, did not conduct public hearings on this issue; consequently, a federal court overturned the ban.)

Under the plaintiffs’ directive, the court asked the defendants to notify other possible victims and to establish early detection and treatment centers. More than 350 plaintiffs subsequently sought damages totaling some $350 billion.

The DES lawsuit was not the only issue to beleaguer Merck. In 1975 the company’s name was added to a growing list of U.S. companies involved in illegal payments abroad. The payoffs, issued to increase sales in certain African and Middle Eastern countries, came to the attention of Merck executives through the investigation of the Securities and Exchange Commission (SEC). While sales amounted to $40.4 million for that year in those areas of the foreign market, the report uncovered a total of $140,000 in bribes. Once the SEC revealed its report, Merck initiated an internal investigation and took immediate steps to prevent future illegal payments.

Later, Merck found itself beset with new difficulties. In its attempt to win hegemony in Japan, the second largest pharmaceutical market in the world, Merck purchased more than 50 percent of the Banyu Pharmaceutical Company of Tokyo. Partners since 1954 under a joint business venture called Nippon Merck-Banyu (NMB), the companies used Japanese detail men (or pharmaceutical sales representatives) to promote Merck products.

When NMB proved inefficient, however, Merck bought out its partner for $315.5 million, more than 30 times Banyu’s annual earnings. The acquisition was made in 1982, and Merck was still in the process of bringing Banyu into line with its more aggressive and imaginative management style in the early 1990s.

Problems in labor relations surfaced during the spring of 1985 when Merck locked out 730 union employees at the Rahway plant after failing to agree to a new contract. For three months prior to the expiration of three union contracts, involving 4,000 employees, both sides negotiated a new settlement. When talks stalled, however, the company responded by locking out employees. The unresolved issues involved both wages and benefits. By June 5, all 4,000 employees participated in a strike involving the Rahway plant and six other facilities across the nation.

The strike proved to be the longest in Merck’s history, but after 15 weeks an agreement was finally reached. A company request for the adoption of a two-tier wage system that would permanently pay new employees lower wages was rejected, as was a union demand for wage increases and cost-of-living adjustments during the first year. Nevertheless, Merck’s reputation as an exceptional, high-paying workplace remained intact, and its subsequent contract agreements were amicable. In fact, Merck was ranked as one of the “100 Best Companies to Work for in America” and one of Working Mother magazine’s “100 Best Companies for Working Mothers” since that ranking’s 1986 inception.

BLOCKBUSTER MEDICATIONS, JOINT VENTURES, MEDCO

During the late 1980s, double-digit annual sales increases catapulted Merck to undisputed leadership of the pharmaceutical industry. CEO Vagelos’s research direction in the 1960s and 1970s laid the foundation for Merck’s drug “bonanza” of the 1980s. Vasotec, a treatment for congestive heart failure, was introduced in 1985 and became Merck’s first billion-dollar-a-year drug by 1988. Mevacor, a cholesterol-lowering drug introduced in 1987, and ivermectin, the world’s top-selling animal health product, also contributed to the company’s impressive growth. In the late 1980s, Merck was investing hundreds of millions of dollars in research and development (R&D), 10 percent of the entire industry’s total. Over the course of the decade, Merck’s sales more than doubled, its profits tripled, and the company became the world’s top-ranked drug company as well as one of Business Week‘s ten most valuable companies.

The company also was recognized for its heritage of social responsibility. In the 1980s Merck made its drug for “river blindness,” a parasitic infection prevalent in tropical areas and affecting 18 million people, available at no charge. In 1987 the company shared its findings regarding the treatment of human immunodeficiency virus (HIV) with competitors. These efforts reflected George W. Merck’s assertion: “Medicine is for the patients. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been.”

Growth did slow in the early 1990s, however, as Merck’s drug pipeline dried up. Although the company maintained the broadest product line in the industry, its stable of new drugs was conspicuously absent of the “blockbusters” that had characterized the previous decade, with one exception. In 1992 Merck introduced Zocor, a cholesterol-fighting drug that eventually surpassed $1 billion in annual sales and became the company’s top-selling drug and one of the most successful pharmaceuticals in history.

In the meantime, Merck entered into a number of joint ventures that created alternative avenues of productPage 273  |  Top of Articledevelopment and marketing. In 1989 Merck joined with Johnson & Johnson in a venture to develop over-the-counter (OTC) versions of Merck’s prescription medications, initially for the U.S. market, later expanded to Europe and Canada. Two years later Merck and E.I. du Pont de Nemours and Company formed a joint venture to research, manufacture, and sell pharmaceutical and imaging agent products. Merck and Connaught Laboratories, Inc. (later part of Aventis S.A.), agreed in 1992 to develop combination vaccines in the United States. In 1994 Merck created a venture with a related company, Pasteur Mérieux Connaught (which was also later part of Aventis S.A.), to market combination vaccines in Europe.

In 1993 Merck acquired Medco Containment Services Inc. for $6.6 billion. Medco was a mail-order distributor of drugs that was previously acquired by Martin Wygod in the early 1980s for $36 million. With the help of infamous investment banker Michael Milken, Wygod built Medco into a mass drug distribution system with $2.5 billion in revenues and $138 million in profits by 1992. The acquired company soon was renamed Merck-Medco Managed Care.

The wisdom of the purchase was debated among analysts. On one hand, it was regarded as making Merckmore competitive in a U.S. healthcare industry dominated by cost-cutting managed care networks and health maintenance organizations. On the other hand, some observers noted that Merck’s newest subsidiary would necessarily distribute competitors’ drugs and that it had been a major proponent of discounting, which threatened to cut into Merck’s R&D funds.

The Medco acquisition also complicated Vagelos’s plans for a successor. Vagelos’s choice, Richard J. Markham, resigned unexpectedly in mid-1993, just months before the CEO’s anticipated retirement. Some observers speculated that 54-year-old Wygod, with his cost-cutting tendencies and marketing forte, was a likely successor, but he, too, resigned in March 1994. In the end, other internal candidates were bypassed as well in favor of the first outsider in Merck history to take the top job, Raymond V. Gilmartin. Named CEO in June 1994 and chairman in November of that year, Gilmartin had helped turn around medical equipment maker Becton, Dickinson & Company as that firm’s chairman and CEO.

RESTRUCTURING AND DIVESTMENTS

Although Vagelos had built Merck into its position of industry preeminence by the time of his retirement, the entire pharmaceutical sector was in upheaval stemming from the growth of managed care. Sales and earnings growth were on the decline. Industry pressure resulted in large mergers that created Glaxo Wellcome plc and Novartis AG and toppled Merck from its position as the world’s biggest drugmaker to a tie for third place with Germany’s Hoechst Marion Roussel. Merck also was suffering from the difficult 18 months it took to find Vagelos’s successor and the “turf-conscious, defection-ridden” culture (so described by Business Week‘s Joseph Weber) that Vagelos left behind. One of Gilmartin’s first major tasks, then, was to restructure the company’s management team. In September 1994 he set up a 12-member management committee to help him run the company and plot strategies for growth. The management team included sales executives in Europe and Asia, the heads of the veterinary and vaccine divisions, the president of Merck-Medco, and executives from the research, manufacturing, finance, and legal areas. The creation of this committee helped to streamline and flatten Merck’s organizational structure, fostered a greater degree of company teamwork, and halted the exodus of top managers that occurred during the Vagelos succession.

One of the management committee’s first acts was to create a mission statement for Merck, which affirmed that the company was primarily a research-driven pharmaceutical company. Gilmartin then launched a divestment program, which jettisoned several noncore units, including a generic-drug operation and a managed mental-health care unit. In 1995 Merck sold its Kelco specialty chemicals division to Monsanto Company for $1.1 billion, and its other specialty chemicals unit, Calgon Vestal Laboratories, went to Bristol-Myers Squibb Company for $261 million. These sales also helped Merck pay down the debt it incurred in acquiring Medco, a unit that Gilmartin retained.

There were also two significant divestments in the late 1990s. In July 1997 Merck exited from the agribusiness sector when it sold its crop protection unit to Novartis for $910 million. In July 1998 Merck sold its half-interest in its joint venture with E.I. du Pont to its partner for $2.6 billion. Merck also restructured its animal health unit by combining it with that of Rhone-Poulenc S.A. to form Merial, a stand-alone joint venture created in August 1997. At the end of the 1990s Merial stood as the world’s largest firm focusing on the discovery, manufacture, and marketing of veterinary pharmaceuticals and vaccines. By that time, Merck’s partner in Merial was Aventis S.A., which had been formed from the late 1999 merger of Rhone-Poulenc and Hoechst A.G. (Aventis later, in 2004, merged with Sanofi-Synthélabo to create Sanofi-Aventis.)

Page 274  |  Top of Article

Another joint venture, the one formed with Astra in 1982, was restructured in the late 1990s. This venture’s biggest success came with the December 1996 approval of Prilosec for the treatment of ulcers and heartburn. Prilosec went on to become a blockbuster. In July 1998 Merck and Astra agreed to transform the joint venture into a new limited partnership in which Merck would have no management control but would hold a limited partnership interest and receive royalty payments. This gave Astra more flexibility in terms of seeking a merger partner, and in April 1999 the company merged with Zeneca Group Plc to form AstraZeneca AB. Stemming from this merger and the 1998 agreement between Merck and Astra, Merck received from Astra two one-time payments totaling $1.8 billion.

LATE-CENTURY DRUG INTRODUCTIONS

From 1995 through 1999, Merck introduced a total of 15 new drugs. Gilmartin helped bring these new products to market, but credit for developing them fell to Dr. Edward M. Scolnick, the research chief under Vagelos who stayed with the firm even though he had vied to succeed Vagelos. Within 18 months of Gilmartin’s arrival,Merck had launched a record eight drugs, including Crixivan, a protease inhibitor used in the treatment of HIV; Fosamax, used to treat osteoporosis; and hypertension medication Cozaar. The eight drugs accounted for more than $1 billion in sales in 1996, about 10 percent of the company’s total drug sales. Through its joint venture with Johnson & Johnson, Merck also received U.S. approval in April 1995 for the antacid Pepcid AC, an OTC version of Merck’s Pepcid.

As the 1990s continued, Merck faced the specter of the expiration of patent protection for some of its biggest-selling products; Vasotec and Pepcid were slated to expire in 2000, Mevacor and Prilosec in 2001. These core drugs generated $5.2 billion in U.S. sales in 1997. Under intense pressure to replace this looming lost revenue,Merck continued its torrid pace of product debuts. In 1998 the company introduced a record five drugs: Singulair for asthma, Maxalt for migraine headaches, Aggrastat for acute coronary syndrome, Propecia for hair loss, and Cosopt for glaucoma. Of these, Singulair eventually became the company’s top-selling drug, with worldwide sales of nearly $3.6 billion by 2006.

Merck managed only one drug introduction in 1999, but it was an immediate blockbuster. Making its U.S. debut in May 1999, Vioxx was part of a new category of pain drugs, dubbed Cox-2 inhibitors. Cox-2, an enzyme present in various diseases, was blocked by the new drugs. As a treatment for arthritis, Vioxx was noteworthy for being effective while not irritating the stomach. Despite being second to market behind G.D. Searle & Company’s Celebrex, Vioxx had a remarkable first seven months in which U.S. physicians wrote more than five million prescriptions. The new medication was expected to have sales in 2000 of more than $1 billion, a rapid rise to that level.

Merck headed into the uncertainty of the early 21st century riding a triumphant 1999 wave. In addition to its successful introduction of Vioxx, the company was heartened by the continued strength of its top-selling drug, Zocor, which was gaining market share despite intense competition, particularly from Warner-Lambert Company’s Lipitor. Worldwide sales of Zocor topped $2.6 billion in 1999. Overall sales that year increased 22 percent, reaching $32.71 billion, while net income increased 12 percent to $5.89 billion. Merck’s worldwide pharmaceutical sales totaled $12.55 billion in 1999, placing the company in the number one position.

Drug company megamergers, however, were creating ever-larger competitors. The year 2000, for example, saw two such deals consummated: the U.K. marriage of Glaxo Wellcome plc and SmithKline Beecham plc that created GlaxoSmithKline plc, and the U.S. coupling of Pfizer Inc. and Warner-Lambert. Merck’s Gilmartin stated that he had no interest in such a merger, despite the looming patent expirations. One apparent reason for Gilmartin’s go-it-alone approach was the company’s rapidly growing Merck-Medco unit, which achieved 1999 sales of $15.23 billion. The unit had established the world’s biggest Internet-based pharmacy, merckmedco.com, and formed an alliance with CVS Corporation in 1999 to sell OTC medicines and general health products through this site. Merck-Medco also was helping enhance the sales of Merck drugs, although the FDA launched an investigation in the late 1990s into the practices of pharmacy-benefit management (PBM) firms, including whether any illegalities were taking place in regard to the PBMs steering patients to drugs made by a particular firm. At the same time, Merck continued its commitment to R&D, spending $2.3 billion on drug development in 2000.

PARTNERSHIP WITH SCHERING-PLOUGH

Also in 2000, Merck entered into a joint venture with Schering-Plough Corporation to develop and market cholesterol-management and allergy/asthma medications. The first outcome of this partnership was the October 2002 FDA approval of ezetimibe (U.S. brand name Zetia), a compound developed by Schering-Plough that blocks absorption of cholesterol from food in the intestinal tract. This cholesterol-management method differed from that of statins, such as Zocor, which interfered with the production of cholesterol in the liver. Sales of Zetia in the United States reached $1.2 billion by 2005 in part because many doctors began prescribing Zetia for their patients instead of increasing the dose of a statin.

Anticipating that Zetia might be used in this way, Merck and Schering-Plough had begun investigating a single-pill combination of Zocor and Zetia even prior to Zetia’s approval. The FDA approved this combination pill in July 2004, and the partners began marketing it as Vytorin. The introductions of Zetia and Vytorin were critical for Merck because it was facing the expiration of Zocor’s patent in 2006. Zocor was the company’s top-selling drug in the first years of the 21st century, with worldwide sales reaching nearly $5.2 billion by 2004. By 2007, however, sales of the now off-patent Zocor had plunged to less than $900 million. In the meantime, Merck and Schering-Plough were enjoying soaring sales of Zetia and Vytorin, more than $5 billion combined worldwide in 2007. Both drugs remained under patent protection until 2015 because that was the expiration date for Zetia’s patent. During this same period, Merck and Schering-Plough were exploring another compound pill, a combination of Merck’s asthma drug Singulair with Schering-Plough’s allergy fighter Claritin in the hope of creating a highly effective asthma and allergy medication.

Other than the cholesterol medications developed with Schering-Plough, Merck’s drug development outcomes were fairly thin in the first years of the 21st century. The bad news continued in 2003 when the company ended development of two once-promising drugs that had reached late-phase clinical trials; a treatment for depression had failed to show efficacy, while mice given a diabetes drug had developed malignant tumors. In addition, Vioxx failed to maintain its original heady growth rate. Sales plateaued at $2.6 billion in 2001 after concerns surfaced over possible cardiovascular risks. Merck nevertheless remained committed to its research-driven approach, eschewing the big mergers that had reshaped the landscape of the pharmaceutical industry and spending nearly $3.2 billion on R&D in 2003.

Under pressure from shareholders, Merck took a number of actions in 2003 to strengthen its position. Merck-Medco was spun off to shareholders as Medco Health Solutions, Inc., a move that turned Merck back into a pure pharmaceutical research company. Merck purchased full control of Banyu Pharmaceutical for $1.53 billion, solidifying its position in Japan, the world’s second largest pharmaceutical market. The company also launched a cost-cutting initiative, one element of which was a workforce reduction of more than 5,000 that was designed to slash annual expenses by $300 million.

THE VIOXX DEBACLE AND ITS AFTERMATH

Merck encountered a new crisis in 2004 when the concerns about Vioxx’s cardiovascular risks were borne out. The company withdrew the painkiller from the worldwide market after a clinical trial found that patients on the drug were twice as likely to have a heart attack or stroke as those on a placebo. A wave of lawsuits ensued. By May 2005 more than 2,400 suits had been filed on behalf of patients or survivors of patients claiming Vioxx had caused heart attacks and other cardiovascular problems. That month Gilmartin was forced into early retirement. Richard T. Clark, most recently the head of Merck’s manufacturing operations, was named the new CEO.

Under Clark, Merck aggressively defended itself against the Vioxx liability suits, winning some crucial early cases while losing a number of others as well. By late 2007 the company had spent $1.2 billion on litigation and hundreds of millions more in payouts to patients. At that time, Merck entered into a settlement of a class-action lawsuit representing tens of thousands of claimants, agreeing to pay a total of $4.85 billion. As part of a five-year plan to revitalize Merck, Clark also launched a major restructuring program in late 2005 that involved the elimination of 7,000 positions from the worldwide workforce (an 11 percent reduction) and the closure or sale of five of its 31 manufacturing facilities around the world. This streamlining was designed to yield pretax savings of as much as $5 billion by 2010.

Under the direction of Peter S. Kim, who had succeeded Scolnick as head of research in 2003, and with a more disease-focused approach instilled by Clark, Merck developed a more robust new product pipeline, with the initial results most evident in the area of vaccines. In 2005 the FDA approved the vaccine RotaTeq for the prevention of rotavirus gastroenteritis, while three more Merck vaccines gained FDA approval in 2006: ProQuad, the first U.S. vaccine to protect against the four diseases measles, mumps, rubella, and chicken pox in one shot; Zostavex, used to help prevent shingles in patients over age 60; and Gardasil, the first vaccine in the United States to guard against human papillomavirus, believed to be the leading cause of cervical cancer cases. Gardasil was considered the most important of these approvals, particularly after the Centers for Disease Control and Prevention recommended the vaccine for all women between the ages of 11 and 26. Sales of Gardasil approached $1.5 billion by 2007. The spate of introductions pushed Merck’s overall vaccine revenues up to $4.28 billion by 2007, nearly four times the $1.1 billion total for 2005 and nearly 18 percent of the company’s overall 2007 revenues.

Part of the improved productivity of Merck’s R&D efforts during this period stemmed from Clark’s decision to focus on nine key disease areas. In addition to vaccines, these included Alzheimer’s disease, atherosclerosis, cancer, cardiovascular disease, diabetes, obesity, pain management, and sleep disorders. Another drug securing FDA approval in 2006 was Januvia, the first of a new class of diabetes drugs touted to enhance the body’s natural ability to improve blood sugar control in patients with type-2 diabetes. Sales of Januvia totaled $667.5 million in 2007. In October 2007 the FDA approved Isentress, a new type of drug for patients with HIV who had developed resistance to other therapies. This approval came just months before another company challenge arose—the expiration of patent protection for osteoporosis treatment Fosamax, which garnered more than $3 billion in worldwide revenues in 2007.

Merck needed to find additional winners in its product pipeline to maintain its momentum and to replace the revenues soon to be lost from further patent expirations. Its hypertension medications Cozaar and Hyzaar, which raked in a combined $3.35 billion in revenues in 2007, were slated to lose patent protection in 2010, with asthma/allergy drug Singulair following two years later. In 2007 Singulair was Merck’s top-selling single drug, with worldwide sales of $4.27 billion.

Merck’s momentum, however, appeared to hit another significant roadblock in early 2008 when a panel of cardiologists recommended that widespread use of Vytorin and Zetia should be curtailed after a study found they were no better at fighting heart disease than the far-less expensive generic version of Zocor. On this damaging news for their blockbuster cholesterol-fighting drugs, Merck and Schering-Plough saw their stock prices plunge, with Merck’s market capitalization slashed $14.3 billion in a single day. Doctors and public officials began raising allegations that the companies had delayed release of the study’s results to protect their sales of Vytorin and Zetia, and a Congressional committee launched a probe. The companies denied these allegations and took exception to the panel’s recommendation. Some researchers questioned the validity of the study’s design and placed greater stock in a much larger study underway that was comparing how Vytorin stacked up against Zocor in preventing deaths and heart attacks in very high-risk patients. The results of this study were expected in 2011.

KEY DATES

1668:

Friedrich Jacob Merck purchases an apothecary in Darmstadt, Germany.

1827:

Heinrich Emmanuel Merck transforms the pharmacy into a drug manufactory.

1887:

E. Merck AG sets up a sales office in the United States.

1891:

George Merck, grandson of Heinrich Merck, joins the U.S. branch, known as Merck & Company.

1899:

The Merck Manual of Diagnosis and Therapy is first published.

1903:

U.S. production begins at a site in Rahway, New Jersey.

1917:

Entrance of United States into World War I leads to severing of relationship between Merck & Co. and E. Merck AG.

1925:

George W. Merck takes over as president, succeeding his father.

1927:

Company merges with Powers-Weightman-Rosengarten and is incorporated as Merck & Co., Inc.

1940s:

Merck’s laboratories make a series of discoveries: vitamin B12, cortisone, streptomycin.

1953:

Company merges with Sharp & Dohme, Incorporated.

1965:

Henry W. Gadsen is named CEO and launches an ill-advised diversification program.

1976:

John J. Honran succeeds Gadsen and reemphasizes drug research.

1979:

Company begins marketing Enalapril, a high-blood-pressure inhibitor whose annual sales eventually reach $550 million.

1982:

Merck enters into a partnership with Astra AB to sell that company’s products in the United States.

1985:

Dr. P. Roy Vagelos takes over as CEO; Vasotec, a treatment for congestive heart failure, is introduced.

1988:

Vasotec becomes Merck’s first billion-dollar-a-year drug.

1989:

Over-the-counter medication joint venture is created with Johnson & Johnson.

1992:

Zocor, a cholesterol-fighter, is introduced and eventually becomes a blockbuster.

1993:

Medco Containment Services Inc., a drug distributor, is acquired for $6.6 billion.

1994:

Raymond V. Gilmartin is named chairman and CEO, becoming the first outsider so named.

1995:

Company divests its specialty chemicals businesses.

1998:

Marketing of the asthma/allergy treatment Singulair begins.

1999:

Astra pays Merck $1.8 billion stemming from a joint venture between the companies and from Astra’s merger with Zeneca; arthritis medication Vioxx makes its debut.

2000:

Merck enters into a partnership with Schering-Plough Corporation to develop and market cholesterol-management and allergy/asthma medications.

2003:

Merck-Medco is spun off to shareholders as Medco Health Solutions, Inc.

2004:

Merck is forced to withdraw Vioxx from the market after the drug is linked to increased risk of heart attack or stroke.

2005:

Richard T. Clark replaces Gilmartin as CEO.

2007:

Company reaches a $4.85 billion settlement of a class-action lawsuit representing tens of thousands of Vioxx claimants.

D.R. Horton, Inc.

Public Company

Incorporated: 1978

Employees: 3,214

Sales: $4.40 billion (2010)

Stock Exchanges: New York

Ticker Symbol: DHI

NAICS: 236117 New Housing Operative Builders

D.R. Horton, Inc., is the largest homebuilder in the United States, operating in 26 states through 33 homebuilding divisions. D.R. Horton builds standardized homes that allow for alterations requested by the buyer. The company builds single-family detached homes and attached homes such as duplexes, triplexes, town homes, and condominiums. The company’s homes have an average closing sales price of approximately $206,000, with detached homes accounting for nearly 90 percent of its business. D.R. Horton also provides mortgage financing and title agency services through its financial services operations.

FOUNDER’S BACKGROUND

D.R. Horton’s swift rise in the U.S. home-building industry was orchestrated by the company’s founder, Donald Horton. Horton was raised in Marshall, Arkansas, a small town in the north-central region of the state where his father worked as a cattleman and a realtor. Instead of joining his father in either of his occupations, Horton left Marshall to pursue a different career. He enrolled at the University of Central Arkansas and decided to become a pharmacist, later transferring to the University of Oklahoma to pursue his degree. However, Horton never completed his studies. Instead, he left school in 1972 and returned to Marshall, where he joined his family’s real estate business.

“I did real well,” Horton remembered in a December 1999 interview with Professional Builder, “but the real estate business in Arkansas was seasonal.” Horton, as his career would later reflect, was exceptionally ambitious, an individual who started each workday at three in the morning. The housing market in Marshall was too small an arena for someone who would become one of the most prolific builders in the country. “I needed to do more in the winter,” he explained in his Professional Builder interview. “I wanted to get somewhere that, the more I put into it, the better I could do.”

Horton left the foothills of the Ozark Mountains in 1977 and moved to Fort Worth, Texas. He walked into a local builder’s office and found a position as a salesperson. Horton thrived in the sales environment, selling a house during his first day at work, but his passion for completing a sale soon led to frustration. Occasionally, he lost a potential sale because the buyer wanted something not included in the standard floor plans, extras such as additional kitchen cabinets or another doorway. His employer would not allow any custom changes, which was a typical response from a builder of standardized homes. The home-building industry was divided between companies that built standardized homes and those that offered custom-built homes. For standardized homebuilders, profitability depended on adhering to existing floor plans. Any changes cost more money, and the increase was not factored in to the original budget, defeating the operating strategy of a standardized homebuilder.

For Horton, the inflexibility of the system defeated his own strategy, which was to sell houses, not build them. “There’s nothing a buyer hates worse than to hear ‘No,’” he said in a February 28, 1994 interview with Forbes. He spent less than a year working for others in Fort Worth before beginning the entrepreneurial career that would lead to the creation of a multibillion-dollar business.

HORTON BUILDS HIS FIRST HOUSE: 1978

Horton set out on his own in November 1978 after persuading a bank to lend him the money to build his first house. The opportunity to show his approach to the homebuilding market arrived during the construction of this house, which was located in a Fort Worth subdivision. During the framing stage of construction, an interested buyer asked if a bay window could be added. Horton agreed, explaining that the addition would cost $500. The buyer immediately agreed, and Horton was on his way toward capitalizing on a new market niche. “I sold that house,” Horton remarked in his December 1999 interview with Professional Builder, “then went back to the bank for the money to build two, then four, then eight more.”

Horton’s exponentially paced success was exploited in a market segment he largely had created. Horton positioned himself in the middle of the industry, operating as a standardized homebuilder who was prepared and willing to make custom changes. There were few homebuilders in the late 1970s who characterized themselves as such. There were fewer still who operated on a national scale, as Horton eventually would operate. Central to the success of a construction strategy that allowed changes to standard floor plans was, in broad terms, astute, meticulous management.

As a salesperson, Horton felt most comfortable, but he excelled at creating a system that allowed the flexibility inherent in his company’s operating strategy to be profitable. Any alteration to existing floor plans required the builder to know precisely how much the addition would cost and to build the addition at that predetermined cost. Horton found that homebuyers were willing to pay more to move a wall or add another window, but he had to create a system that allowed for those changes without impinging on the company’s profitability. In the years ahead, as D.R. Horton grew increasingly larger, the task of presiding over a flexible construction strategy became commensurately more difficult. The company proved it was up to the task, however, as Horton’s vision of the homebuilding experience spread across the nation.

A BLUEPRINT FOR SUCCESS IS CREATED: 1981–89

For Horton, success was immediate. He built 20 houses in 1979 and 80 houses in 1980, beginning a phenomenal record of consistent growth. During the 1980s, the size of his company essentially doubled every year. In every fiscal quarter during the decade, D.R. Horton increased its revenue, its profits, and the number of homes the company built. Encouraged by the company’s consistency and by changes in the housing industry, Horton made an important decision in 1987, one that marked a turning point in the company’s development. For the first decade of its existence, D.R. Horton operated only in the Dallas-Fort Worth metropolitan area, but in 1987 Horton sensed the beginning of a trend toward consolidation in the nation’s housing markets. He resolved to turn his company into a major competitor on a national scale by leading the trend toward consolidation. In the years ahead, D.R. Horton looked beyond the Dallas-Fort Worth area, applying its leader’s system of flexible construction to housing markets throughout the country.

As the company expanded, it did so in a careful manner, adhering to its customer-driven philosophy. Typically, the company researched a new market for three to five years before entering it, then spent between $5 million and $10 million on approximately 50 home sites during its first year in the market. To determine what construction features buyers desired in a local market, the company’s salespeople visited other builders’ model homes and canvassed the visitors about what aspects of the homes they liked. “We kick the tires,” Horton remarked in his February 28, 1994 interview with Forbes. If the salespeople and the local architects the company employed noticed a trend, the feature was incorporated into one of the several types of homes designed for the market in question. As always, however, the company was amenable to other changes, agreeing to additions such as marble hallways, whirlpool baths, and decorative molding.

Although the company’s exponential growth during the 1980s was impressive, its financial and physical achievements during the 1990s established the D.R. Horton name as one of the nation’s premier builders. The company vaulted itself onto the national stage by assuming the posture of an aggressive acquisitor, becoming a leading consolidator in an industry where the top five builders increased their market share on an annual basis. Industry giants were being fashioned, and Horton intended to become one of those giants. He took his company public in June 1992, raising $40 million in an initial public offering (IPO) of stock. In 1993, when sales reached $190 million, the company ranked as the 24th-largest builder in the country. During the year, new divisions were opened in San Diego; Los Angeles; Austin, Texas; and Salt Lake City, Utah.

ACQUISITIONS ENGENDER GEOGRAPHIC DIVERSITY: 1994–99

D.R. Horton’s acquisition campaign began in earnest in 1994, when the company operated in 25 cities located in 11 states. Between 1994 and 1999, the company acquired 14 homebuilders, adding to its organizational structure division by division. The acquired companies generally continued to operate under their own names, but D.R. Horton presided over the collection of builders within its fold, orchestrating the activities of subsidiaries such as Joe Miller Homes, Arappco Homes, Regency Homes, Trimark Communities, SGS Communities, and Cambridge Homes. In some cases, the acquisitions were quite large, such as the 1997 purchase of the Torrey Group, which ranked as the leading homebuilder in Atlanta, the largest housing market in the nation at the time.

The D.R. Horton divisions created from the acquisitions were granted considerable control over their own operations, giving the company a decentralized corporate structure. In Arlington, Texas, however, certain aspects of the company’s overall operation fell under the control of a central command, particularly after a national accounts division was created in 1998. Through the company’s headquarters, all administrative functions of the divisions were conducted, including accounting and finance, human resources, and information technology.

By the end of the 1990s, D.R. Horton could boast 21 consecutive years of growth in revenues, housing units built, and profits for every single fiscal quarter. Revenues soared, increasing from $869 million in 1995 to $1.5 billion in 1997 and $3.1 billion in 1999, the year Professional Builder selected D.R. Horton as its “Builder of the Year.” By 2000, the company ranked as the third-largest builder in the country with 50 divisions in 23 states.

D.R. HORTON ECLIPSES ALL RIVALS: 2002–05

By D.R. Horton’s silver anniversary year, the company’s record of constant financial and physical growth remained intact. The company generated $6.7 billion in revenues in 2002, a total collected from closing the sale of 29,761 homes. Net income for the year eclipsed $400 million, a 57 percent increase over the profits recorded in 2001. In addition to record-breaking financial figures, the other great achievement of the year was the completion of the largest acquisition in the company’s history. In February 2002, D.R. Horton purchased El Segundo, California-based Schuler Homes, Inc., a designer, builder, and marketer of single-family attached and detached houses. The integration of Schuler Homes gave D.R. Horton dominant market positions in California, Colorado, Oregon, Washington, Arizona, and Hawaii.

D.R. Horton’s first quarter-century of business represented a phenomenal success story in the homebuilding industry. By allowing its divisions to act autonomously and to respond to local market conditions and tastes, the company became one of the strongest competitors in the nation. With the addition of Schuler Homes, D.R. Horton became the second-largest homebuilder in the country, trailing only Pulte Homes, Inc. The company leaped past Pulte midway through the decade, ending 2005 by reaching several remarkable milestones. D.R. Horton became the first builder to close more than 50,000 homes during a year. It also became the first builder to sell more than 50,000 homes in a year. The company, which held sway as the largest homebuilder in the nation, recorded a 61 percent increase in profits during the last quarter of the year, becoming the first builder to generate more than $500 million in net income during a quarter. D.R. Horton was growing at an electric pace that instilled confidence in the company’s management, leading Horton and his team to anticipate closing 100,000 homes annually by 2010.

AN INDUSTRY IN TATTERS: 2006–10

For D.R. Horton and the rest of the housing sector, market conditions quickly began to deteriorate. The nation was headed toward the worst financial crisis since the Great Depression. The collapse of the housing market led the way, resulting in staggering losses for D.R. Horton and virtually every other homebuilder, big or small. The first signs of distress appeared in mid-2006, when D.R. Horton cut its full-year earnings forecast by almost one-third. By the fall of 2006 the company’s rate of canceled orders was twice the historical average. By the spring of 2007 its quarterly profit was down 85 percent, plunging from $352 million to $51 million. By the summer of 2007 profits had disappeared. The company, which had cut its workforce by nearly 4,000 employees, posted an $823 million loss, the first time it recorded a quarterly loss in its history. It was a dizzying fall from the heights of 2005, but for D.R. Horton and the rest of the industry the worst was yet to come.

Financial institutions stopped lending money and the demand for new home construction plummeted, delivering a devastating blow to D.R. Horton’s financial results. After generating $14.7 billion in revenue in 2006, the company watched its business volume shrink to $3.6 billion by 2009. Losses mounted, reaching a staggering $2.6 billion in 2008 alone, resulting in more than $4 billion in losses during a three-year period. The company, which had employed more than 10,000 workers midway through the decade, cut its payroll to 3,214 employees by the end of the decade.

Despite the massive decline in its financial stature, D.R. Horton remained the country’s largest homebuilder at the end of the decade. In early 2010 the company recorded its first profitable quarter since 2007. Sales for the year climbed to $4.4 billion, stopping a three-year downward slide, and the company ended the year with a profit of $78 million. The positive results fanned hopes within the company’s management that the worst was over and ahead lay the days of robust growth to which it had become accustomed.

COMPANY PERSPECTIVES

Over 30 years ago, Donald R. Horton had a vision of livable and affordable new homes built with unmatched efficiencies and uncompromising quality. Of family traditions passed on to new generations. Of a business that would grow by making customers’ dreams a reality. That philosophy of creating value every step of the way was the company’s signature focus when Horton unveiled his first neighborhood in the Dallas/Ft. Worth area over three decades ago. As the company grew from a local homebuilder, to a regional homebuilder, to ultimately the largest homebuilder in the United States, that philosophy has never wavered.

KEY DATES

1978:	Donald Horton builds his first home in Fort Worth, Texas.
1987:	D.R. Horton begins to expand beyond the Dallas-Fort Worth market.
1992:	Company completes its initial public offering of stock.
1997:	D.R. Horton acquires the Torrey Group, the leading homebuilder in Atlanta.
2002:	D.R. Horton acquires Schuler Homes, Inc., becoming the second-largest homebuilder in the country.
2005:	D.R. Horton becomes the first builder in the country to close more than 50,000 homes in a year.
2010:	After recording more than $4 billion in losses during the preceding three years, the company posts a profit for the year.

Illinois Tool Works

Public Company
Founded: 1912
Incorporated: 1915
Employees: 51,000
Sales: $14.14 billion (2013)
Stock Exchanges: New York
Ticker Symbol: ITW

In 1912 four Smith brothers advertised for experienced manufacturing workers to help them set up a new business producing metal-cutting tools to serve expanding midwestern industry. With the backing of their wealthy and influential father, Byron Laflin Smith, the brothers formed what would later be called Illinois ToolWorks Inc. (ITW). The Chicago-based company prospered. Under Smith family management through much of its history (with the family still owning about 17 percent of the company in the early 21st century), Illinois ToolWorks became known as a company with conservative management and innovative products that made big profits on small items. By the 1990s the company was somewhat changed with management placing a greater emphasis on acquisitions, even if it meant going into debt. Long organized into hundreds of decentralized business units, ITW in 2013 reorganized its operations into about 90 larger global divisions. These divisions manufacture a diversified range of industrial products and equipment. With operations in 56 countries, ITW generates approximately 57 percent of its revenues outside the United States.

EARLY HISTORY

In 1857, just 20 years after the city of Chicago was incorporated, Byron Laflin Smith’s father set up Merchants’ Loan & Trust to help fledgling businesses get off the ground, becoming the first Chicago resident to own a Chicago banking institution. The city’s population was approximately trebling each decade as railroads and the Great Lakes made it a transportation and manufacturing center. As the city grew, the corresponding real estate boom made rich men richer. The elder Smith took advantage of all these opportunities to make his family one of the wealthiest and most influential in the Midwest.

After graduating from the University of Chicago, Byron Smith went to work for his father at Merchants’ Loan & Trust. Smith eventually left the family business, striking out on his own. In 1889 he founded the Northern Trust Company, which was to become one of the city’s premier banking institutions.

A successful man in his own right by the early years of the 20th century, Smith saw other opportunities in the growing city. Through his business connections, Smith realized that there was an increasing need for large-scale production of machine tools for the growing transportation and communication industries. These emerging industries needed more parts than small machine shops could provide, and Smith thought he and his sons Solomon, Harold C., Walter, and Bruce were just the men to fill the need.

In 1912 the Smiths placed an advertisement for experienced manufacturing workers. They chose Frank W. England, Paul B. Goddard, Oscar T. Hogg, and Carl G. Olson to help get Illinois Tool Works off the ground, and Harold and Walter Smith managed the new company. Solomon Smith continued to work at Northern Trust (he succeeded his father as president when Byron died two years later), and Bruce went to work in New York.

In 1915, the same year that the company was incorporated, Harold C. Smith became president of Illinois ToolWorks, and Walter and Solomon Smith continued to serve on the board of directors. Harold built on the company’s initial success in selling tools to manufacturers and soon expanded the company’s product line into truck transmissions, pumps, compressors, and automobile steering assemblies. While investing heavily in modern plants and equipment, Smith insisted on the conservative financial approach that ITW became known for, maintaining cash reserves and eschewing debt. Under Smith, ITW also became known for producing high-quality products. Smith’s strategy served the growing company well when World War I broke out. The war years boosted company profits handsomely.

EXPANSION INTO FASTENERS

In 1923 ITW engineered a new product that brought it into a different industry niche. The Shakeproof fastener, the first twisted-tooth lock washer, was to lead ITW into the profitable area of industrial fasteners. Shakeproof became a separate operating division offering a full line of related items, including preassembled washers and screws and thread-cutting screws. Each item in the Shakeproof division’s product line sold for an average of less than one cent apiece, but ITW took the leadership position in the industry and its sales volume produced strong profits.

Harold C. Smith died in 1936. He had built ITW into an industry leader in metal-cutting tools, manufacturing components, and industrial fasteners. Smith had been an industry leader as well, serving as director of both the Illinois Manufacturers Association and the National Association of Manufacturers. After Smith’s death, his son, Harold Byron Smith, became president of ITW. The oldest of four boys, Harold B. Smith had joined the company in 1931. Harold B. Smith followed his father’s successful, conservative management practices, but he introduced some innovations as well. Smith emphasized research and development, encouraging engineers to develop new products, even outside of ITW’s traditional product areas. He also decentralized the company, setting up separate divisions to pursue specific markets. This philosophy, followed by Smith’s successors, meant forming individual operating units that concentrated on only their own product niche.

Under Harold B. Smith, ITW became known as a problem solver. Its sales force developed new products to

answer customers’ specific needs, even when customers had not requested a solution, a practice that led to increased sales.

World War II, like World War I, produced a boom for the company, which by this time manufactured components for almost every type of equipment needed for the war effort. Even the wartime labor shortage could not prevent ITW from increasing its cash reserves.

CONTINUING GROWTH

Smith put some of the company’s wartime profit into research and development, leading directly to expansion in the 1950s. One new and profitable area was plastic and combination metal-plastic fasteners. The company already had extensive expertise in the fastener industry with its Shakeproof division. Successful plastics manufacture and marketing led to the formation of another new operating unit, Fastex, in 1955.

Another area of expansion after the war, based in part on ITW’s experience with plastics, was into the production of electrical controls and instruments. ITW’s Licon division was formed in 1959 to produce electric switches and electromechanical products. ITW became a leader in miniaturizing these components. Its solid-state switches and preassembled switch panels brought the company into the computer and defense industries in addition to increasing sales in its traditional industrial base.

It was clear by this time that Illinois Tool Works was outgrowing its name. It no longer manufactured just tools. Smith set up a separate Illinois Tools division during the 1950s to concentrate on the original cutting-tool business and the company’s initials, ITW, became the more frequently used, though unofficial, name for the business as a whole.

ITW’s special expertise in gears led to two other developments during the 1950s. The company set up the Illinois Tools Division Gear School in 1958 to train engineers, especially those of customer firms, in the intricacies of gearing. ITW’s development of the Spiroid right-angle gear led Smith to found the Spiroid operating unit in 1959 to produce specialty gearing for defense and general industries.

INTRODUCTION OF PLASTIC SIX-PACK HOLDERS

A new opportunity emerged from ITW research and development in the early 1960s. Company engineers had been looking for less bulky, lower-cost packaging than the traditional cardboard boxing used for six-packs of beverages. Metal holders cut both the fingers of the customers and, occasionally, the cans they were meant to hold. ITW’s increasing familiarity with plastics led to the invention of a flexible plastic collar to hold the cans. This simple patented invention generated substantial savings for beverage makers, from 40 percent to 60 percent according to ITW estimates. It led to the formation of another new operating unit, Hi-Cone, in 1962. Over the next decade, plastic drink packaging virtually replaced cardboard packaging for six-packs. The six-pack holder became one of ITW’s most important moneymakers, and earnings from the Hi-Cone division offset fluctuations in profits from the company’s products that served heavy industry.

In 1970 Harold B. Smith stepped down from the chairmanship of ITW. By this time ITW was an internationally recognized name. The Smith family’s emphasis on decentralized operation meant that many of the company’s production facilities were near large overseas customers, often under the control of local subsidiaries in the country where they were located. ITW components supplied heavy industries, the food and beverage industries, and the packaging industries in West Germany, Belgium, Australia, Spain, Italy, France, Great Britain, and New Zealand. The company’s performance, however, suffered from the inflation that plagued the economy of the 1970s.

With Harold B. Smith’s retirement, the first non-Smith, Silas S. Cathcart, became chairman of ITW. Smith’s son, Harold B. Smith Jr., served as president and COO from 1972 through 1981, and Smith family members continued to serve on the board of directors. Under this leadership, the 1970s saw some new developments despite the sluggish economy. Most notable was ITW’s entry into the adhesives industry with the 1975 purchase of Devcon Corporation. Devcon was a leader in specialty chemicals and manufactured adhesives and sealants.

ACQUISITIONS AT CENTER STAGE UNDER NICHOLS

When John D. Nichols took over as CEO in 1982, he was determined to keep ITW growing by investing more cash into the development of new product lines and in acquisitions, while cutting costs elsewhere to maintain profitability. He kept production costs low, for example, by developing what he termed “focus factories,” where a single product was produced in a highly automated setting.

Nichols expanded ITW’s industrial tools and systems businesses by purchasing Heartland Components, a maker of customized replacement industrial parts, in 1982; Southern Gage, a manufacturer of industrial gages, and N.A. Woodworth, a maker of tool-holding equipment, in 1984; and Magnaflux, a maker of nondestructive testing equipment and supplies, in 1985. Nichols formed a separate operating unit for automotive controls in 1983, and a division for producing equipment for offshore geophysical exploration, Linac, in 1984.

In 1986 Nichols made another significant acquisition when he purchased closely held Signode Industries, Inc., for $524 million. The Glenview, Illinois, manufacturer of plastic and steel strapping for bundling items, sketch film, and industrial tape fit in well with ITW’s own plastics line. Nichols followed company tradition by breaking Signode down into smaller units. Within a year and a half, over 20 new products had been developed as a result of the acquisition, which nearly doubled ITW’s revenues. Also in 1986, Cathcart retired as chairman, with Nichols replacing him, while retaining the position of CEO.

Under Nichols, ITW acquired 27 companies in related product lines in the 1980s, whereas only three firms had been purchased before Nichols’s tenure. These acquisitions meant that company debt reached higher levels than in the past, but these levels were not out of line with that of other industrial firms. More importantly, revenues surpassed the $2 billion mark for the first time in 1989 and earnings continued to increase steadily, reaching $182.4 million that year.

Acquisitions continued to fuel spectacular growth in the 1990s for ITW, growth that was only partially slowed by the recession of the early years of the decade. The largest of 15 acquisitions in 1990 was that of the $200 million revenue DeVilbiss spray painting equipment business of Eagle Industries Inc., which built on the prior year’s purchase of Ransburg Corporation, also a maker of spray painting equipment. In 1993 ITW added Miller Group Ltd., a maker of arc welding equipment that had $250 million in revenues. As usual, Miller’s operations were soon broken apart, with seven separate units emerging.

The years 1995 and 1996 were transitional ones for ITW, as Nichols handpicked a successor and then stepped aside. W. James Farrell, a 30-year ITW veteran who had served as president, moved into the CEO position in September 1995, replacing the retiring Nichols as chairman in May 1996. During his 14 years as CEO, Nichols oversaw an amazing period of growth, from $450 million in revenues in 1981 to $4.18 billion in 1995, when earnings reached $387.6 million. Revenues grew at a rate of about 20 percent per year, and profits increased even faster, 40 percent in 1995 alone. Through Nichols’s aggressive acquisition program and his commitment to a decentralized organizational structure, ITW boasted 365 separate operating units by 1996. During his tenure, Nichols also increased the company’s presence outside the United States such that by 1996 about 35 percent of revenues were derived overseas, primarily from European operations.

THE FARRELL ERA AND THE 80/20 PHILOSOPHY

The Farrell-led ITW essentially picked up where Nichols left off. The company made 19 acquisitions in 1996, including Hobart Brothers Company, a maker of welding products, and the Australian-based Azon Limited, a manufacturer of strapping and other industrial products. The possibility that Farrell would be even more aggressive than Nichols was raised in late 1995 when ITW made its first hostile takeover bid in the company’s history, a $134 million offer for fastener maker Elco Industries Inc., a venture that failed after ITW was outbid for Elco by Textron Inc.

One hallmark of the Farrell era of leadership was the greater prominence given to an ITW management philosophy known as 80/20. Managers of the numerous company units were encouraged to focus most of their efforts on the 20 percent of their customers who accounted for 80 percent of their business. ITW viewed this approach as a way to spark improvements in numerous areas, including product quality, productivity, market share, and customer satisfaction.

In the meantime, the acquisition pace picked up under Farrell in the late 1990s, as ITW completed 30 deals in 1997, 46 in 1998, and 31 in 1999. The vast majority of these were smaller purchases of companies with annual sales of less than $50 million. In November 1999, however, the company completed the biggest acquisition in its history, a $3.4 billion deal for Premark International, Inc., of Deerfield, Illinois. Premark, onetime parent of the Tupperware food-storage product business, produced commercial food equipment for restaurants, hotels, and hospitals under the Hobart, Vulcan, Traulsen, and Wittco brands and the Wilsonart line of decorative laminates for countertops, furniture, and flooring.

These were the two main Premark product lines that ITW sought to add for the long haul, and they represented annual revenues of approximately $2.5 billion. Broken apart into more than two dozen smaller autonomous businesses, they also helped increase the number of ITW units to nearly 600 by the end of 2000. Premark was involved as well in the production of consumer products, including West Bend appliances, Precor fitness equipment, and Florida Tile ceramic tiles. These operations fell outside ITW’s traditional industrial focus, and they were earmarked for divestiture in December 2001. Consequently, Precor and West Bend were sold in October 2002, and Florida Tile followed in November 2003.

ECONOMIC DOWNTURN, THEN RECESSION

The economic downturn of the first years of the 21st century interrupted Illinois Tool Works‘ consistent pattern of growth. Profits fell in both 2001 and 2002, while revenues dropped 2 percent in 2001 before rebounding slightly the following year. As the economy rebounded, ITW resumed its growth trajectory in 2003 when revenues surpassed the $10 billion mark for the first time, and net income surged past $1 billion, also a record. The pace of acquisitions slowed during this period because ITW management felt that business owners were placing excessively high price tags on their companies considering the state of the economy. After spending some $800 million to complete 45 acquisitions in 2000, ITW completed 29 deals for a total of $556 million in 2001 and then 21 deals for just $188 million and 28 deals for $204 million in 2002 and 2003, respectively.

In 2004 the profit figure of $1.34 billion and the revenue total of $11.73 billion both represented sharp jumps from the preceding year. This stellar year was the last with Farrell at the helm, as the executive stepped down from the CEO spot in August 2005. Succeeding him was 27-year company veteran David Speer, who had been an executive vice president since 1995. Speer became chairman as well in August 2006 following Farrell’s retirement.

Under Speer’s guidance, Illinois Tool Works remained on its acquisition-led growth track. During 2005 the company purchased 22 companies for a net total of more than $625 million. While most of these acquisitions continued to be of companies with annual sales of between $30 million and $50 million, two larger purchases were completed that year. In the spring ITW bought Permatex, Inc., a Hartford, Connecticut-based maker of sealants, adhesives, and other products for the automotive aftermarket and industrial markets with annual sales of $125 million. ITW paid about $240 million in the fall for Instron Corporation, a Norwood, Massachusetts, manufacturer of materials and structural testing machinery and software.

In February 2006 ITW acquired Alpine Engineered Products, Inc., a manufacturer of metal connectors, design software, and related machinery for the design and assembly of trusses for the residential and commercial construction markets. Based in Pompano Beach, Florida, Alpine had 2005 revenues of $201 million.

The ongoing deal making brought the number of ITW business units to around 700 by early 2006. Between 2006 and 2008 the company completed more than 150 acquisitions, spending about $3.9 billion on the deals. By 2008, however, despite this high acquisition pace, ITW’s growth had begun to stall and its profits were on the decline. A major reason for this was the company’s heavy exposure to the automotive and construction industries, two sectors that showed considerable weakness even before the official start of the global economic downturn that began in 2008.

Late in 2007, seeking to reignite its growth, Illinois Tool Works announced its intention to pursue larger acquisitions. In the spring of 2008, the company entered into a bidding war with the Manitowoc Company, Inc., over Enodis plc, a U.K.-based manufacturer of commercial kitchen equipment. Purchasing Enodis would have nearly doubled the size of ITW’s existing food equipment operations, but Manitowoc won the takeover battle with a $2.4 billion bid. In a further setback, ITW in August 2008 announced its intention to sell Click Commerce, Inc., a developer of supply chain management software that had been acquired in 2006 for $292 million. ITW had earlier written down the value of the unit by $97 million, Page 249  |  Top of Articlewhich constituted the largest write-off in the company’s history. Click Commerce was sold to a private-equity firm in 2009, and ITW said it planned to avoid making further acquisitions of software companies, a sector outside the company’s area of expertise.

At the height of the recession in 2009, ITW saw its sales fall nearly 19 percent to $13.88 billion, while net income plunged more than 37 percent to $947 million. The acquisitions market dried up that year and into the next as business owners were reluctant to sell at a market bottom, while ITW also continued its practice of not pursuing businesses in distress. Only 20 deals were completed in 2009, valued collectively at $281.4 million.

Acquisitions did not fully pick up again until 2011, when ITW spent more than $1.3 billion on 28 deals. Some of the purchases made that year were of the larger type being sought, including Despatch Industries, a leading provider of thermal processing equipment for the solar, carbon fiber, and other thermal technology markets, with annual revenues of more than $200 million; and the aftermarket car-care business of SOPUS Products, which included Rain-X rain repellent for windshields, Black Magic liquid wax, and Gumout fuel system cleaner. The latter business, which generated annual revenues of around $300 million, was subsequently renamed ITW Global Brands. The acquisitions at this time were also selected in part to aid in the pursuit of emerging market growth. By 2012, for example, ITW derived more than $2 billion in sales from the Asia-Pacific region, more than double the figure for 2006.

CHANGING COURSE

Under pressure from shareholders because of its lackluster growth in the nascent recovery from the recession, ITW changed course and began selling slower-growth, lower-margin businesses within its extensive portfolio. In April 2012 the company sold its finishing group of businesses to Graco Inc. for $650 million. Included in the deal were spray painting systems and technologies sold under the Gema, Ransburg, DeVilbiss, BGK, and Binks brands. ITW also sold a 51 percent interest in its decorative surfaces operations, which included the Wilsonart brand, to a fund managed by the private-equity firm Clayton, Dubilier & Rice, LLC. As part of this deal, completed in October 2012, ITW received $1.05 billion in cash and retained a 49 percent stake in the business.

In November 2012, a month after taking a medical leave, Speer died of complications from cancer. Succeeding Speer as CEO was E. Scott Santi, a company veteran who had joined ITW in 1978 and had moved up to become vice chairman by 2008. He had served as interim CEO during Speer’s leave. Santi accelerated the transformation of ITW that Speer had started. By the spring of 2014 the company had shed more than 20 slower-growing businesses that represented about 25 percent of its 2012 revenues. Most dramatically, ITW sold its industrial packaging unit to the Carlyle Group in May 2014 for $3.2 billion. This unit, which included such brands as Signode, Strapex, Angleboard, and Mima, had generated around $2.4 billion in revenues in 2012.

Another key element of ITW’s new strategy was a restructuring designed to create larger businesses with the ability to sustain long-term above-average organic growth. During 2013 and into the following year, Illinois ToolWorks worked to consolidate its hundreds of business units into approximately 90 larger-scale global divisions. Decentralization remained a hallmark at ITW, but the company structure became much more streamlined. These changes were intended to make the company less dependent on acquisitions for growth. Two-thirds of growth was expected to come organically, with the remainder derived from larger, strategic acquisitions. It remained to be seen whether the changes that had been implemented were sufficient to return ITW to the sustained levels of growth that characterized the company when it was significantly smaller.

COMPANY PERSPECTIVES

The ability to invent, envision, and create something new is central to ITW’s longevity and profitable growth. Our innovation is “80/20 enabled,” meaning that we draw deep insights from our key customer relationships, and then focus our efforts on designing and patenting new products and components that solve their specific challenges. Encouraging new ideas—whether they come from engineers, chemists, or other members of the ITW team—and providing a supportive, entrepreneurial framework, has produced ITW’s strong culture of sustainable differentiation through innovation.

KEY DATES

1912:

Byron Laflin Smith and sons form Illinois Tool Works (ITW) to begin producing machine tools.

1915:

Company is incorporated.

1923:

Company enters industrial fastener market.

1936:

Harold Byron Smith becomes president of ITW and later introduces firm’s trademark decentralized structure.

1955:

Fastex, a unit focused on plastic products, is formed.

1962:

ITW forms Hi-Cone, specializing in plastic drink packaging.

1975:

Company enters adhesives industry through purchase of Devcon Corporation.

1999:

Acquisition of Premark International, Inc., brings to the fold Hobart, Vulcan, Traulsen, and Wittco commercial food equipment.

2013:

ITW begins consolidating its hundreds of business units into approximately 90 larger-scale global divisions.

KeyCorp

Public Company
Founded: 1825 as Commercial Bank of Albany
Incorporated: 1958 as Society Corporation
Employees: 18,500
Total Assets: $99.98 billion (2007)
Stock Exchanges: New York
Ticker Symbol: KEY
NAIC: 551111 Offices of Bank Holding Companies; 522110 Commercial Banking; 522292 Real Estate Credit; 523110 Investment Banking and Securities Dealing; 523920 Portfolio Management; 523930 Investment Advice; 524210 Insurance Agencies and Brokerages; 525910 Open-End Investment Funds; 532420 Office Machinery and Equipment Rental and Leasing

One of the 15 largest banks in the United States, KeyCorp is involved in retail and commercial banking as well as a number of other sectors within the financial services industry. Its community banking operations encompass more than 950 full-service branches and more than 1,400 ATMs in 13 northern-tier states: Oregon, Washington, and Alaska in the Northwest; Colorado, Idaho, and Utah in the Rocky Mountain region; Ohio, Michigan, Indiana, and Kentucky in the Great Lakes region; and New York, Vermont, and Maine in the Northeast. Via this network, KeyCorp offers individuals and small businesses a variety of deposit, lending, investment, and wealth management products and services.

KeyCorp also operates a number of other business units that reach a broader swath of the country, 29 states in all. These include operations focusing on real estate capital, equipment financing, global treasury management, asset management, investment banking, capital markets services, insurance, and financial planning. The KeyCorp of the early 21st century is a product of the 1994 merger of “old” KeyCorp, whose ultimate predecessor was the Commercial Bank of Albany, founded in Albany, New York, in 1825, and Society Corporation, a Cleveland-based institution dating back to its establishment in 1849 as Society for Savings.

THE ROAD TO KEYCORP

KeyCorp’s history dates back to 1825 when New York Governor DeWitt Clinton signed a bill chartering the Commercial Bank of Albany, KeyCorp’s direct ancestor. In 1865 Commercial Bank was reorganized under the National Banking Act of 1864, and its name was changed to National Commercial Bank of Albany. Also during this time, another bank that would eventually become part of KeyCorp opened, the Trust and Deposit Company of Onondaga in Syracuse, established in 1869. In 1919 this bank merged with First National Bank of Syracuse to become First Trust and Deposit Company. Around the same time, the National Commercial Bank of Albany went through another reorganization, consolidating with Union Trust Company to become National Commercial Bank and Trust Company.

These two banking concerns operated independently over the next several decades, growing via a number of acquisitions. In 1967 First Trust and Deposit Company adopted a “key” symbol, the foundation for the KeyCorpname and its signature logo. Four years later, First Trust and Deposit merged into National Commercial Bank and Trust, creating First Commercial Banks, Inc. With that transaction, First Commercial had 89 offices in New York State. The name was changed to Key Banks Inc. in 1979, and then six years later, with its expansion beyond branch banking and into other financial services, the institution’s holding company adopted the nameKeyCorp.

Victor J. Riley, Jr., became president and CEO of the bank in 1973. He continued to serve in this capacity into the early 1990s, when he was one of the longest-tenured bank CEOs in the country. Riley led the bank from its days as a strictly upstate New York bank to its position as the country’s 29th largest financial institution in 1991 with $23 billion in assets, up from $2.4 billion ten years earlier. Between 1981 and 1991, the bank’s stock produced an impressive 810 percent total return including dividends, third among the 50 largest banks, according to the company’s annual report.

During the 1970s and early 1980s, KeyCorp bought banks throughout the upstate area as well as 25 offices from the Bank of New York. Initially, Riley’s plan was for KeyCorp to become a regional concern by acquiring banks in New England as well, starting with its purchase of a bank in Maine: Augusta-based Depositors Corporation, acquired in early 1984. However, at the same time, to keep the large New York banking establishments from dominating the New England banking system, a move was made to exclude New York banks from purchasing banks in Massachusetts and Connecticut.

LOOKING WEST

Riley looked to the West when his New England strategy was thwarted. He anticipated that when U.S. trade with Asia increased, the economies of western states would also improve. KeyCorp bought a string of banks, and in the four years between 1985 and 1990 quintupled its assets from $3 billion to $15 billion. While other banks were focusing on large cities, especially in the Northeast, KeyCorp was focusing on areas of low population in which banking services were scarce. Furthermore, KeyCorp avoided the pricing wars that often occurred in highly competitive markets.

While eastern banks were buying other eastern banks at premium prices, KeyCorp continued its westward expansion, acquiring inexpensive and promising banks in Wyoming, Idaho, and Utah. In 1985 Riley bought two banks in Alaska and Alaska Pacific Bancorporation; he used Alaska’s interstate banking laws to purchase a bank in Oregon, which became known as Key Bank of Oregon. The next year, KeyCorp acquired Northwest Bancorp of Albany, Oregon, and Pacwest Bancorp of Portland, Oregon, which also became part of Key Bank of Oregon.

Many leaders in the banking industry thought Riley was making a mistake when he started buying banks in Alaska and the Northwest in 1984. Critics doubted his ability to manage such banks from a home office in Albany, New York. The purchase certainly seemed like a mistake when oil prices dropped dramatically, and Alaska plunged into a recession. KeyCorp moved quickly to restructure loans for borrowers hit by recession and foreclosed on loans when necessary.

KeyCorp also continued to buy banks in small towns and cities in New York State. In 1986 it acquired four savings banks in the mid-Hudson Valley. In the same year, it increased its western holdings by purchasing Beaver State Bank in Beaver, Oregon.

Although KeyCorp had been shut out of acquisitions in much of New England a few years before, in 1987 Riley bought eight branch offices in Maine from Fleet/Norstar Financial for $14 million. They became part of Key Bank of Maine. KeyCorp also opened a unique subsidiary based in Albany, Key Bank USA N.A., which provided banking services by mail to customers nationwide who were not within a Key Bank region.

REGIONAL DIVERSITY WITH A SMALL-TOWN APPROACH

Regional diversity had advantages and disadvantages for KeyCorp. On the positive side, KeyCorp was not so vulnerable to economic slumps in one region. Director H. Douglas Barclay told the Wall Street Journal,“Problems in one or two states can be contained. Over time it all balances out.” While the Northwest was in a slump, the Northeast was booming. Then, the tables were turned and the Northwest picked up while the Northeast was in recession. Nevertheless, geographic diversity also made KeyCorp expensive to run, with operating costs as a percentage of assets high. Top executives also spent a lot of time on the road, visiting branches far from the Albany headquarters.

Consistent with the small-town approach, Riley rarely replaced personnel in the banks KeyCorp purchased, choosing instead to stay with management familiar to the local population. He told Business Week, “You cannot go into a new state and start shuffling people around and maintain yourself as a retail bank.”

The small-town philosophy, which had led Wall Street to commonly refer to it as the “Wal-Mart of banking,” also helped the bank avoid costly bad loans. KeyCorp’s policy was to lend to people and businesses in the areas it served. It avoided the pitfall of many other banks, lending outside the states in which it had branches. In 1990 bad loans made up only 4 percent of its $9.9 billion load portfolio; most of those bad debts were at its Alaska banks, hard hit by a decline in oil exploration. Furthermore KeyCorp’s lending practices were financially conservative. The company did not make any loans greater than $20 million and its average commercial loan was only about $2 million. Furthermore, no single industry group represented more than 24 percent of KeyCorp’s commercial loans.

After more than ten years of acquisitions that had brought KeyCorp into the top 50 list, KeyCorp shifted its focus to reducing its high overhead costs. In 1990 its efficiency ratio was about 66 percent, meaning that about 66 cents worth of every dollar in revenue was spent on overhead. By the end of 1992, its efficiency ratio had improved to 61.9 percent and was more in line with the efficiency ratios of comparable banks. KeyCorp merged its operations into two computer centers and brought its four mortgage companies together as one. The banking company also sold a car-leasing business and a finance company that were unprofitable. Still KeyCorplacked a standardized reporting system for its hundreds of branches. This became a priority for William Dougherty, the company’s chief financial officer, who set to work linking KeyCorp’s branches by computer and consolidating its back-office operations. By the end of 1992, all of KeyCorp’s banks were linked electronically, with primary processing centers in Albany and in Tigard, Oregon. Six secondary sites handled business more suited to regional processing.

CONSOLIDATION AND FURTHER ACQUISITIONS

In line with the trend in banking toward consolidation of holdings, KeyCorp consolidated several New York State operations into one financial institution. Key Bank of Eastern New York, Key Bank of Central New York, and Key Bank of Western New York became a single nationally chartered bank, Key Bank of New York State, N.A., with its offices in Albany.

KeyCorp benefited from the country’s thrift crisis in the early 1990s by buying from the government assets of two large failed New York thrifts: Empire Federal Savings and Loan and Goldome Savings Bank. With the Goldome purchase, KeyCorp moved from its status as an unknown in the mortgage industry to become the 19th largest mortgage banker in the nation. Furthermore, the Goldome purchase turned out to be profitable as the market for new and refinanced mortgage loans boomed, with interest rates the lowest they had been in decades.

In 1992 KeyCorp acquired Valley Bancorporation of Valley Falls, Idaho, which became part of Key Bank of Idaho. KeyCorp also bought the 48 branches of Security Pacific Bank in Washington, which became part of Key Bank of Washington. The company negotiated several other deals as well that were completed in early 1993; Puget Sound Bancorp, with assets of $4.7 billion, merged with Key Bank of Washington; 40 branches of New York’s First American Bankshares and nine branch offices of National Savings Bank of Albany were acquired; and KeyCorp also bought its first holding in Colorado, Home Federal Savings Bank of Fort Collins.

By the end of 1992, KeyCorp had its operations and its expenses under control, using a computer system to keep track of its coast-to-coast snowbelt holdings. Its earnings were also looking better. For a long time earnings stood at 90 cents for every $100 in assets, but in 1992, they pulled past the industry standard of one dollar per $100 in assets.

While other banks in the Northeast had been saddled with bad real estate loans, KeyCorp’s net earnings were increasing because its Northwest holdings, which in 1990 made up more than 39 percent of its holdings, were booming. Although it owned banks in some larger western cities, the majority of its banks were located in small towns such as Troy, Idaho, with a population of 820 and Gig Harbor, Washington, with a population of 2,429.

Riley and Dougherty were credited with taking KeyCorp into the ranks of the top 50 U.S. financial institutions, with total assets of more than $30 billion by early 1993. According to the Economist, KeyCorp’s “loan book and profitability are the envy of other banks.” That article explained that KeyCorp avoided the “easy money” made from big development loans for commercial property and corporate loans for highly leveraged transactions. This kept KeyCorp out of some of the deep troubles that other banks encountered. KeyCorp also refrained from making loans to third world nations. In 1992 the bank held only 25 loans that were worth more than $12.5 million and only one worth more than $30 million, a loan to the owner of the bank’s headquarters in Albany. From this prudent position, KeyCorp next pursued a merger with Society Corporation.

FROM SOCIETY FOR SAVINGS TO SOCIETY CORPORATION

The Society for Savings was founded by Samuel H. Mather as a mutual savings bank in Cleveland, Ohio, in 1849. Within three years, Mather’s part-time business had collected deposits of $150,000; by 1857, Society had become Mather’s full-time job. Ten years later, the bank built its first headquarters, a three-story building on Cleveland’s Public Square. Society outgrew that building by 1890, when the bank erected Cleveland’s first “skyscraper,” a ten-story stone structure that featured two massive murals depicting the story of “the goose that laid the golden egg.” At the time, the Society for Savings was the tallest structure between New York and Chicago.

The bank earned a reputation for security and conservatism during its first half-century in business by surviving four depressions and financial panics. It emerged from the Great Depression’s federally mandated bank holiday as one of Cleveland’s four largest banks, with deposits of over $100 million. By the time Society celebrated its centenary in 1949, it was the largest mutual savings bank west of the Allegheny Mountains. Although it still had only one office, Society had garnered 200,000 depositors and over $200 million in deposits.

Society National Bank was formed in 1955 as a commercial bank of the National Banking Association. Society National acquired the assets and liabilities of the Society for Savings mutual bank in 1958. The terms of the merger also made Society a public company. Voting certificates were issued to depositors of record at the end of 1958 at $500 each. Society Corporation was then created and became the first entity in Ohio formed under the 1956 federal Bank Holding Company Act. Before 1960, Society National became the first commercial bank in the United States to use online teller terminals, one of the decade’s newest electronic data systems.

Society Corp.’s adoption of the holding company structure enabled it to grow rapidly between 1958 and 1978, when it acquired 12 community banks, including: Fremont Savings Bank, Western Reserve Bank of Lake County, Springfield Bank, Xenia National Bank, Erie Page 276  |  Top of ArticleCounty Bank, Farmers National Bank & Trust Co., Tri-County National Bank, Second National Bank of Ravenna, Peoples Bank of Youngstown, 1st State Bank & Trust, American Bank, and First National Bank of Clermont County. The subsidiary banks had combined assets of over $500 million in 1972.

Society Corp.’s history as a mutual savings bank was often derided by analysts, but by the mid-1970s, the heritage was recognized as an advantage. Savings accounts, a source of strength and stability, represented 65 percent of the bank’s $1.5 billion in total deposits. In 1979, when Ohio’s banking laws were revised to permit banks to establish branches in counties contiguous to the home office’s county, Society Corp. was poised for its second growth spurt. The expansion was accomplished through dozens of small acquisitions and three billion-dollar mergers between 1979 and 1989.

1979 ACQUISITION OF HARTER BANCORP.

Society Corp.’s opening salvo in its acquisitions spree occurred in 1979 with the acquisition of Canton, Ohio’s largest bank, Harter BanCorp. Harter entered Society Corp.’s 12-bank stable second only to Society Corp.’s flagship Society National Bank, adding $400 million in assets to the holding company’s $1.8 billion. Society Corp. acquired five smaller banks over the next three years. Second National Bank of Bucyrus, with assets of $34.6 million, was purchased in 1980 for $5.2 million. Second National helped fill a gap between Society Corp.’s northern Ohio banks and its Dayton and Columbus affiliates, thereby giving the corporation access to counties that it had not been able to reach in the past. Later that year, Society Corp. acquired Community National Bank (Mount Gilead, Ohio) and merged its $15 million assets and customers with Second National of Bucyrus. The new entity was renamed Society National Bank of Mid-Ohio. In 1981, Society Corp. purchased First National Bank of Carrollton and merged it with Harter BanCorp.’s flagship Harter Bank & Trust. Lancaster National Bank’s $30 million in assets and three branch offices were added to Society Corp.’s roster at a cost of $2.78 million later that year. The acquisition of Citizens Bank of Hamilton for $10.7 million in cash and notes closed Society Corp.’s first round of relatively small acquisitions.

The corporation regrouped over the next two years by reorganizing its top management structure and consolidating its bank holdings. Early in 1982, a tripartite management team was formed, with J. Maurice Struchen, chairman and CEO of Society Corp., Robert W. Gillespie, vice-chairman of Society Corp. and COO of Society National Bank, and Gordon E. Heffern, president and COO of Society Corp., sharing the corporation’s top responsibilities. The team concept helped coordinate policymaking, planning, and operating between the holding company and its largest subsidiary. It also helped Society Corp.’s management prepare for interstate banking and inter-industry acquisitions.

Later in 1982, Society Corp. merged three of its northwest Ohio banks—Society National Bank of Northwest Ohio, Fremont Savings Bank, and American Bank in Port Clinton—to form a $250 million, 15-office, five-county bank. Society Corp. also joined with three other banks, National City Corporation (Cleveland), Fifth Third Bancorp (Cincinnati), and Third National Bank of Dayton, to form an ATM network of 400 machines. The virtually statewide network gave over one million customers access to accounts in most major Ohio cities.

1984 ACQUISITION OF INTERSTATE FINANCIAL

By the end of 1983, Society Corp. had net earnings of $8.01 million on total assets of $4.3 billion, and was poised for another major acquisition. In the spring of 1984, Society Corp. merged with Interstate Financial Corporation, parent of Third National Bank in Dayton. The acquisition increased Society Corp.’s assets to $5.1 billion and gave the corporation a stronger foothold in Dayton metropolitan area banking, where Interstate was the second largest bank. Interstate’s subsidiary, North Central Financial Corp., had offices in Ohio, Indiana, Virginia, Maryland, and Florida, and held $1.1 billion in mortgage loans.

Within a little over a year, Society Corp. would make an even larger acquisition, but in the meantime, the corporation contented itself with the purchase of BancSystems Association, a regional bank card processor headquartered in suburban Cleveland. BancSystems provided MasterCard and Visa credit and debit card processing for 140 banks and savings and loan associations, and employed over 300 people. The acquisition helped Society Corp. diversify its income base into more non-interest sources, giving it over 1.4 million credit card accounts and annual volume of $2.3 billion in processed transactions. Later in 1984, Society Corp. set up barriers to a takeover by prohibiting two-tier pricing and establishing a two-thirds majority in case a takeover vote was called.

1985 ACQUISITION OF CENTRAN

The corporation further shored up its takeover defenses with the purchase of Centran Corp., a holding company of Cleveland’s fourth largest bank, Central National, in 1985. Society Corp. offered Centran’s stockholders a choice of cash or stock totaling $220 million for its assets of $3.1 billion and 82 offices in northern and central Ohio. The acquisition made Society Corp. one of the state’s top five banks. The merger had some drawbacks, however. Centran carried with it the vestiges of ill-advised bond investments made in 1980, an unsuccessful attempt to expand into consumer finance that lost another $20 million, and problems with international loans. Centran lost $70 million on the bad bonds and had to be bailed out by Marine Midland Banks, Inc., which held influential stock in the company. Society Corp. offered Marine Midland $26 million in cash and $50 million in non-voting adjustable-rate perpetual preferred stock, thereby limiting this bank’s voice in the merged company. Following the takeover of Centran, Heffern continued as chair and CEO of Society Corp., while Wilson M. Brown, Jr., chairman, president, and CEO of Centran, became president and chief administrative officer of Society Corp. Gillespie was named deputy chairman and chief operating officer. All three combined to maintain the tripartite “office of the chairman.”

The merger was deemed a success when the positive results started pouring in as early as 1985: both Society Corp. and Centran chalked up record earnings for the year, and once their two primary banks were integrated, Society National Bank ranked second in Cleveland. Society Corp.’s assets reached $9 billion, up from $6.1 billion before the acquisition, while the company saved $28 million in annual operations in the process of the merger. Society Corp. became Ohio’s third largest bank holding company, next to National City Corporation (Cleveland), with $12 billion in assets, and Banc One Corporation (Columbus), with $9.6 billion in assets. Society Corp. had 250 bank branches statewide and about 6,500 employees. One of the reasons for the bank’s continuing success was its tradition of conservatism. The company’s executives were proud of the fact that it had avoided most of the decade’s banking pitfalls: agricultural, energy, and foreign loans, and the financing of leveraged buyouts.

In 1987 Heffern retired and was succeeded as CEO by Gillespie, who, at 42, became the youngest chief executive to head one of Ohio’s top-ten bank holding companies. The promotion gave Gillespie a total of four titles: CEO and president of Society Corp. and CEO and president of Society National Bank. Gillespie had spent his entire career at Society Corp., starting out as a part-time teller while in graduate school at Case Western Reserve University. Also in 1987, Society Corp. was able to set earnings records by repurchasing some of its stock after the October 1987 stock market crash. Profits rose to $89 million, and the stock appreciated almost $10 per share within less than a year.

Ohio’s interstate banking legislation opened the state to banks from virtually any other state with similar legislation in October 1988. By 1990, new state laws enacted around the country had made old federal laws against interstate banking irrelevant, and in the summer of 1989, a federal thrift reform law that permitted the purchase of savings and loans was passed.

The country had entered an era of “superregional banks,” such as NBD Bancorp of Detroit, PNC Financial Corporation of Pittsburgh, and Banc One of Columbus. To prepare for the increased competition that would come from these powerful banks, Society Corp. began to consolidate its holdings. Society Bank of Eastern Ohio was merged into Society National Bank, creating a bank with assets of $7.5 billion and 132 offices. Society National was then reorganized into nine districts to take advantage of the growing bank’s economies of scale. Late in the year, Society Corp. increased its impact in central Ohio with the purchase of 13 branches of Citizens Federal Savings and Loan Association. The acquisition increased Society Corp.’s number of offices in the Columbus area by 50 percent, and raised the assets of the newly merged bank to $2.75 billion. Society Corp. sold BancSystems Association Inc. to Electronic Data Systems Corp. of Dallas to garner an estimated $6 million profit late in 1989.

ACQUISITIONS OF TRUSTCORP (1990) AND AMERITRUST (1991)

Society Corp. began the 1990s with two major acquisitions that placed it among the area’s superregional banks. In 1990 the purchase of Toledo’s Trustcorp, Inc., through an exchange of $430 million in stock gave Society Corp. operations in Ohio, Michigan, and Indiana and raised its total assets to almost $16 billion, thereby ranking the company among the United States’ 40 largest banks. Trustcorp’s BB credit rating pulled Society Corp.’s A-plus down to an A because of several loan losses on downtown Toledo real estate projects. Society Corp. was also obliged to settle a $5.6 million shareholder lawsuit against Trustcorp and assign extra funds to reserves that would cover any defaulted loans. By the fall of 1991, Society Corp. had turned its newest subsidiary around and renamed its affiliates Society Bank & Trust; Society Bank, Indiana; and Society Bank, Michigan.

Society Corp. worked to pare down its non-interest expenses during the recession of the early 1990s that slowed loan demand and cut into profits. In March 1990 it repurchased Marine Midland’s interest in the corporation for $49.25 million, thereby saving the preferred dividends paid on the stock. That spring, Society Corp. vowed to cut about 10 percent, or $40 million, from its $390 million in annual non-interest expenses.

In September 1991 Society Corp. announced the largest bank acquisition in Ohio history. It merged with Cleveland’s Ameritrust Corporation. The tax-free agreement called for an exchange of $1.2 billion in Society Corp. stock, and created a new corporation with combined assets of $26 billion. The addition of Ameritrust’s retail and trust locations throughout Ohio, Indiana, Michigan, Texas, Florida, Missouri, Colorado, New York, and Connecticut made Society Corp. the largest bank in Cleveland and the 29th largest in the country. The two banks’ trust departments together became the 15th largest in the country in terms of revenues. Merging Ameritrust and Society Corp. required the elimination of about 2,000 positions and closing or selling 90 branches. Society Corp. also had to divert about $46 million to Ameritrust’s reserve against problem loans.

Society Corp.’s acquisitions in 1992 and 1993 were modest, compared to the purchases made in the first two years of the decade, but they expanded the Great Lakes corporation geographically. In 1992, the corporation purchased First of America Bank-Monroe (Michigan), a $149 million bank, from First of America Bank Corporation. Early in 1993, Society Corp. completed its purchase of First Federal Savings and Loan Association of Fort Myers, a $1.1 billion thrift with 24 branch offices in central and southwestern Florida.

1994 MERGER OF KEYCORP AND SOCIETY CORP.

In October 1993 Society Corporation and KeyCorp agreed on a so-called merger of equals valued at $3.9 billion. In this deal, completed in March 1994, KeyCorp was merged into Society Corporation, which was the surviving entity but took the KeyCorp name. The new KeyCorp, which adopted Society’s headquarters in Cleveland as its base, was led by Victor Riley as chairman and CEO and Society’s Robert Gillespie as president and COO. With $58 billion in assets, KeyCorp ranked as the 11th largest bank in the country.

The merger created a branch network ranging across 13 states, all in the northern tier, save Society’s Florida branches. Society’s other branches in Ohio, Michigan, and Indiana filled in a gap in KeyCorp’s operations, which encompassed Alaska, Washington, Oregon, Idaho, Utah, Wyoming, Colorado, New York, and Maine. The combination was designed to mesh KeyCorp’s strength in community banking with Society’s more robustly developed array of financial products, which included strong investment management, specialty finance, and large corporate banking operations.

The actual implementation of the merger ended up being a protracted one hampered by culture clashes and in the short run failing to deliver on the initial synergistic promises. A number of restructuring moves were needed, including divesting certain peripheral operations, such as its residential mortgage servicing unit, which was sold to NationsBank Corporation in March 1995. On the addition side, KeyCorp expanded into the booming market for subprime lending, the sector of the lending market serving higher-risk individuals with lower credit ratings. The company acquired Chicago-based AutoFinance Group, Inc., a subprime auto lender, in September 1995 for $325 million in stock and Champion Mortgage Co., Inc., a subprime home-equity lender based in Parsippany, New Jersey, for $200 million in stock in August 1997. KeyCorp in July 1997 also acquired Leasetec Corporation, a concern based in Boulder, Colorado, specializing in the leasing of information-technology and telecommunications equipment.

The branch network was overhauled as well. In March 1995 KeyCorp gained its first branches in Vermont and also became the number one bank in Maine by purchasing the Maine and Vermont operations of Bank of Boston for nearly $200 million. In mid-1996 the company sold its Florida banking operation having determined that it would be unable to become a major player in that market. Late that same year, KeyCorp launched a major restructuring. Seeking further efficiencies in its operations, the company announced plans to close or shut down 280 branches across the country and eliminate about 3,000 jobs. Among the subsequent cuts was the sale of all of the branches in Wyoming. In addition, in 1997 KeyCorp dismantled its regional-bank structure by consolidating its various state-chartered banks into a single national bank, KeyBank National Association. To raise its profile among consumers around the country, KeyCorp in 1996 launched a highly successful and long-running television ad campaign featuring actor Anthony Edwards. In the midst of all these developments, a transition in leadership occurred as well. Riley turned over the CEO position to Gillespie in September 1995 and then the chairmanship one year later.

MOVE INTO INVESTMENT BANKING AND FURTHER RESTRUCTURING

As the barriers between commercial and investment banking continued to crumble, KeyCorp late in 1998 made its own move into investment banking, purchasing McDonald & Company Investments, Inc., for around $581 million in stock. The deal enabled KeyCorp to add the stock and bond underwriting capabilities of Cleveland-based McDonald and thereby broaden its offerings to corporate clients in small and medium-sized markets.

Still dealing with a higher cost structure than many of its peers, KeyCorp ended the decade with further restructuring moves. In October 1999 the company sold its 28 branches on Long Island after concluding that this was another market where it was destined to remain a minor player. The move freed up resources to invest in markets with higher growth potential, such as Salt Lake City, Denver, Seattle, and Portland, Oregon. Just a month later, the company launched a major restructuring that eventually yielded annual cost savings of roughly $300 million. KeyCorp reduced its workforce by nearly 4,100 mainly through management cuts and the consolidation and outsourcing of various “back-office” functions, including processing and customer-service operations. As this overhaul began, KeyCorp unloaded another peripheral business, selling its relatively small, $1.3 billion credit card portfolio to Associates First Capital Corporation and recording a $332 million pretax gain in the process. KeyCorp aimed to concentrate its lending in such areas as commercial and small-business loans and home-equity lines of credit.

In the early months of 2001, Gillespie retired from both the CEO position and the chairmanship. His handpicked successor was Henry L. Meyer III, who had been president and COO and who had come from the company’s Society side, having joined that concern in 1972. Meyer continued to oversee the restructuring launched in late 1999 and spearheaded the jettisoning of another troubled unit. In May 2001 KeyCorp announced plans to exit from the automobile leasing business and also to cut back on its indirect auto lending. In connection with these pullbacks, the company recorded more than $400 million in charges, cutting net income for 2001 to just $132 million, down from the previous year’s total of just over $1 billion.

RETURN TO GROWTH

By 2002 KeyCorp was confident enough in its restructuring and turnaround efforts to enter into another period of acquisitions that lasted through 2006. During this period, the company made its first bank acquisition in seven years, the $66 million, December 2002 purchase of Union Bankshares, Ltd., a Denver-based seven-branch banking operation with assets of $475 million. In July 2004 KeyCorp bolstered its Michigan branch network by purchasing Sterling Bank & Trust FSB, a privately held thrift based in Southfield with ten branches and approximately $380 million in deposits. Later in 2004, KeyCorp spent $195 million for EverTrust Financial Group Inc. of Everett, Washington, which operated 12 bank branches and two commercial loan offices and had assets of $770 million.

KeyCorp was also busy beefing up its operations in three areas in which it was ranked among the nation’s leaders: commercial real estate, equipment leasing, and asset management. Purchases in the commercial real estate field included Conning Asset Management (Hartford, Connecticut; June 2002), Malone Mortgage Company (Dallas; July 2005), and ORIX Capital Markets, LLC (Dallas; December 2005). In December 2004KeyCorp acquired the equipment leasing unit of American Express Company’s small business division. Then in April 2006 the company bought Austin Capital Management, Ltd., an asset management firm based in Austin, Texas, that specialized in selecting and managing hedge fund investments mainly for institutional investors.

Toward the end of this array of acquisitions, KeyCorp began focusing more intently on its 13-state branch banking business and on other “relationship-based” businesses that best meshed with its retail banking operations. A number of businesses unrelated to its retail banking network were thus jettisoned. KeyCorp sold its indirect auto lending business in the spring of 2006 and then sold Champion Mortgage to a unit of HSBC Holdings plc in November 2006 for $2.5 billion. In February 2007 KeyCorp pulled back on its foray into investment banking by selling the branch network of McDonald Investments to a subsidiary of UBS AG for $219 million.

In 2007, as the deteriorating housing market and credit crisis began sending ripples through the U.S. banking industry, KeyCorp announced its largest acquisition since 1998. In a deal completed in early 2008, the company bought U.S.B. Holding Co., Inc., parent of Union State Bank, for $547 million. Adding U.S.B. and its $3 billion in assets and 31 branches doubled KeyCorp’s branch network in New York’s Hudson Valley and pushed its total assets close to the $100 billion mark. Soon thereafter, however, KeyCorp announced its results for 2007, reporting that its fourth-quarter earnings had plummeted 83 percent after it had been forced to set aside $363 million during the quarter to cover rising loan delinquencies and defaults. Full-year earnings dropped 13 percent to $919 million. The credit crisis that precipitated these results also sparked speculation about a possible merger between KeyCorp and crosstown rival National City Corporation, which had been hit even harder by the crunch. Such a merger of equals, the second for KeyCorp, had the potential to create the sixth largest bank in the United States as well as a much more competitive institution than the two predecessors.

Key Dates

1825:

Commercial Bank of Albany is chartered in Albany, New York.

1849:

The Society for Savings is founded in Cleveland, Ohio.

1865:

Commercial Bank of Albany is reorganized as National Commercial Bank of Albany.

1869:

Syracuse-based Trust and Deposit Company of Onondaga is established.

c. 1919:

Trust and Deposit merges with First National Bank of Syracuse to become First Trust and Deposit Company; National Commercial Bank of Albany merges with Union Trust Company to become National Commercial Bank and Trust Company.

1958:

Society for Savings is reorganized as Society Corporation.

1967:

First Trust and Deposit adopts a “key” symbol.

1971:

First Trust and Deposit and National Commercial Bank merge to form First Commercial Banks, Inc.

1979:

First Commercial changes its name to Key Banks Inc.; Society Corp. acquires Harter BanCorp.

1984:

Key Banks ventures outside New York with the purchase of a bank in Maine; Society Corp. purchases Interstate Financial Corporation.

1985:

Key Bank is renamed KeyCorp and also expands to the west, acquiring its first banks in Alaska; Society Corp. acquires Centran Corp.

1990:

Society Corp. acquires Trustcorp, Inc.

1991:

Society Corp. purchases Ameritrust Corporation.

1994:

KeyCorp and Society Corp. merge to form a “new” KeyCorp, which is based in Cleveland.

1999:

Major restructuring is launched.

NiSource, Inc.:

Public Company
Incorporated: 1912 as Calumet Electric Company
Employees: 7,981
Sales: $8.87 billion (2008)
Stock Exchanges: New York
Ticker Symbol: NI
NAICS: 221112 Fossil Fuel Electric Power Generation; 221119 Other Electric Power Generation; 221121 Electric Bulk Power Transmission and Control; 221122 Electric Power Distribution; 221210 Natural Gas Distribution; 486210 Pipeline Transportation of Natural Gas

NiSource Inc. is an energy holding company that provides natural gas and electric power to customers throughout the eastern and midwestern United States. During the 20th century the company operated exclusively in its home state of Indiana, under the name Northern Indiana Public Service Company (NIPSCO). As states began to deregulate their utilities industries during the 1990s, however, the company began to explore business opportunities in other regions of the country. In 1999 it concluded its first significant merger, acquiring the Massachusetts-based utility Bay State Gas. Shortly after the merger, the company changed its name to NiSource, as a way of reflecting its broader geographical reach. With the acquisition of the Virginia-based Columbia Energy Group in 2000, NiSource became the leading natural gas provider east of the Rocky Mountains, with the largest storage capacity in the United States.

THE EMERGENCE OF A MAJOR MIDWESTERN UTILITY: 1853-1923

NiSource Inc. traces its origins to the mid-19th century, when the utility industry of northern Indiana was still in its infancy. In 1853 a forerunner of NiSource’s earlier incarnation, the Northern Indiana Public Service Company (NIPSCO), was established and called the Fort Wayne Gas Light Company. Thomas A. Edison, who later worked as a telegrapher in the area, was for a time a frequent visitor to the plant. Another important predecessor, the South Bend Gas Light Company, was organized in 1868 by the Studebaker brothers, who the same year founded their wagon-manufacturing company (which would later make automobiles). During the next three decades several other utilities in the area were formed; more important, however, were two momentous events of this early era: the experimental but unsuccessful introduction in 1880 of electric street lighting in Wabash, Indiana, and the discovery in 1886 of a large reserve of natural gas near Kokomo, which prompted the speculative drilling of more than 5,000 gas wells by more than 200 separate companies.

Consolidation of the existing utilities was hastened by the influx of major industry such as Standard Oil in 1889, Inland Steel in 1901, and U.S. Steel in 1906, as well as the completed construction in 1908 of the Chicago, Lake Shore, and South Bend Railroad. Together, these developments helped create a lasting economic tie between the cosmopolitan hub of Chicago and the Calumet area along the southern shore of Lake Michigan.

In 1909 the Northern Indiana Gas and Electric Company was formed. A year later it acquired South Bend Gas Light Company and became a subsidiary of United Gas Improvement Co. This formative branch of NIPSCO was complemented by another, the Calumet Electric Company, whose 1912 date of incorporation is usually given as the inception of NIPSCO. Like Northern Indiana Gas, Calumet eventually attracted the interest of a large holding company, the multibillion-dollar Midland Utilities Company. This company was managed by Samuel Insull, a former business secretary of Edison and a titan in the public utilities industry. In 1923 Midland acquired Northern Indiana Gas, thus uniting the two branches of NIPSCO. Three years later NIPSCO attained its near-present form when Calumet changed its corporate name to Northern Indiana Public Service Company and then merged with Northern Indiana Gas. At that time, NIPSCO, chaired by Insull, served 25 counties and approximately 200,000 customers.

GROWING PAINS

For a brief time Insull’s son, Samuel Insull Jr., served as president of the company, but in 1933, with the election of John N. Shannahan to the posts of president and chairman, the Insull family ceased its direct participation in NIPSCO’s affairs. Meanwhile, acquisitions, service territory, and power capability increased rapidly. Following Shannahan’s death in 1938, NIPSCO embarked on a long, steady period of growth under the leadership of Dean H. Mitchell. In 1947 Midland sold its NIPSCO stockholdings, allowing the former subsidiary to go public. The 1950s, 1960s, and 1970s were marked by continued corporate expansion and the completion of the Mitchell, Bailly, and Schahfer generating stations, all located in the northwestern corner of Indiana. Together with the Michigan City plant, completed decades earlier, these electric stations possess a total capacity of 3,059 megawatts, or approximately 90 percent of NIPSCO’s total power capability.

In 1974, three years after its original filing date, NIPSCO received a construction permit from the Atomic Energy Commission to build its first nuclear power plant at a site adjacent to its Bailly station and to the Cowles Bog, an ecologically unique wetlands area within the recently created Indiana Dunes National Lakeshore. An enormously controversial and costly project, Bailly Nuclear One was eventually abandoned in 1981 after $191 million had been spent with only 1 percent of the construction being completed. Despite NIPSCO’s eventual triumph in state supreme court litigation over the placement of the facility, new cost projections caused by the delays proved insurmountable. Intensifying NIPSCO’s loss was the Indiana high court’s later ruling that NIPSCO could not amortize the failed project’s costs over a 15-year period, which forced the company in 1985 to declare a net loss of $94.8 million.

Presiding over NIPSCO during most of this troubled period was Edmund A. Schroer, who became chief executive officer in 1976 after serving as corporate legal counsel for the previous 10 years. Schroer helped NIPSCO weather the 1985 crisis, associated court battles, and enforced reductions in employees by emphasizing a program of internal energy development, trenchant defense of the company’s image and actions, and improved profitability through justifiable rate hikes and cost-effective management of labor and capital. By 1990, when these causes were restated in a five-year plan, NIPSCO had demonstrated marked improvements in its financial health. As a result, Moody’s, and later Standard & Poor’s, elevated bond ratings for the company. By this time as well, NIPSCO had distanced itself from the Bailly project, allegations of double billing, and protracted negotiations with the Department of the Interior over its handling of fly ash, soot emitted from power station smokestacks.

RESTRUCTURING AND DIVERSIFICATION: 1987-2000

Most significant for the company’s renewed success was the incorporation in 1987 of NIPSCO Industries, the parent company of NIPSCO, followed by an exchange of shares the following year. This made possible NIPSCO’s viability as a holding company for a group of subsidiaries. These were individually responsible for oil and gas exploration, energy transmission and supply, financing, real estate development, and energy brokering. The various efforts of these companies helped NIPSCO meet its high expectations. Commenting on NIPSCO’s technological and fiscal turnaround, Schroer, in a 1992 letter to shareholders published in the Wall Street Journal, stated, “We believe that our evolution from 40 percent dependence on external sources several years ago to independence with environmentally compliant units will continue to prove of benefit to the Company for many years to come and will allow us maximum flexibility in developing new sources on a profitable basis.”

NIPSCO’s primary emphasis continued to be on a combination of gas and electrical power, and the company had thus earmarked some $779 million for construction between 1992 and 1996 to further this goal. NIPSCO appeared well prepared to embrace a future of determined expansion and steadily growing revenues. The company had a relatively low long-term debt to total capitalization ratio of 47 percent and a 1991 net income of $133.4 million (an $8 million increase over the prior year). Additionally, it had the approval of investors who in 1991 raised the common stock price to its highest level in 18 years. NIPSCO was hit by two crises in 1991, a March ice storm that downed more than 130 miles of electrical lines and a collapse in July of two large circulating water pipes. Nevertheless, the company’s swift response to both situations and its minimization of adverse financial effects prevented overreactions within the securities markets.

The February 1992 purchase of Kokomo Gas and Fuel Company, a transaction valued at $47.9 million, was one of many new developments intended to fulfill NIPSCO’s five-year plan and Schroer’s extended vision. Kokomo Gas, serving the city of Kokomo and surrounding rural areas, planned to expand the company’s natural gas customer base by approximately 30,000. Outside the country, through the NIPSCO Development Company, NIPSCO actively negotiated financing for a 30 megawatt tires-to-energy plant in England and also pursued similar possibilities in Belgium and Scotland.

THE CHALLENGES OF REGULATION

Like many utilities, NIPSCO may find its greatest challenge for the future in its ability to meet both regulatory requirements and the demands of federal environmental laws while maintaining its desired level of profitability. One of its largest environmental commitments is to Pure Air, a general partnership of Mitsubishi Heavy Industries America, Inc., and Air Products and Chemicals, Inc. The Pure Air project, which has been in operation since June 2, 1992, provides flue gas desulfurization and reduces sulfur dioxide emissions by nearly 95 percent through a scrubber at the Bailly Generating Station. Supplemented by $48.8 million in government funding for construction, Pure Air’s scrubber cost NIPSCO an estimated $14.4 million in operating and maintenance expenses over a three-year period.

The project, according to NIPSCO’s 1991 annual report, should “meet the standards of the new Clean Air Act Amendments more than two years ahead of schedule.” NIPSCO asserted that any additional financial measures the company needed to take to comply with the Clean Air Act would be recoverable through its utility charges.

Nevertheless, NIPSCO’s reputation for corporate responsibility seemed intact. In 1992 the company intended to fulfill its plan to donate more than 2,150 acres of land to the Indiana Natural Resources Foundation for natural preservation and public recreation. Interestingly, the property included two small hydroelectric plants that the company planned to maintain and operate. Another example of NIPSCO’s resolve in this area was its funding of studies of electromagnetic fields and their effects, coordinated by the Electric Power Research Institute.

NEW IDENTITY, RAPID GROWTH: 1997-99

Toward the end of the 1990s, as the U.S. utilities industry experienced a process of widespread deregulation, NIPSCO Industries began to search for new business opportunities outside of its traditional region of operations. The company took a major step toward achieving this goal in December 1997, when it entered into a $780 million merger agreement with the Bay State Gas Co., a Massachusetts-based utility. Under the terms of the acquisition, Bay State would become a wholly owned subsidiary of NIPSCO. The move placed NIPSCO in a strategic position to compete in the lucrative New England energy market, where Bay State had more than 300,000 customers in Maine, New Hampshire, and Massachusetts. These new customers would increase NIPSCO’s existing natural gas customer base to over a million, making it the 10th-largest natural gas distributor in the United States.

After undergoing more than a year of intensive regulatory scrutiny, NIPSCO’s purchase of Bay State finally received approval from the Securities and Exchange Commission in February 1999. A month later NIPSCO announced a proposal to change the company’s name to NiSource, as a way of signaling its intention to compete outside of its core market of Indiana. According to a company press release quoted in the March 12, 1999, issue of Gas Utility Report, the name change reflected the company’s shift toward becoming “a multistate supplier of energy and water resources and related services.” In April 1999 the company’s name change was approved by shareholders, and NIPSCO officially became NiSource Inc.

BID TO MERGE WITH COLUMBIA ENERGY GROUP

As its ambitious growth strategy began to take shape, NiSource set out to expand its holdings into new geographical areas. In April 1999 NiSource offered to purchase the Columbia Energy Group, a Virginia-based natural gas provider with roughly two million customers in several states and Washington, D.C. The company’s offer was rejected by Columbia chairman and CEO Oliver G. Richard III, however, who wanted to pursue his own expansion plans. Two months later NiSource launched a hostile takeover bid for Columbia, in a proposed deal worth $5.7 billion. After the company’s acquisition attempt was rebuffed a second time, NiSource head Gary L. Neale decided to bring the matter before the Columbia Energy shareholders. According to an article published in the June 25, 1999, Washington Post, Neale even wrote a letter directly to the Columbia CEO, indicating his company’s intention “to pursue this transaction to its end.”

NiSource was denied a third time in early July, when Columbia’s board of directors voted against the merger, calling it “the wrong price, at the wrong time, with the wrong company.” Undeterred, NiSource embarked on a publicity campaign in an effort to generate support for the acquisition; Neale even accused Richard of deliberately concealing vital financial information from his shareholders in order to obscure the benefits of the merger. In October 1999 NiSource raised its bid to $6.2 billion, but the Columbia Energy board once again turned it down. As tensions between the two companies escalated, lawmakers in the affected states became increasingly nervous that NiSource’s takeover attempts might make it impossible for smaller utilities to remain competitive. In Ohio, where Columbia already had a sizable market share, Governor Bob Taft even signed emergency legislation granting the Public Utility Commission special powers to block the takeover bid.

In mid-February 2000, confronted with mounting opposition on numerous fronts, NiSource withdrew its offer for Columbia Energy. The merger appeared to be dead. Two weeks later, however, NiSource suddenly announced that it had finally succeeded in its takeover bid, with an offer worth roughly $8.5 billion. The company immediately set out to gain the necessary regulatory approval, both from the states and the federal government. Finally, in July 2000, the company cleared its last hurdle when the merger received official sanction from Virginia and Pennsylvania. With the completion of the acquisition, NiSource became the largest natural gas company in the eastern United States. The deal also drove up the company’s market value among investors; by February 2001, the value of NiSource stock had risen 80 percent.

UNCERTAINTIES IN THE NEW MILLENNIUM

While NiSource had achieved an important long-term goal with its purchase of Columbia Energy, the merger took an immediate financial toll on the company. Over the next several years, NiSource was forced to sell off a number of its assets as a means of managing its sizable debt. In July 2003 the company sold two of its subsidiaries, Primary Energy and Columbia Energy Resources, for a combined sum of approximately $665 million. Two years later NiSource entered into a $1.6 billion agreement to outsource a range of administrative tasks to computer and technology giant IBM. The deal was projected to save NiSource roughly $530 million, while reducing its total workforce by about 1,000 employees. In January 2007 NiSource began to explore the possibility of selling one of its principal subsidiaries, the Northern Indiana Public Service Company, to North Carolina utility Duke Energy. Negotiations eventually stalled, however, and by midyear it appeared that Northern Indiana Public Service Company would remain under NiSource ownership.

Toward the end of the decade, NiSource began to stumble, as the slumping global economy led to a broad decline in the demand for energy. In 2008 the company saw net profits fall to $79 million, a decline of roughly 75 percent from the previous year. It was the company’s weakest financial performance in nearly 20 years. The drop in business was particularly sharp among the company’s industrial customers, as the stagnant market forced regional steel producers to curtail operations. The company’s manufacturing customers represented a key source of revenue for its electrical power business. In 2007 industrial clients had purchased more than 50 percent of the company’s total output of electricity. As long as U.S. manufacturing continued to struggle,NiSource would face tough challenges in its efforts to restore its electricity unit to profitability.

Key Dates

1853:

Fort Wayne Gas Light Company is founded.

1868:

The Studebaker brothers establish the South Bend Gas Light Company.

1909:

The Northern Indiana Gas and Electric Company is formed.

1912:

Calumet Electric Company is incorporated.

1923:

Calumet Electric merges with Northern Indiana Gas to form the Northern Indiana Public Service Company (NIPSCO), a subsidiary of the Midlands Utility Company.

1947:

Midlands Utility spins off NIPSCO.

1974:

NIPSCO constructs its first nuclear power plant.

1987:

NIPSCO Industries is incorporated as a holding company of NIPSCO.

1992:

NIPSCO acquires Kokomo Gas and Fuel Company.

1999:

NIPSCO Industries changes its name to NiSource Inc.

2000:

NiSource acquires Virginia-based natural gas provider Columbia Energy Group.

2005:

NiSource enters into $1.6 billion outsourcing agreement with IBM.

Denbury Resources

Public Company
Incorporated: 1951 as Key Lake Mines Limited (N.P.L.)
Employees: 1,308
Sales: $2.31 billion (2011)
Stock Exchanges: New York
Ticker Symbol: DNR
NAICS: 211111 Crude Petroleum and Natural Gas Extraction; 325120 Industrial Gas Manufacturing; 486990 All Other Pipeline Transportation

Denbury Resources Inc. is an independent oil and gas company that ranks as the largest operator in Mississippi. Denbury also owns producing fields in Louisiana and Montana. The company also owns the largest reserves of carbon dioxide east of the Mississippi River. Carbon dioxide, when injected into an oilfield, acts as a type of solvent for the oil, causing it to expand and become mobile, easing its recovery.

Denbury began using carbon dioxide to extract oil from proven oilfields in the late 1990s, transforming the company into a tertiary exploitation producer, as opposed to one reliant on traditional acquire-drill-exploit tactics. Denbury’s carbon dioxide properties are located in western Mississippi. In eastern Mississippi, the company owns interests in hundreds of wells. It also owns interests in southern Louisiana and the Rocky Mountains, and is Montana’s largest combined oil and natural gas producer.

ORIGINS

Denbury underwent significant changes during its first half-century of business, changing its name, its corporate structure, its nationality, and its business strategy. However, the outward inconstancy of the company developed from one common characteristic, its involvement in oil and gas exploration and development. Denbury began its business life as Key Lake Mines Limited (N.P.L.), a company incorporated under the laws of Manitoba, Canada, in March 1951. During this era of the company’s existence, it was focused on developing oil and natural gas properties in Manitoba although it did maintain a small presence in Saskatchewan. For the next three decades, the company’s geographic scope of operations remained essentially the same.

The company changed its name to Newscope Resources Limited in September 1984, symbolizing the sweeping changes about to take place. The company changed its name three more times during the ensuing nine years, eventually settling on Denbury Resources Inc. in December 1995. During this period, the profile of the company changed dramatically, as Denbury’s predecessor sold its assets, abandoned its home country, and chose a new geographic base.

COMPANY PERSPECTIVES

When they say “done,” we say “start.” When other companies are ready to plug and abandon their mature oil wells, Denbury is ready to implement our CO2 EOR strategy to recover significant amounts of otherwise stranded oil.

The company spent more than 35 years earning its living in Manitoba and Saskatchewan. After 1987, however, the unvarying quality of its existence began to change. Between 1988 and 1990, the majority of the company’s exploration and development activities shifted west, to Alberta. The change in geographic stance marked the beginning of a far more dramatic alteration in the company’s geographic focus.

DIVESTING CANADIAN OPERATIONS

During the early 1990s, Newscope’s management decided to divest its Canadian operations and focus on operating in the United States instead. In March 1992, the company sold its Manitoba oil and gas properties, the historical roots of the organization. In a transaction completed four months later, the company acquired all the outstanding shares of Denbury Management, a Mississippi-based company formed in 1990, and appointed its leader, Gareth Roberts, president and chief executive officer of Newscope. The acquisition pointed the company in a new direction, giving it oil and gas properties in Texas, Louisiana, and Mississippi. In September 1993, the geographic transformation was completed when Newscope sold all its remaining Canadian oil and gas properties, operations that consisted primarily of producing oil and gas properties in Saskatchewan and Alberta, as well as undeveloped lands in British Columbia, Alberta, and Saskatchewan.

Following a new business strategy, Newscope focused primarily on onshore properties in Louisiana and Mississippi. It was two years before Newscope changed its name to Denbury to reflect the name of its U.S. subsidiary, and another six years before the company moved its headquarters to the United States (Denbury moved to Texas in April 1999).

As these events occurred in the background, Roberts and his executives worked to build the company’s presence in the southern United States. They bolstered Denbury’s position largely through the acquisition of oil and gas properties. As a rule, roughly three-quarters of the company’s oil and gas reserves during the 1990s were obtained from acquisitions. During the second half of the decade, Denbury completed four acquisitions that provided the base for its rapid expansion as it entered the new century.

The first of Denbury’s signal purchases occurred in May 1996. The company paid $37 million for properties owned by Amerada Hess Corporation that averaged nearly 3,000 barrels of oil equivalent per day, or BOE/D, a measurement that quantified both oil and gas production into one figure. Next, the company completed the largest acquisition in its history. In December 1997, Denbury paid $202 million to Chevron U.S.A., Inc. for the Heidelberg field in Jasper County, Mississippi. The purchase, which gave the company the vast majority of holdings in the Mississippi Salt Flats Basin, more than doubled the company’s total reserves. Before the acquisition, the company’s reserves totaled 27.4 million barrels of oil equivalent (BOE), a volume that exponentially increased after the addition of Heidelberg’s 30.2 million BOE.

Additional acquisitions were completed during the late 1990s, but before the deals were concluded, Denbury’s management needed to resolve a difficult situation. The company’s cash flow declined sharply in 1998, when depressed oil prices delivered a stinging blow to its operations. Low oil prices continued into 1999, further draining the company’s cash flow and increasing debt levels. To resolve the problem, Denbury sought an infusion of capital from its largest shareholder, Texas Pacific Group. In April 1999, the deal was concluded, when Texas Pacific gave Denbury $100 million in return for increasing its ownership in the company from 32 percent to 60 percent.

ACQUISITION OF CARBON DIOXIDE ASSETS

By the end of the 1990s, the properties acquired from Amerada Hess and Chevron ranked as two of the five largest fields supporting Denbury. Of the other three largest fields, two were acquired in 1999, including one that gave the company a new strategic focus for the 21st century. Denbury paid nearly $5 million for the King Bee oilfield in Mississippi and $12.3 million for the Little Creek tertiary recovery oilfield, also located in Mississippi. Although the Little Creek purchase paled in stature to the Heidelberg acquisition, its addition to Denbury’s property portfolio had a tremendous influence on the company. With Little Creek, a project originally developed by Shell Oil Company, Denbury acquired its first carbon dioxide assets, leading the

KEY DATES

1951:

Denbury’s predecessor organization, Key Lake Mines Limited (N.P.L.), is incorporated in Manitoba, Canada.

1984:

Key Lake changes its name to Newscope Resources Limited.

1992:

Newscope decides to divest its Canadian holdings and turn its focus to the southern United States.

1995:

Newscope changes its name to Denbury Resources Inc.

1999:

Acquisition of the Little Creek field moves Denbury into the carbon dioxide business.

2001:

Acquisition of carbon dioxide properties from Airgas, Inc. confirms Denbury as the region’s dominant carbon dioxide owner.

2006:

Free State Pipeline is completed to bring carbon dioxide from its Jackson Dome to oil and gas wells within Mississippi.

2010:

Company builds 320-mile Green Pipeline to supply carbon dioxide to wells near Houston.

company to begin approaching its production efforts in a new way.

The use of carbon dioxide in oil extraction gave Denbury a new way of conducting its business and brought new potential to old oil wells. When injected, or “flooded,” into an oil well, carbon dioxide acted as a solvent, causing oil to expand and become mobile, which eased the recovery of both the oil and the carbon dioxide. Once recovered, the carbon dioxide was extracted from the oil, compressed back into a liquid state, and reinjected into the oil reservoir. After repeating this cycle several times, nearly as much oil could be recovered as in the primary production phase of an oil reservoir.

SUFFICIENT SUPPLY KEY TO FEASIBILITY

Pilot studies sponsored by major oil companies during the 1970s and 1980s demonstrated carbon dioxideinduced oil extraction could work. Its financial feasibility, however, was contingent on there being a sufficient supply of carbon dioxide available at a reasonable cost. Few regions possessed abundant supplies of carbon dioxide, but Mississippi was one of them, rich in reserves produced from a volcano near Jackson. The carbon dioxide reserves were discovered during the 1960s, when exploration efforts to find oil and gas revealed large volumes of carbon dioxide.

Denbury, situated ideally to take advantage of a bountiful supply of inexpensive carbon dioxide, seized an opportunity available to few other oil producers. After the August 1999 acquisition of Little Creek, a momentous event in the company’s history, Denbury moved to acquire additional carbon dioxide assets and to breathe new life into its business and into established oilfields.

By 2000, Denbury dominated ownership of carbon dioxide properties in Mississippi. In February 2001, the company paid $42 million for properties that ensured its supply of carbon dioxide, confirming the company as the leader in its niche. The acquisition, purchased from a business unit of Airgas, Inc., gave Denbury 800 billion cubic feet of carbon dioxide (most of the carbon dioxide supply in Mississippi) and ownership of a 183-mile carbon dioxide pipeline.

With the ability to control the price and availability of carbon dioxide, the company acquired oil wells within its carbon-dioxide service area, typically purchasing old oil properties for a low price relative to their tertiary recovery value. In two such cases, Denbury paid $4 million for the West Mallalieu and Olive fields in southwestern Mississippi in 2001. In 2002, the company acquired the McComb field for $2.3 million.

Denbury also expanded its business in other areas at this time. In mid-2001, the company acquired Matrix Oil & Gas, Inc., a Louisiana-based company with most of its properties located offshore in the Gulf of Mexico. The acquisition, completed for $158 million, increased Denbury’s reserves by approximately 12 percent and its production by approximately 22 percent. In August 2002, the company added to its offshore portfolio, acquiring COHO Energy Inc.’s Gulf Coast properties for $48 million. In July 2004 Denbury divested its interests in the Gulf of Mexico, selling its offshore subsidiary, Denbury Offshore, Inc., for $200 million in July 2004.

Denbury recorded explosive growth in the years following its decision to extract oil with carbon dioxide. The company exited the 1990s with less than $90 million in annual revenue. By 2003, the company was generating nearly $400 million in revenue. The effectiveness of carbon dioxide extraction contributed greatly to the company’s growth. Its original carbon dioxide property, Little Creek, served as a prime example of the gains to be achieved by employing carbon dioxide.

When Denbury acquired the property, it was producing 1,350 barrels of oil per day. By 2003, after carbon dioxide flooding of the property, Little Creek was averaging 3,201 barrels of oil per day. The company by this point owned every carbon dioxide producing well in western Mississippi, vanquishing any competitor’s hope of following Denbury’s lead. Furthermore, in the area stretching from eastern Texas to Florida, the company owned all the natural sources of carbon dioxide.

PIPELINES BUILT

As Denbury prepared for the future, the company’s stranglehold on carbon dioxide assets boded well for growth in the coming years. The company was preparing to expand the geographic scope of its operations by building new carbon dioxide pipelines to service other oilfields. In February 2004, the company initiated feasibility studies concerning extending carbon dioxide recovery operations into eastern Mississippi. In August 2004, after arriving at positive conclusions, Denbury announced it had begun to acquire leases for the construction of an 84-mile pipeline to transport carbon dioxide eastward from its source near Jackson. The pipeline, completed in 2006, carried carbon dioxide into the company’s Eucutta field, the primary producing property acquired in the 1996 Amerada Hess purchase. In the years ahead, Denbury was planning to increase the coverage of its pipeline system and to acquire oil properties in proximity to its supply of carbon dioxide, as the company endeavored to leverage its power and record robust growth.

Denbury continued to post excellent results despite weathering two major hurricanes in 2005. It was low in debt and the divestiture of offshore operations had lowered its exploration costs. The company continued to steadily acquire smaller mature fields in the Gulf Coast.

In 2006 Denbury finished the $50 million, 84-mile Free State Pipeline in Mississippi. Mississippi Business Journal, in June 2006, noted that the company was already the largest oil and gas producer operating in the state, accounting for more than eight million barrels a year, or 45 percent, of the state’s total production. Denbury had the largest carbon dioxide reserves east of the Mississippi, and the gas was a marketable commodity in itself. Denbury sold some of it for dry ice production and other commercial uses.

Earnings rose 25 percent in 2007 to a record $253.1 million, driven by high production levels and high oil prices. Revenues were $972 million. The company had 686 employees and was still led by Roberts. In 2009 Denbury posted a rare net loss of $75.2 million as total revenues fell 35 percent from $1.07 billion to $866.7 million. During the year the company divested its Barnett Shale assets.

Denbury divested Genesis Energy, LLC, in February 2010. The next month it bought Encore Acquisition Company for $4.8 million. Within a year Vanguard Natural Resources bought Denbury’s interests in Encore Energy Partners.

Net income more than doubled to $573 million in 2011 on revenues of $2.3 billion. The workforce had grown to about 1,300 employees. Natural gas made up almost one-quarter of the company’s oil and gas reserves. Although gas prices were low, there were many new discoveries in shale plays across the country.

With a barrel of oil requiring as much as 10 million cubic feet of carbon dioxide, its availability remained a chief constraint for the company. The Jackson Dome repository remained its chief supply. Another potential source of carbon dioxide was a new generation of power plants such as the coal-fired one under construction in Kemper County, Mississippi. These captured the carbon dioxide emitted as part of all combustion.

UNTAPPED POTENTIAL

The company had invested upward of $700 million in the 320-mile Green Pipeline from Jackson Dome to Houston, which was completed in 2010. After a lawsuit by a reluctant landowner, the Texas Supreme Court ruled that because the pipeline was for a private owner and not a common carrier, the project could not use the principle of eminent domain to force landowners to sell. This made acquiring negotiating easements a more expensive process. The pipeline began in Donaldson, Louisiana, and crossed Galveston Bay. Denbury prided itself on minimizing the impact to both the region’s ecology and its shipping traffic.

With both energy independence and the reduction of greenhouse gas emissions a matter of government policy, Denbury seemed likely to continue to thrive. Ownership of carbon dioxide gave the company much control over its destiny. The future held vast potential as only an estimated 5 percent of domestic oil production was derived from tertiary methods.

Dow Chemical

Public Company
Incorporated: 1947
Employees: 52,195
Sales: $44.87 billion (2009)
Stock Exchanges: New York
Ticker Symbol: DOW
NAICS: 325131 Inorganic Dye and Pigment Manufacturing; 325188 All Other Basic Inorganic Chemical Manufacturing; 325211 Plastics Material and Resin Manufacturing; 325611 Soap and Other Detergent Manufacturing; 325612 Polish and Other Sanitation Goods Manufacturing; 326122 Plastics Pipe and Pipe Fitting Manufacturing; 326130 Laminated Plastics Plate, Sheet, and Shape Manufacturing; 326150 Urethane and Other Foam Product (Except Polystyrene) Manufacturing

The Dow Chemical Company is the largest chemical company in the United States and the second-largest competitor in the world. Dow manufactures more than 5,000 products at 214 sites in 37 countries, organizing its business along eight business lines: electronic and specialty materials; coatings and infrastructure; health and agricultural sciences; performance systems; performance products; basic plastics; basic chemicals; and hydrocarbons and energy.

19TH-CENTURY BEGINNINGS

Herbert Dow began his career around 1890, when he convinced three Cleveland businessmen to back his latest project, which involved the extraction of bromide from brine. Dow’s idea was to extract the huge underground reservoirs of brine, souvenirs of prehistoric times when Lake Michigan had been a sea. This brine was being used for salt, but Dow was determined to distill bromides and other chemicals from it. His first venture, called Canton Chemical, failed and was superseded by Dow Chemical.

Dow’s use of an electric current to separate bromides from the brine was revolutionary. He was experimenting with electrolysis at a time when the electric lightbulb was still viewed with suspicion. (At the time, President Harrison refused to touch the newly installed light switches in the White House for fear of electrocution.) However, Dow constructed primitive cells from wood and tar paper, and began producing bromides, as well as bleaching agents, for another fledgling company by the name of Kodak.

In the first years of this century, Dow began to sell his bromides abroad, but the Deutsche Bromkonvention, a powerful group of German bromide producers, declared an all-out price war against Dow Chemical. German and British bleach makers (bromide is used in bleach) reduced the price of their product from $1.65 to $0.88 a pound in the United States, which was less than cost. Dow’s plants depended on a price of $1.65 in order to make a profit. While other U.S. bleach makers closed for the duration of the price war, Dow went deeper into debt and fought for his share of the domestic and foreign markets. One of his successful tactics was to purchase the imported bromide that the Germans were selling in New York at a price below cost, and then resell it in Europe where the price of bromide was still $1.65 per pound.

RESILIENCE THROUGH WAR AND DEPRESSION

After the bromide war came World War I, which, among other things, ended German domination of the world chemical industry. The German naval blockade forced U.S. industry to turn to U.S. chemical makers for essential supplies. Dow was pressed into the manufacture of phenol, used in explosives, and magnesium, used in incendiary devices. At the time these two substances had limited use outside of munitions, but they were later to play an important role in the development of Dow Chemical and the chemical industry in general. Phenol would become a key ingredient required for the manufacture of plastics, and magnesium would make aviation history.

After the war, Congress protected the fledgling U.S. chemical industry by imposing tariffs, so that the country would not become dependent on foreign chemical manufacturers again. By 1920 Dow Chemical was selling $4 million worth of such bulk chemicals as chlorine, calcium chloride, salt, and aspirin every year. By 1930 sales had climbed to $15 million and the company stock had split four times. Before the stock market crashed in 1929 the price per share had climbed to $500.

Dow’s success drew the attention of du Pont, which wished to acquire the midwestern bromide manufacturer until Herbert Dow threatened to leave the company and take his engineers with him. Without Herbert Dow’s leadership and ingenuity the company was not regarded as worth the price of purchase and du Pont subsequently withdrew its offer.

Herbert Dow died just as the Depression began and was replaced by his son Willard. Willard Dow, like his father, considered research, as opposed to production or sales, the key to the company’s future. Despite the state of the economy, Willard Dow approved expenditures for research into petrochemicals and plastics. The company’s product line expanded to include iodine, ethylene, and materials to flush out oil from the ground. A new plant was constructed that would extract bromine from seawater, beginning in 1933. There was also a rumor on Wall Street that Dow’s new method could extract gold from the seawater. The rumor turned out to be true. However, for every $300 worth of gold, $6,000 worth of bromine could be recovered.

WORLD WAR II: DEPRESSION-ERA STRATEGIES PAY OFF

During World War II, Dow Chemical’s new research resulted in handsome rewards. Even before the United States’ entrance into the war, Dow had started to expand in preparation for future hostilities. One of its first wartime contracts was with the British, who desperately needed magnesium. Dow produced some of this metal at its new plant in Freeport, Texas, which extracted magnesium from seawater. Dow later supplied the metal to the United States and even shared its patented process with other companies. In 1943, Dow and Corning Glass formed Dow Corning, a company that manufactured silicone products for the army. The company later expanded into civilian markets.

Before World War II the potential value of magnesium in the manufacture of airplanes had gone unnoticed, and during this time Dow Chemical was the only U.S. magnesium producer. Even with a monopoly on the metal, however, the company lost money on its production. This was typical of Dow Chemical at that time. It often invented a product and then patiently waited for a market. During the war, Dow produced over 80 percent of the magnesium used by the United States, which later led to federal investigations into whether or not Dow had conspired to monopolize magnesium production in the country. The U.S. press, however, sided with Dow and eventually the charges, which had included accusations of a conspiracy with German magnesium manufacturers, were dropped.

Besides manufacturing magnesium the company also made styrene and butadiene for synthetic rubber. During World War II the Japanese had conquered the rubber plantations of the Far East and soon this commodity was in short supply. Due to the fact that Dow had persisted in plastics research during the Depression, it was at the forefront of manufacturing synthetic products, including rubber. Besides making styrene and butadiene, it molded Saran plastic, now known as a food wrap, into pipes, or had it woven into insect screens to protect soldiers fighting in the tropics.

POSTWAR EXPANSION

After the war the company had to adapt to the postwar economy. One of management’s concerns was that Dow Chemical had placed such a strong emphasis on research and development in the past that it sometimes ignored the fact that it was supposed to be making profits. The Marketing and Sales departments were reluctantly increased. Said one man employed at the time, “You got the feeling that Willard looked on sales as a necessary evil.”

Despite having to share trade secrets with its competitors during the war, Dow ranked as the sixth-largest chemical company in the country and was well positioned to take advantage of the increasing peacetime demand for chemicals. Its product line was extensive and included chemicals used in almost every conceivable industry. Bulk chemicals accounted for 50 percent of sales and plastics accounted for 20 percent of sales, while magnesium, pharmaceuticals, and agricultural chemicals each accounted for 10 percent of sales.

Dow expanded significantly during the postwar period, going heavily into debt in order to finance its growth. The man who presided over this expansion was Willard Dow’s brother-in-law, Lee Doan (Willard Dow had been killed in a plane crash). One of Doan’s first tasks was to reorganize the company and make it more customer-oriented. Willard’s and Herbert Dow’s tenures had been previously described by insiders as “capricious.” The emphasis now was on long-range planning.

In the year of Willard’s death, 1949, sales were $200 million, but 10 years later they had nearly quadrupled. Products such as Saran Wrap (introduced in 1953) began to make Dow a high-profile company. Dow’s growth surpassed that of its competitors, and the company was soon ranked fourth in the industry. The company’s plants had previously been located in Texas and Michigan, but during the 1950s important production centers were built elsewhere. Foreign partnerships like Ashai Dow in Japan were formed, and the company expanded its presence in the European market.

RESTRUCTURING, GROWTH, AND CONTROVERSY: 1960-69

Dow began the 1960s with a change of leadership. Ted Doan succeeded his father and, with Ben Branch and Carl Gerstacker, reorganized the company. Communication had become a problem because of Dow’s vast size, so the company was broken into more manageable units that could be run like small businesses. Marketing, however, became more centralized. The management liked to think of their company as democratic, with overlapping lines of responsibility. The structure of the company was deliberately arranged so that employees would use their own initiative to invent new products and to manufacture existing products at a lower cost. The strategy worked.

In 1960, Dow purchased Allied Labs, thus entering the world of pharmaceuticals. Also in the early 1960s, Dow Corning began collaborating with two Texas plastic surgeons, Frank Gerow and Thomas Cronin, on silicone breast implants. This venture would spell trouble for Dow Corning and its parent companies, some 30 years later.

Throughout the 1960s, Dow’s earnings increased approximately 10 percent each year. Among the company’s hundreds of products, however, one began to receive an inordinate amount of publicity: napalm. Beginning in 1966 the company became the target of anti-Vietnam War protests. Company recruiters were overrun on college campuses by large numbers of placard-waving students. Dow defended its manufacture of the searing chemical by saying that it was not responsible for U.S. policy in Indochina and that it should not deprive U.S. troops of a weapon that the Pentagon thought was necessary. Critics charged that the Page 171  |  Top of Articlegruesomeness of the weapon made it imperative for the company not to cooperate with the government. Right or wrong, the public outcry against Dow demoralized a company that wanted to be associated with Saran Wrap rather than with civilian Vietnamese casualties.

A TROUBLED DECADE: 1970-79

At the beginning of the 1970s, Forbes magazine predicted that Dow would have trouble growing because of its indebtedness. In 1974, however, the same Forbes reporter was subjected to criticism by CEO Carl Gerstacker because Dow had a record year. The oil embargo benefited Dow since it had its own petroleum feedstock with which to manufacture its various specialty chemicals; its competitors could not find the necessary petroleum. Noted Gerstacker: “Price wasn’t the problem in ’74; it was availability.” Dow increased the price of many of its chemicals and its earnings increased, despite a strike in its hometown of Midland, Michigan. After the six-month strike, Dow gave the strikers a 10 percent bonus and gave each pensioner $2,000 worth of bonds. Company stockholders did not mind management’s sudden display of generosity. That year they received a 30 percent return on equity.

The year 1975 was followed by an oversupply of petrochemicals and a business slowdown, and the company’s earnings began to slide. Since the company was doing almost half of its business overseas, an unfavorable rate of exchange added to the above problems.

By 1978 a change of leadership was deemed necessary; Gerstacker’s retirement from the board of directors was the end of an era. Carl Gerstacker’s management strategy was, “you should have as much debt as you can carry.” During recessions and slowdowns, borrowed money was used for research and development as well as plant expansion. He was an administrator in the tradition of Herbert Dow, but the moves that had catapulted Dow to a position of leadership in the chemical industry seemed unwise in the business climate of the late 1970s. P. F. Oreffice, who Gerstacker had referred to as “a little old lady in tennis shoes” because of his conservative fiscal policy, became president and CEO.

RECESSION AND RECOVERY: 1980-89

Soon after his promotion, Oreffice reorganized Dow as most of his predecessors had done after their appointment. These frequent reorganizations were less a testimony to the inadequacy of the previous organization than an admission that the company was outgrowing previously successful arrangements. This time management was reorganized on a geographical basis, since Dow had plants all over the world. In 1980, the year of the reorganization, sales exceeded $10 billion for the first time.

In the early 1980s a pattern of write-offs that depressed earnings began to emerge. In 1983 the write-off of two ethylene plants and a caustic soda plant caused earnings to drop 16 percent. Ethylene, a lead additive that prevents knocking in automobile engines, had been an important product for Dow at one time. In 1985 earnings fell 90 percent from the previous year as additional ethylene plants were closed.

Another factor that depressed 1985 products was the decrease in price and demand for basic chemicals. Dowderived 50 percent of its income from commodity chemicals that are sold by the ton. Foreign competitors, Arab chemical companies in particular, invaded the U.S. market in the same way that Dow once invaded the European bromide market. To make matters worse, the market for commodity chemicals is sensitive to world economic conditions. Dow’s position as a U.S. company complicated matters further. When the dollar was strong, as it was in 1984 and part of 1985, the company’s exports were harder to sell and its foreign earnings, when converted to dollars, were smaller.

In 1981, Dow purchased Merrell Drug, thus expanding its Pharmaceutical division. With the purchase Dow assumed liability for Bendectin, an antinausea drug that was blamed for birth defects. Despite the fact that Dow won practically all lawsuits (independent studies proved no connection between the drug and birth defects), the cost of continuing litigation forced the company to take Bendectin off the market.

ACQUISITIONS ADD DIVERSITY

In 1984, Dow purchased Texize, which boasted a strong line of detergent products, from Morton Thiokol. Research spending remained at almost 90 percent of cash flow. Extra-strong ceramics and plastics for the electronics industry were among the numerous specialty chemicals that Dow hoped would account for two-thirds of its sales in the 1990s. The company still placed a premium on innovation, however, and stated that it anticipated placing 15 to 25 new products on the market each year. However, some felt that the expansion into pharmaceuticals, specialty chemicals, and household products, required a new approach to management. According to an analyst with Kidder and Peabody, “If you’re running a monolithic chemical business, management is the same across all products. Now they’re going to have hundreds of small businesses to manage.”

The company appointed a new chairman of the board, Robert Lundeen, and launched a new ad campaign, in which working for Dow was equated with “doing something for the world.” Eager to rid itself of the adverse publicity surrounding topics such as Vietnam and alleged environmental abuse, Dow actually supported an increase in the Environmental Protection Agency’s budget and a strengthening of rules regarding hazardous waste. This marked a significant philosophical turnaround for a company that had argued against a ban on dioxin in the 1970s.

Despite its changes in management, however, Dow was hurting in 1985, as it failed to recapture market share lost during the 1980 to 1982 recession. Profits tumbled from $805 million in 1980 to $58 million in 1985. Frank Popoff was promoted to president and CEO from his position as head of Dow Chemical/Europe. Largely on the strength of Popoff’s decisions, the firm improved marketing and sales of value-added products, which commanded higher prices. Dow began to win market share in this higher-margin area as it increasingly concentrated on finding new applications for existing products.

AUTOMOTIVE BUSINESS BRINGS RELIEF

The company’s efforts found a ready-made market in the auto industry, which was in the midst of a campaign to increase efficiency and cut costs. Dow concentrated on other durable sectors as well, such as appliances, housewares, and electronics. It also looked into packaging and the recreation and health care industries. Since Dow already made so many plastics, chemicals, and hydrocarbons inexpensively, increased sales of these products at higher margins offered an immediate hike in profits. This strategy was immediately successful, and the company received a further boost when the U.S. dollar began to fall, making it easier for Dow to sell against German companies and other competitors.

Oil prices fell in 1986, further feeding Dow’s recovery. With the dollar continuing to fall and the world economy humming, the spread between raw material costs and final prices expanded until the firm’s plastics business was making a record 25 to 30 percent on sales during mid-1987.

Dow continued to diversify through acquisition, but tried to concentrate on firms with a base in chemicals, paying special heed to firms with technologies or distribution systems deemed not practical for Dow to develop internally. A joint venture in agricultural chemicals, called DowElanco, was begun with Eli Lilly. Dow acquired 39 percent of Marion Laboratories, a pharmaceuticals firm, for $2.2 billion, then joined it with Dow Merrell, making it a public company with a 67 percent Dow stake.

By 1988 commodity chemicals accounted for just 53 percent of the firm’s $13.3 billion in sales. Its move into pharmaceuticals was proving to be a success, with $1.1 billion in sales a year. Its star drug was Seldane, an antihistamine with sales that were reaching hundreds of millions of dollars. In 1989, Merrell Dow’s Pharmaceutical division merged with Marion Labs to form Marion Merrell Dow, in which Dow had a 71 percent stake. Total Dow sales for 1989 reached $17.6 billion, an increase of $7 billion over five years earlier, with profits up to $2.5 billion.

PRICE WAR ERUPTS: 1990

In 1990 the world economy headed into recession. As in past recessions, the chemical industry, plagued by overcapacity, began a price war and began cutting output. Dow was the leading low-cost producer of commodity chemicals, hydrocarbons, and plastics. Rather than cut capacity, Dow continued to producechemicals at a lower profit margin in the hopes of keeping its market share and driving out weaker competitors. Profits fell, but the company maintained its position in the marketplace. Even du Pont was forced to cut production of polymers.

The Persian Gulf War temporarily caused the price of oil to rise, further hurting Dow. When the war ended, the slowdown in the chemical industry continued. Many in the industry believed that it was just another cycle in a cyclical industry. Frank Popoff, however, maintained that the slowdown represented a more fundamental shift in the industry, one that was eroding the advantages of larger firms. The strategy, Popoff felt, was now to be as lean and fast as small firms while maintaining a research and development advantage.

Despite these beliefs, Dow was forced to build new plants for commodity chemicals when a Canadian supplier decided to become a competitor. Dow began building ethylene plants in Alberta, Canada, and Freeport, Texas. Even after 40 years in Asia, sales there still accounted for less than 10 percent, while European sales accounted for 31 percent of the total. However, with Europe mired in recession and European sales slowing, Dow began pushing into Asia again, building a petrochemicals plant in China, where it enjoyed an expanding polyurethane business. Although its growth had been slowed by the downturn in chemicals, Dow had nevertheless reduced its dependence on commodity chemicals from 80 percent of sales in 1980 to 45 percent in 1992, making it one of the world’s most diversified chemical firms.

With success came growing controversy. Starting in the early 1980s, Dow Corning faced questions and lawsuits regarding the safety of its silicone breast implants. Many women claimed to have developed autoimmune diseases as a result of silicone leakage from the implants. Faced with many individual lawsuits, as well as class-action suits, Dow Corning filed for Chapter 11 bankruptcy protection in 1995 (emerging from Chapter 11 nine years later), and settled with breast implant recipients for $3.2 billion. Dow, however, as a 50 percent shareholder in Dow Corning, was named in many individual lawsuits. As of 2001, with over 20 independent studies done, no causal relationship between silicone breast implants and autoimmune diseases (or cancer) had been established.

UNION CARBIDE MERGER IN 2001

Another controversy erupted on August 4, 1999, when Dow announced plans to merge with Union Carbide, one of the world’s leading manufacturers of polyethylene plastics, and a pioneer in the petrochemical industry. The announcement drew fire from various groups, including Dow shareholders. At issue was Union Carbide’s reputation, and possible continuing liability, following the Bhopal gas leak disaster in India (“The world’s worst industrial accident”). Plans for the $11.6 billion merger nevertheless moved on. To receive clearance from the Federal Trade Commission (FTC) and international regulators, Dow agreed to divest itself of a number of polyethylene plants worldwide. The FTC granted approval for the merger on February 5, 2001. Union Carbide became a wholly owned subsidiary of Dow.

Throughout the 1990s and into the new millennium, Dow continued to reinvent itself through sales and acquisitions of various assets. In 1995 Dow sold its stake in Marion Merrell Dow to Hoechst for $7.1 billion. In 1998 its consumer products subsidiary, known as DowBrands, was sold to S.C. Johnson & Son. DowBrands included the Home Food Management unit, responsible for familiar names such as Ziploc and Saran Wrap. The second DowBrands unit, Home Care Products, made products such as Spray ‘N Wash and Fantastik. Dowpurchased ANGUS Chemical from TransCanada Pipelines in 1999. In 2000 it acquired General Latex Chemical Corporation and Flexible Products Company, both manufacturers of foam products. Another foam business, Celotex Corporation (makers of foam insulation) was purchased in 2001. The same year Dow expanded its agricultural product line by acquiring the agricultural chemicals arm of Rohm and Haas.

LEADERSHIP PROBLEMS AT THE MILLENNIUM

Dow’s interest in the assets owned by Rohm and Haas would deepen later in the decade, but before the company expressed its interest, it contended with pernicious difficulties. CEO William Stavropoulos handed his leadership duties to Michael Parker, a 34-year Dow veteran, in 2000, touching off a period of slumping profits and stock value. Potential Bhopal litigation as well as another liability inherited from the Union Carbide merger, potential asbestos litigation, cast a pall over Dow’s fortunes. Compounding the company’s difficulties was the escalating cost of oil and gas, which resulted in higher feedstock costs. Under Parker’s command, Dow’s profits plunged 80 percent and its stock value languished, prompting his departure and marking the return of Stavropoulos to the CEO post in December 2002.

Stavropoulos, who had handpicked Parker as his replacement, enjoyed far greater success with his second choice for a permanent replacement. In November 2004, he selected Andrew Liveris, an Australian, to become Dow’s CEO. Liveris, who joined Dow in 1976 and rose to the post of chief operating officer before being tapped as CEO, initiated a major restructuring program when he took the helm, executing what he termed “an intervention” in a January 31, 2005 interview with Business Week. Liveris sold or shuttered dozens of manufacturing facilities and reduced Dow’s global payroll by 14 percent, making the chemical giant a leaner organization. His changes coincided with a rising demand for Dow’s chemicals and plastics, particularly from China, as the company’s core industry shrugged off five years of anemic performance and began to record robust growth.

ROHM AND HAAS MERGER: 2009

Record high profits and revenues were reached during Liveris’s first years in command. He began forming joint venture companies in fast-growing economies in the Middle East, Brazil, Russia, India, and China, injecting vitality in Dow and transforming it into “an aggressive, growth-oriented enterprise,” as the April 28, 2008 issue of Business Week noted. Dow’s restored luster enabled Liveris to move forward aggressively, leading to the announcement in mid-2008 that Dow intended to acquire specialty chemicals maker Rohm and Haas for $18.8 billion. The acquisition paved Dow’s entry into the specialty chemicals business, which tended to have higher profit margins and greater stability than the basic chemicals business. “The addition of Rohm & Haas’ portfolio is game-changing for Dow,” Liveris said in the July 11, 2008 issue of Investor’s Business Daily. “There aren’t many jewels out there. This is one of them.”

Liveris soon changed his appraisal. Not long after the deal was announced, deteriorating economic conditions prompted Dow to attempt to scuttle the merger. Rohm and Haas sued Dow in January 2009 for reneging on the agreement, but just before heading to trial Dow agreed to follow through on the merger. As part of the settlement, Rohm and Haas’s two largest shareholders agreed to invest as much as $3 billion into the combined company, thereby reducing the valuation of the merger to $16.3 billion. The completion of the merger left Dow saddled with debt, but hopeful that a return to better economic times would justify the cost of the massive merger.

Key Dates

1897:

Herbert Dow founds The Dow Chemical Company.

1933:

Dow begins extracting bromine from seawater.

1935:

Dow enters the plastics business.

1943:

Dow and Corning Glass merge to form Dow Corning Company, specializing in silicone products.

1953:

Saran Wrap becomes a household product.

2001:

Dow merges with Union Carbide.

2009:

Dow acquires specialty chemicals maker Rohm and Haas for $16.3 billion.

Supervalu, Inc.:

Public Company
Incorporated: 1926 as Winston & Newell Company
Employees: 178,000
Sales: $40.59 billion (2010)
Stock Exchanges: New York
Ticker Symbol: SVU
NAICS: 445110 Supermarkets and Other Grocery (Except Convenience) Stores; 446110 Pharmacies and Drug Stores

Minnesota-based SUPERVALU INC. (Supervalu) is the third-largest retail grocer and one of the leading grocery wholesalers in the United States. Supervalu owns and operates more than 1,550 stores in 40 states, including 850 combination food and drug stores, more than 350 food stores, and more than 300 limited-assortment food stores. Supervalu stores operate under several brand names, most of them located in regional markets. Save-A-Lot is the largest store brand, with more than 1,175 corporate-owned and licensed stores across the United States, followed by Albertsons with more than 460 Albertsons stores in the western states. Jewel operates more than 180 combination stores in Chicago and the Midwest, while Acme Markets counts 125 stores in Pennsylvania. Shaw’s and Star Markets brands have more than 175 stores in Boston and five New England states. Cub Foods’ 78 stores in the Minneapolis area include 30 franchised locations. Farm Fresh’s 44 stores are located around Richmond, Virginia, and Shop ‘n Save’s 41 stores are in the St. Louis area. Shoppers Food & Pharmacy brand includes more than 60 stores in the Baltimore and Washington, D.C., area. Four brands have fewer than 20 stores each: Bristol Farms and Lucky in Southern California, bigg’s in the Cincinnati area, and Hornbacher’s in Fargo, North Dakota. Instore pharmacies operate in 850 stores under the Sav-on and Osco brands, and 130 stores offer automotive fuel.

Supervalu’s wholesale grocery business operates from 33 warehouse and distribution centers supplying products to 2,000 independent stores in 48 states and abroad. These include regional and national chain supermarkets, mass merchandisers, and e-tailers. The W. Newell & Company subsidiary distributes fresh produce. Total Logistics, Inc., offers supply chain management and consulting services to retail grocery stores, automotive parts distributors, and manufacturing companies. Business support service offerings include consumer and market research; private labeling; personnel training; accounting; insurance brokerage and services; store site selection, construction and design; category management; and business planning.

LATE 19TH TO EARLY 20TH CENTURY: MINNEAPOLIS WHOLESALER ROOTS

Supervalu’s origins lie in the 1871 merger of the Minneapolis wholesale grocery firms B.S. Bull and Company and Newell and Harrison Company. The new Newell and Harrison existed for only three years. In 1874 George R. Newell bought out his partners and renamed the company George R. Newell Company.

Meanwhile, one of Newell’s former partners, Hugh G. Harrison, formed a wholesaling venture called H.G. Harrison Company in 1879. After a series of reorganizations (including Harrison’s sale of his interest), this company became Winston, Harper, Fisher Company in 1903, headed by F. G. Winston, a Minneapolis railroad contractor; J. L. Harper, a merchandiser; and E. J. Fisher, a financier. In 1916 Harrison’s grandson, Perry Harrison, joined Winston, Harper, Fisher as vice-president and co-owner.

In 1926 George R. Newell Company and Winston, Harper, Fisher Company merged to form Winston & Newell Company, with Perry Harrison and L. B. Newell, Winston’s son-in-law, as principal shareholders. Winston & Newell was incorporated in 1926 in response to the threat that independent retailers faced from the emerging grocery store chains that began developing in the 1920s. Winston & Newell hoped to improve services to these independent retailers so they could withstand the competitive impact of the chain stores. At the time of its creation, Winston & Newell was serving some 5,000 small grocery stores and had sales of $6 million, making it the largest grocery wholesaler in the Midwest.

With Minnesotan Thomas G. Harrison at its helm, Winston & Newell became one of the first wholesale distributors in the nation to join the new Independent Grocers Alliance (IGA). Harrison, the son of Perry Harrison, had joined Winston, Harper, Fisher Company in 1919 as an assistant sales manager. He successively became assistant treasurer and executive vice-president, directing the operations of Winston & Newell and later Super Valu in a variety of executive positions from 1926 until his retirement as CEO in 1958.

Harrison, in guiding the company through the Great Depression, was primarily responsible for introducing many practices that changed the way in which grocery stores conducted business. Cash-and-carry and self-service shopping, almost unheard of at the time, were two of his innovations at Winston & Newell. He broke with tradition again when he stopped using a pricing structure with an arbitrary markup and began charging instead the manufacturer’s price plus a percentage fee that declined with volume. This practice gave the company impressive cumulative profits. During the 20-year period from 1942 to 1962, Fortune reported that the company’s sales volume increased from about $10 million to more than $300 million.

EARLY FORTIES TO SIXTIES: FORMATION OF VOLUNTARY ASSOCIATIONS

It was during World War II that Winston & Newell began the march to becoming Supervalu and attaining its position as the world’s largest food wholesaler and distributor. Although no acquisitions were made during the 1940s, in 1942 the company ended its affiliation with IGA and formed its own association, known in the industry as a “voluntary.” Winston & Newell offered independent retailers services such as food processing and packaging, preparation of advertising for individual store use in local newspaper advertising, and store-planning assistance, in addition to supplying most of the merchandise sold. This voluntary association introduced the Super Valu name and operated independently from the wholesale business. Super Valu and another voluntary association called U-Save (which was also formed under the auspices of Winston & Newell) were familiar to grocers in Iowa, Minnesota, and North Dakota. By 1942 the company had wholesale sales of $10 million and some 400 stores belonged to its wholesale-retail team.

In 1954 Winston & Newell Company changed its name to Super Valu Stores Inc. in order to clarify the connection between itself and the voluntary association. During the 1950s Super Valu began to grow by acquiring other voluntary associations. In 1955 it purchased Joannes Brothers of Green Bay, Wisconsin, a firm that had begun serving stores in northern Michigan and northeastern Wisconsin in the 1870s. Joannes Brothers became Super Valu’s Green Bay Division. In 1958 Russell W. Byerly became president of Super Valu. Byerly, a North Dakota native who joined Winston & Newell in 1932 as a bookkeeper, served as president until 1964 and later was chairman of the board and chief executive officer.

SERIES OF ACQUISITIONS IN THE SIXTIES

Acquisition followed acquisition during the 1960s as Super Valu expanded throughout the Midwest. In 1961 Super Valu moved into the Ohio Valley with the purchase of the Eavey Company, one of the nation’s oldest food wholesale distributors. In 1963 the company acquired the J.M. Jones Company of Champaign-Urbana, Illinois, and the Food Marketing Corporation of Fort Wayne, Indiana. Each of these companies could trace its beginnings to the early days of the grocery business. Jones began as a general store and developed into a large wholesale business. Food Marketing dated back to the early 1800s, as Bursley & Company and the Bluffton Grocery Company. The Food Marketing acquisition also brought Super Valu into the institutional market. After the acquisition, these two companies were operated as autonomous divisions in a company that historically gave its divisions and stores as much free rein as possible.

In 1964 Super Valu expanded its area of operation outside the Midwest by acquiring Chastain-Roberts Company, which had begun in 1933 as a wholesale flour and feed company, and the McDonald Glass Grocery Company, Inc., of Anniston, Alabama. These acquisitions formed the basis for Super Valu’s Anniston Division.

In 1965 Super Valu acquired the Lewis Grocer Company of Indianola, Mississippi. The Lewis Grocer Company was founded by Morris Lewis Sr. in 1895 and eventually became a multimillion-dollar wholesale grocer, branching out later into the retail grocery business. The 1960s were a growth period for Super Valu in ways other than acquisition. The company expanded its retail support services to include accounting, efficiency studies, budget counseling, and store format and design advice. In 1962 Super Valu established Planmark, a department that offered engineering, architectural, and design services to independent retailers, subsidiaries, and corporate stores. Planmark became a division in 1975. With Studio 70, its commercial design arm, Planmark used computer-assisted design to analyze and develop plans for construction, expansion, or remodeling. This innovation, implemented in the recessionary years of the late 1970s, allowed Super Valu retailers to take a project from planning to opening faster than their competition. Super Valu also began providing financial assistance for retailers building new stores, bankrolling some 500 stores in a three-year period in the 1960s. Super Valu also signed leases on its retailers’ behalf, allowing them to locate in prime space in shopping centers and other locations.

In 1968 Preferred Products, Inc., (PPI) was incorporated as a subsidiary of Super Valu to develop its private-label program. A food packaging and processing division, it was started in the 1920s as a department of Winston & Newell.

Super Valu also formed an insurance agency, Risk Planners, Inc., in 1969. This wholly owned subsidiary began by providing insurance on retail property for the company and its retail affiliates. Tailored specifically to the needs of retailers, its products have expanded to include all types of insurance for Super Valu and its stores and franchisees, as well as independent retailers’ employees and families.

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DIVERSIFIED OPERATIONS IN THE SEVENTIES

Diversification was the moving force at Super Valu in the 1970s, in part because the U.S. government in the late 1960s made it clear that it was not going to allow further consolidation of the food industry. Beginning with the 1971 acquisition of ShopKo, a general merchandise discount chain, Super Valu began what proved to be a highly profitable program of nonfood marketing operations. ShopKo, founded by James Ruben in Chicago in 1961, opened its first store in Green Bay, Wisconsin, in 1962. In 1971 Super Valu acquired Daytex, Inc., a textile goods company, but the venture proved unsuccessful and its assets were liquidated in 1976. Meanwhile, Super Valu sales surpassed $1 billion for the first time in 1972.

When Jack J. Crocker became chairman and CEO of Super Valu in 1973, he initiated another diversification venture, County Seat. A success story in its own right, County Seat opened its first store in 1973 selling casual apparel, including the complete Levi’s jeans line. By 1977 there were 183 County Seat stores, and the chain’s earnings were $8 million in that fiscal year. When it was sold for $71 million to Carson Pirie Scott and Company of Chicago in 1983, there were 269 stores in 33 states.

Crocker, a CPA who came to Super Valu from the presidency of the Oregon-based grocery and pharmacy chain Fred Meyer, Inc., also directed the company’s continuing acquisition and expansion program. Very much a part of the trend toward consolidation in the food wholesale industry, Super Valu continued to purchase smaller food wholesalers, acquiring Pennsylvania-based Charley Brothers Company in 1977. Charley Brothers, which began as a retail grocery store in 1902 and moved into wholesaling in 1918, served Shop ‘n Save stores and other independent retailers in Pennsylvania.

The advent of universal price codes and scanning equipment in the grocery business led to the introduction, in the mid-1970s, of Testmark, an independent research center providing store measurement data. These data had been available from Super Valu stores since 1965 and, during the period before Testmark was established, had been handled by Super Valu merchandising research, an internal department for clients who preferred not to use commercial research companies. In direct competition with these commercial research companies, Testmark, with Super Valu’s backing, offered its customers the advantage of cooperation within the Super Valu network and with major chains and independents nationwide. Testmark’s autonomy was enhanced by its Hopkins, Minnesota, location, separate from Super Valu’s corporate headquarters.

Crocker’s tenure at Super Valu was characterized by his success in running what was one of the better-capitalized and stronger wholesalers in the country and by the casual no-frills operation he ran. Company headquarters were in a warehouse, not a plush office. Crocker personally founded a professional soccer team, the Minnesota Kicks, in 1976. They, too, were a Crocker success story, becoming popular in their home territory.

Crocker’s successes were apparent on the bottom line as well. By 1978 earnings per share had increased approximately 50 percent since Crocker’s first year with Super Valu. Crocker commented to Financial World in 1977, “I don’t think about profits very much. If you’re doing things right, profits always follow.” By the end of the 1970s Super Valu’s sales were $2.9 billion.

MOVE INTO RETAIL GROCERIES WITH CUB FOODS IN 1980

Super Valu ushered in the 1980s with the acquisition of Cub Foods, a discount grocery store operation. Warehouse stores, with bare bones facilities and prices, were a phenomenon of the 1970s. Cub Foods was founded by the Hooley family, grocers since 1876 in Stillwater, Minnesota. The Hooleys opened their first warehouse store with the Cub name in a Minneapolis suburb in 1968. When Super Valu purchased the chain in 1980, there were five Cub stores and a Hooley supermarket in Stillwater. Culver M. Davis was appointed president and chief executive officer of Cub Foods in 1985. Davis had joined the Hooley organization in 1960 and was a founder, with the Hooley family, of the discount stores.

Super Valu originally acquired the Cub chain to boost its wholesale sales. Business Week reported in 1984, the company soon realized it had a “tiger by the tail,” and that Cub had “taken on a (retailing) life of its own.” Super Valu improved the atmosphere of Cub Foods stores by using attractive decor, keeping the stores clean, and increasing product offerings, including perishables, which the early warehouse stores did not offer. As a result, Cub Foods evolved into a combination of the conventional grocery store and the warehouse store, known in the industry by the late 1980s as a “super warehouse.”

Although Cub Foods competed directly with a number of Super Valu’s customers’ stores and its own corporate stores, the company saw a benefit in the opportunity Cub offered its retailers to learn about warehouse-store operations from the inside. Several of its retailers did not totally agree, citing a 10 to 15 percent reduction in business when a Cub Foods store opened in their market area. To address this complaint, Super Valu started franchising its Cub stores and also developed County Market, a downsized version of Cub with the same low prices, but aimed at smaller communities and at independent retailers who could not meet the financial commitment that buying a Cub franchise required. By 1989, 74 Cub Foods stores (of which Super Valu owned 34) were in nine states and had sales of approximately $3 billion.

By 1986 Super Valu had introduced another variation on the Cub theme. Developed for retailers who needed to improve their stores’ look and style to meet competition, the Newmarket format combined warehouse pricing with an upscale product line and services such as video rental, check cashing counters, and baggers. The first Newmarket store opened in the St. Paul-Minneapolis area, and was so successful that the company opened more stores in other locations.

In June 1981 Jack Crocker, at age 57, stepped down from his position as CEO. Crocker, who headed Super Valu for nine years, brought the company to just over $4 billion in sales. He is reported to have handpicked Michael W. Wright, who had joined Super Valu as an executive vice president in 1977 and became president in 1978, to be the next CEO. Wright had first come to Crocker’s attention when he handled some legal matters for the company in Minneapolis. Wright, a former captain of the University of Minnesota football team, had put himself through law school by playing professional football with the Canadian Football League.

1980S: EXPANSIONS IN THE WEST & SOUTH

Super Valu took its expansion west in 1982 when it acquired Western Grocers, Inc. Western had distribution centers in Denver, Colorado, and Albuquerque, New Mexico. In 1984 these two centers became separate divisions. Super Valu also moved into Nebraska in 1982 by acquiring the Hinky Dinky distribution center near Omaha from American Community Grocers, a subsidiary of Texas-based Cullum Companies. In 1984 Super Valu sold the center back to Cullum. With intentions of gaining a strong market presence in Florida, in 1983 and 1984, respectively, Super Valu purchased Pantry Pride’s Miami and Jacksonville distribution centers. In what Super Valu considered a breach of their agreement, Pantry Pride began selling off its stores. With this and the fact that the Florida market had historically been dominated by the chains, Super Valu, claiming that the Florida market would take a large amount of capital to develop, sold the Miami center to Malone & Hyde in 1985, and the Jacksonville center to Winn-Dixie in 1986.

In 1985 Super Valu created its Atlanta Division when it acquired the warehouse and distribution facilities of Food Giant. Through this division the company supplied Food Giant, Big Apple, Cub Foods, and independent stores. Food Giant, according to a 1988 Financial World report, “refused to implement Super Valu’s turnaround plan for store upgrading,” and the retail stores that Super Valu owned through the original transaction and a later acquisition of stock lost money for the company. By 1988 the company had divested itself of these stores, but operated or franchised seven Cub stores in the Atlanta area.

Also in 1985, Super Valu acquired West Coast Grocery Company (Wesco) of Tacoma, Washington. Wesco, founded by the Charles H. Hyde family in 1891, was Super Valu’s largest acquisition to that time. Wesco had distribution centers in two Washington cities and Salem, Oregon, and a freezer facility in another Washington city. Super Valu’s West Coast operations were hurt when the Albertsons chain opened a distribution center to supply its own stores in Washington.

In 1986 and 1987 Super Valu acquired two more distribution centers in Albuquerque and Denver, respectively. These centers were owned by Associated Grocers of Colorado, which, at the time of the Denver purchase, was in Chapter 11 bankruptcy proceedings. In December 1988, Super Valu acquired the Minneapolis; Fargo, North Dakota; and Green Bay, Wisconsin, distribution centers of Red Owl Stores, Inc. The former Denver and Albuquerque divisions of Western Grocers were moved into these new facilities.

By the mid-1980s Super Valu had developed a substantial presence in the military commissary marketplace. The company had been supplying both product and retail support to military commissaries in the United States and abroad and, in 1986, demonstrated its commitment to international operations by appointing a military and export product director. Super Valu International had its beginnings with the Caribbean and Far East markets and eventually supplied fresh goods and private-label canned goods, general merchandise, and health and beauty aids to most countries of the world.

During the 1980s ShopKo continued to expand and to turn in substantial profits for the company. At the end of fiscal 1989 ShopKo operated 87 stores in 11 states from the Midwest to the Pacific Northwest and had sales of $1.28 billion. Super Valu’s only nonfood retail operation at the time, ShopKo had its headquarters and distribution center in Green Bay, Wisconsin, and distribution centers in Omaha, Nebraska, and Boise, Idaho.

It was perhaps the successes of ShopKo and of Cub Foods that led Super Valu to its largest venture in retailing in the 1980s: the “hypermarket,” a retailing concept that originated in Europe after World War II. The first hypermarkets introduced in the United States in the early 1970s were not successful, but in the mid-1980s Hyper Shoppes, Inc., a predominantly French consortium, reintroduced the hypermarket in the United States. Super Valu was a 10 percent investor in the venture, which opened bigg’s, a 200,000-square-foot food and general merchandise store in the Cincinnati, Ohio, area.

With the experience of this venture under its belt, Super Valu created its own version of the hypermarket, Twin Valu. A combination of a Cub Foods and a ShopKo, this 180,000-square-foot store opened in early 1989 in Cleveland. A second Twin Valu opened in Cleveland in 1990. The hypermarket concept as executed by Super Valu emphasized low prices, good selection, and brand-name merchandise.

In 1988 Super Valu lost its position as the world’s largest wholesaler when Oklahoma City-based Fleming Companies bought Malone & Hyde, a purchase Super Valu declined to make. At the end of the 1980s, Super Valu served some 3,000 independent retailers in 33 states. The company still owned and operated 70 conventional grocery stores and some Cub Foods stores and served its corporate stores and customers from 18 retail support and distribution centers.

WETTERAU & OTHER PURCHASES HIGHLIGHT EARLY NINETIES

Super Valu entered the 1990s having to contend with the loss of $220 million in business from the sale or closing of three major customers in 1989: Red Owl stores in Minneapolis, Skaggs Alpha Beta stores in Albuquerque, and two Cub Foods stores in Nashville. The loss of business through acquisition of its independent retail customers by major chains, nearly all of whom were self-distributing, would continue to pose a threat to Super Valu and other wholesalers throughout the 1990s. Part of Super Valu’s response to this threat was to further bolster its own retail operations.

Meanwhile, Super Valu’s ShopKo subsidiary had grown so rapidly it was beginning to be too large for Super Valu to manage. The company decided to divest itself of part of ShopKo through an initial public offering (IPO). In October 1991 the IPO resulted in the sale of 54 percent of ShopKo to the public, netting Super Valu $420 million. Wright told Grocery Marketing that if Super Valu had not taken this step, “it was a case where we would have ended up with the tail wagging the dog.”

The very next month Wright began to reinvest the cash, and to boost the company’s retail sector through the purchase of Scott’s Food Stores, a 13-store chain based in Fort Wayne, Indiana. With the addition of Scott’s, Super Valu became the 25th-largest retailer in the United States.

In early 1992, Super Valu Stores Inc. changed its name to Supervalu Inc. Later that year, the company made its largest acquisition to date when it acquired Wetterau Inc., the fourth-largest wholesaler in the country, in a $1.1 billion deal. The addition of Wetterau’s $5.7 billion in sales volume to Supervalu’s $10.6 billion leapfroggedSupervalu over rival Fleming and back into the top spot in U.S. grocery wholesaling. Wetterau, founded in 1869 and based in Hazelwood, Missouri, was led at the time of the merger by Ted C. Wetterau, a member of the fourth generation of Wetteraus to run the company. With Wright, Wetterau became vice chairman of Supervaluand a company director. Wetterau retired late in 1993, leaving Wright in sole control of Supervalu once again.

In addition to bolstering Supervalu’s wholesaling operation, Wetterau brought Supervalu a significant retail operation: 180 stores in 12 states (added to Supervalu’s stable of 105 stores in 11 states). Most significantly, Wetterau’s stores included the Save-A-Lot chain of limited-assortment stores, a format new to the Supervalufold and one that would expand under Supervalu’s supervision. The newly combined retail operations movedSupervalu into 14th place among U.S. food retailers. The company set a long-term goal of being one of the top 10 retailers by the end of the 1990s.

The Wetterau acquisition was soon followed by additional acquisitions, several in retail. Late in 1993 Supervaluacquired Sweet Life Foods Inc., a wholesaler based in Suffield, Connecticut, with $650 million in revenues and a few retail operations in New England, one of Supervalu’s weaker regions. In March 1994, the 30-store Texas T Discount Grocery Stores chain was acquired. Then in July, Supervalu bought Cincinnati-based Hyper Shoppes, Inc., which ran seven bigg’s stores in Cincinnati, Denver, and Louisville, Kentucky, and had more than $500 million in annual revenues. Meanwhile, in June 1994, Fleming leapfrogged back over Supervalu into the number one wholesaling position when it acquired Scrivner Inc., then number three. At that time, Fleming claimed $19 billion in revenue to Supervalu’s $16 billion.

MID-NINETIES TO 2002: SUPERVALU RESTRUCTURES WHILE STILL GROWING

Supervalu announced in late 1994 that it would begin to implement a restructuring program called Advantage in early 1995. Over a two-year period, the company eliminated about 4,300 jobs (10 percent of the total workforce) and divested about 30 underperforming retail stores. The Advantage program also centered around three chief aims: revamping the distribution system into a two-tiered system in order to lower the costs to retailers; creating a new approach to pricing called Activity Based Sell; and developing “market-driving capabilities” that would increase sales for Supervalu’s retail customers, chiefly through category management.

The last of these goals also involved the realignment of the company’s wholesale food divisions into seven marketing regions: Central Region, based in Xenia, Ohio; Midwest Region, Pleasant Prairie, Wisconsin; New England Region, Andover, Massachusetts; Northeast Region, Belle Vernon, Pennsylvania; Northern Region, Hopkins, Minnesota; Northwest Region, Tacoma, Washington; and Southeast Region, Atlanta, Georgia.Supervalu took a $244 million charge in 1995 to implement the Advantage program, which was the company’s response to increasing market pressures (low inflation, industry consolidation, a slowdown in growth, and changes in the promotional practices of manufacturers) that had yet to hurt the company’s earnings but were certain to begin to do so if the company took no action.

In late 1996 Supervalu bought the 21-store Sav-U Foods chain of limited assortment stores from its rival, Fleming Companies. The purchase provided Supervalu its first Southern California retail presence. The stores were to be converted to Save-A-Lot stores, small, warehouse-style retail markets offering a limited assortment of 1,200 to 1,300 food items. The company made plans to eventually open 200 to 300 Save-A-Lot stores in the area.

Also in late 1996, ShopKo and Phar-Mor Inc., a chain of more than 100 deep-discount drug stores, merged under the umbrella of a new holding company called Cabot Noble Inc. Although initially Supervalu was to have no stake in the new company, the final agreement gave Supervalu 6 percent of Cabot Noble in order to reduce the amount of financing needed for the merger. Supervalu also gained about $200 million as a result of the purchase of most of its shares in ShopKo. In 1997 the company exited its 46 percent investment in ShopKo, making about $305 million in net proceeds. Supervalu had also started to take some tentative steps toward expanding its presence overseas, through a 20 percent stake it held in an Australian wholesaler and its agreement to supply products to a new supermarket in Moscow.

By mid-1998, the company had a strong first quarter to boast about, a two-for-one stock split, and opened or completed acquisitions of 73 stores. The company focused its expansion efforts that year on growing the Save-A-Lot unit. That same year, Supervalu began its investment in the pharmacy business: Scott’s Foods stores acquired Keltsch Pharmacy of northeast Indiana, which included 11 freestanding pharmacies and three in-store ones. Supervalu also lost one of its larger customers, Bellevue, Washington-based QFC, which was acquired by Portland’s Fred Meyer.

In 1999 Supervalu reported record sales of $17.4 billion for 1998, and shortly thereafter, still riding the crest of the previous year’s revenue wave, acquired Richfood Holdings, Inc., the leading mid-Atlantic food distributor and retailer. As a result, Supervalu took over the Shoppers Food Warehouse, Metro, and Farm Fresh retail food chains and gained about 800 new customers. Supervalu then divested Hazelwood Farms Bakeries to focus its investments on core food distribution and retail businesses, but maintained its link with the bakeries (and new owner Pillsbury Bakeries & Foodservice) as a supplier.

Along with various cost-reduction initiatives, Supervalu’s continued focus on core businesses and the boost from the Richfood acquisition helped Supervalu see another record year for sales. By mid-2000, Supervalu’s sales surpassed the $20-billion mark. An ever-growing, increasingly more efficient company, Supervalu was operating more than 194 price superstores (including Cub Foods, Shop ‘n Save, Shoppers Food Warehouse, Metro, and bigg’s), 839 limited assortment stores (including 662 licensed locations under the Save-A-Lot banner), and 85 other supermarkets. It was also the primary supplier to about 3,500 supermarkets and franchises of its own retail chains, and a secondary supplier to approximately 2,600 stores, including 1,350 Kmart stores. The company also joined the Worldwide Retail Exchange, a premier retail-focused, business-to-business exchange, and signed a multiyear national supply agreement with Webvan Group, Inc., of Foster City in California.

As was the trend among wholesalers at this time, Supervalu planned to continue its expansion of retail stores in order to gain more control of its core businesses. By 2001 Supervalu’s retail food business represented about 60 percent of total company operating earnings, and was growing even more. One of the company’s goals was to increase retail square footage by about 5 percent for the 2001 fiscal year. The pharmacy side of Supervalu’s retail business, however, was apparently not considered a core one, as the company closed 30 stores in three states, 18 of which contained pharmacies.

The distribution side of Supervalu’s business took a blow when Kmart ended its contract with the company, resulting in $2.3 billion in reduced revenue for the year. Supervalu also lost a $400 million annual supply contract with the Genuardi’s chain, once the East Coast chain was bought by Safeway in mid-2001. Supervalucontinued to consolidate its distribution centers and announced that it would cut 4,500 jobs, or 7.3 percent of its workforce.

JEFF NODDLE AT THE HELM AS CEO

When he replaced the retiring Mike Wright as chief executive officer in 2001, Jeff Noddle pursued an aggressive expansion strategy to offset the loss of distribution business. During 2002, Supervalu opened 115 new stores, including 103 Save-A-Lot stores, 11 price superstores, and one conventional supermarket, and closed 49 stores. In mid-2002, the company announced its plans for 2003: It would open 10 to 15 superstores and at least 150 extreme-value food stores. In another move to gain control over its core business, Supervaluannounced that it would purchase St. Louis-based Deal$-Nothing Over a Dollar LLC, adding 53 stores to its general merchandise business. Supervalu’s Save-A-Lot chain also opened its 1,000th store in 2002.

In 2003 Noddle negotiated a swap with C&S Wholesale Grocers, offering its New England distribution business for operations in Wisconsin and Ohio. Also, Supervalu obtained the retail distribution business of Flemings, which discontinued those operations in 2003.

Supervalu parlayed its expertise in supply chain management into a subsidiary offering retail distribution logistics management. In October 2003 the company launched Advantage Logistics, expanding on the Advantage brand used for existing Kroger accounts. As a third-party logistics coordinator, Advantage offered its proprietary logistics technology for warehouse, distribution, and transportation management. Flexibility in the technology allowed for easy interface with a client’s existing information technology. Success with the concept led Supervalu to expand with the acquisition of Total Logistics, Inc., for $234 million. The 2005 acquisition expanded Supervalu’s business into nonfood areas, including automotive parts and office supplies.

Supervalu continued to expand its distribution network. The company added 49 SuperTarget stores in Texas, Oklahoma, Louisiana, Colorado, and Utah. Supervalu started a new distribution business in 2005, W. Newell & Company, which distributed fresh produce to grocery retailers.

In the extreme-value segment, Supervalu continued to expand its highly profitable Save-A-Lot brand through corporate expansion and licensed stores. By the end of fiscal year 2005, more than 1,270 Save-A-Lot stores were in operation.

2006 ALBERTSONS ACQUISITION

Previously the 11th-largest retail grocer in the country, Supervalu ranked third after its 2006 merger with New Albertsons. Recorded as a $17.4 billion acquisition, the deal involved store locations in the western states and along the West Coast operating under Albertsons and Bristol Farms names. Operations in the Midwest and East added Acme Market, Jewel, Shaw’s Supermarkets, and Star Markets brands. Supervalu nearly doubled in size with the addition of 1,125 stores to approximately 1,400 existing stores. The Osco and Sav-on in-store pharmacy brands contributed 900 units. Other operations included corporate headquarters in Boise, Idaho; regional offices; and 10 distribution centers.

Supervalu began an extensive overhaul of operations systemwide. Integration with Albertsons maximized the efficiency of its supply chain network and administrative functions. Supervalu closed poorly performing stores or stores in close proximity to better stores. Most of the company’s $1.2 billion annual renovation budget for 2007 and 2008 was applied to 100 to 150 newly acquired stores. Supervalu maintained identities of its many brands to preserve regional customer loyalty.

The multiyear project involved updating the company’s merchandising strategy. Its new Premium, Fresh & Healthy atmosphere included the Wild Harvest store-within-a-store concept offering organic foods and improvements to the perishable foods areas. In 2006 Supervalu introduced in-store health clinics, Now Care Clinics. Shop the World offered international foods. Shoppers Food Warehouse became Shoppers Food & Pharmacy. The store retained its low cost pricing, without the warehouse atmosphere. At the 202-store Shaw’s chain Supervalu shifted from sale prices designed to increase traffic to an everyday low-price strategy.

To simplify merchandising across Supervalu chains, the company initiated the Own Brands program. The company offered a smaller range of brands across three pricing and quality categories, entry-level, national-brand-equivalent, and premium selections. Supervalu introduced several private-label brands, developed at the company’s new East View Innovation Center. Test kitchens, sensory laboratories, and related facilities supported new product development. Private-label brands included Homelife Value, Shoppers Value, Wild Harvest, Baby Basics, and Java Delight. Culinary Circle offered fresh-prepared, casual foods.

Supervalu opened several stores under many of the acquired brands, as well the company’s existing brands. These involved approximately 25 new supermarkets and 75 limited-assortment stores.

After its first full year operating as one of the top three retail grocers, Supervalu reported $44.05 billion in sales for the fiscal year ending February 23, 2008. Retail accounted for 90 percent of sales, compared to approximately 50 percent before the Albertsons acquisition. Integration of operations resulted in $40 million in savings and operating income rose 31.5 percent to $1.55 billion, resulting in net income of $593 million.

ECONOMIC CONTRACTIONS OF THE GREAT RECESSION

Supervalu continued to expand. However, the economic crisis of late 2008 led to another round of operational and management restructuring, especially after Noddle’s retirement in 2009. As consumer spending declined, same-store sales suffered, leading Supervalu to close 22 marginal stores across several brands and throughout the country in late 2008.

Taking the helm as CEO of Supervalu in May 2009, Craig Herkert closed 50 stores and sold the company’s 36 Albertsons stores in Utah. He reduced the budget for store remodeling and streamlined the management structure, which had become bloated during the initial integration phase of the Albertsons acquisition. In early 2010 Supervalu sold 16 Shaw’s Markets in Connecticut. Herkert pursued a plan of slow development, with an emphasis on the expansion of the Save-A-Lot chain of extreme-value stores.

Key Dates

1871:

Minneapolis wholesale grocery firms (B.S. Bull and Company, and Newell and Harrison Company) merge to form the early forerunner to Supervalu.

1926:

Company incorporates as Winston & Newell Company.

1954:

Company changes its name to Super Valu Stores Inc.

1955:

Company begins acquiring regional wholesalers.

1971:

With acquisition of ShopKo, company begins major investments in the nonfood, general merchandise business.

1989:

Company opens its first hypermarket in Cleveland, Ohio.

1992:

Company changes its name to Supervalu Inc.

1999:

Supervalu acquires Richfood Holdings, Inc., a leading mid-Atlantic food distributor and retailer.

2000:

Sales surpass $20 billion.

2002:

Supervalu opens its 1,000th Save-A-Lot store.

2006:

Supervalu becomes third-largest grocery retailer with acquisition of New Albertsons.