Avon Products, Inc.

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De La Salle University

Ramon V. del Rosario College of Business

Financial Management FNC535M

RCBC Plaza Room 520

Avon Products Inc.

Case Analysis & Corporate Strategy

Group no.4 Report

Dean Atty. Joe-Santos Balagtas Bisquera

MBA Professor

EXECUTIVE SUMMARY

Avon Products, Inc. (Avon or the Company) is a United States (US) based manufacturer and marketer of beauty products.  The Company is engaged in the beauty product direct-selling business, in which a sales force of independent sales representatives generates most of its revenues.  Under its Beauty Group, Avon sold cosmetics, fragrances, toiletries, and fashion jewelry, gift and decorative products.  In the early 1980s, Avon decided to invest in the healthcare industry by acquiring Foster Medical Supply, Mediplex Group and Retirement Inns of America, companies that provide healthcare services and retirement living facilities.

Sometime in 1980’s, Avon’s cash flow has been weakened as more women are leaving their homes, where most sales take place, to take on office jobs.  Moreover, its acquisition of Mallinckrodt, a specialty chemical company that sells to health care industry, added to its tight cash position.  To respond to this, the Company was forced to reduce its dividend payout in 1982.  

By 1987, Avon’s management have concluded that its investments in the health care industry is no longer grows and earns at an attractive rate.  With this, the Company decided to divest from the health care business and instead increased its commitment to its beauty products line.  In the same year, it acquired Giorgio, Inc. to add prestige fragrance sold through retail stores to its business line.

As part of reorganizing its business, Avon Chairman and CEO Hicks B. Waldron, thought of reconsidering the Company’s financial policies, including the its dividend policy.  In line with the Company’s strengthening of its beauty product business, management deemed it necessary to conserve its cash flows to fund its planned growth and expansion.  Reduction of dividend is the best option; however, the management is hesitant due to its possible effect on the stock price.  To lessen the impact on the stock price, the management is evaluating the possibility of implementing an Exchange Offer wherein cumulative preferred shares will be issued for certain portion of outstanding common shares.  Since most of the large and institutional shareholders of the Company look forward to high dividend payments, the management is in the process of evaluating the fairness of the Exchange Offer to all shareholders of the Company.

PROBLEM

Institutional

What strategy should the Company undertake to improve its results of operations and financial position, and to maximize growth?

Operational

Should the Company maintain its current capital structure and reduce the amount of dividends per share or should it implement the proposed exchange offer?

CORPORATE OBJECTIVE

Avon have built a strong brand over its years of operations.  Its current operations continue to hold on to its market position and positive outlook of investors – its shareholders.  Considering the operational and institutional challenges faced by the Company, its objectives are as follows:

Immediate:

To improve its current position in the market, adapt to the changing consumer preference, explore possible new markets and survive the increasing competition for beauty products and translate it to improved financial results of operations.

Long-Term:

To ensure that the Company’s financial position remain stable and that shareholder confidence on the Company’s performance and long-term prospects remain strong and positive.

AREAS OF CONSIDERATION

Environmental Opportunities and Threats

1. Macro-Economic Indicators

Political

The 1980s marks the Raegan Revolution, where Raegan was characterized as the leader of a broadly based conservative movement whose ideas dominated national policy making in areas such as taxes, welfare, defense, the federal judiciary, and the Cold War.

It was also during this period were the Iran-Iraq war ended.

Economic

The stock market crashed in October of 1987, marks as the first contemporary global financial crisis, known as the “Black Monday” where in
October 19,1987, the Dow Jones Industrial Average dropped 22.6 percent.

In an article on entitled “The Stock Market Crash of 1987”, the Fed’s response was to “encouraged banks to continue to lend on their usual terms. Ben Bernanke, writing in 1990, noted that “making these loans must have been a money-losing strategy from the point of view of the banks (and the Fed); otherwise, Fed persuasion would not have been needed. But lending was a good strategy for the preservation of the system as a whole” (Bernanke 1990). According to Bernanke, the 10 largest New York banks nearly doubled their lending to securities firms during the week of October 19 even though discount window borrowings didn’t themselves increase (Garcia 1989).”