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Case Synopsis:
Avon Products, Inc. founded in 1886 was one of the largest manufacturer
and marketer of beauty products. It produced and sold cosmetics,
fragrances, toiletries and fashion jewelry and accessories. It largely sold
its products through direct door-to-door selling and in 1988 it had more
than 1.4 million active sales representatives. By mid 1980s it had also
ventured into sub-acute health care services such as alcohol and drug
abuse treatment centres, nursing homes and psychiatric hospitals. Also it
provided home health care, operated retirement living facilities.
As a result of strong cash flow it gave regular high dividends and was
perceived as a high dividend paying company and also made aggressive
acquisitions. Its other principal business group was its Health Care Group
which comprised of Foster Medical Corporation, Mediplex Group and
Retirement Inns of America.
Instead of depending primarily on direct sales it wanted to develop
additional distribution channel. At the same time it also wanted to
continue acquisitions in health care area so that even if beauty business
failed it could remain viable.
While the health care industry prospects began declining, the
performance of Beauty group started growing markedly. Riding on this
strength they wanted to focus more in this segment and move out of the
health care business.
2. The companys cash also has been decreasing over the years and the
company can save almost $71.65 Mn by reducing the dividends from $2 to
$1 per share. But there has been a considerable decrease in the share
price from $30 to $20.375 just at the news of decreasing dividends in
1981.
3. The company also has 12,561,200 (17.6%) of the investors who have just
invested in the company f0r the yields. The concern of institutional holders
has also been shared with Mr. Waldron regarding decrease in dividends.
4. The company is planning to reduce the dividend pay through an exchange
program of 18 Mn shares. To achieve the same cash reduction of
$71.65Mn they have to give out a common dividend of $0.66 to the
remaining common stock holders. Through this program they would also
be able to satisfy the 17.6% investors.
5. The volatility of the share has already increased to 35.5% per year in the
last year. The institutions whose primary objective is yield have 17.6% of
the shares. If they sell of the volatility in the market further increases.
Group 2I_Avond
Products.xlsx
Recommendation:
We suggest that the company should divest in two of its businesses in health
sector as the sector has decreasing gross margins across years and it is also less
than the consolidated gross margin in 1987. The company should then go for the
exchange offer by which they would be able to conserve cash by having a little
effect on the stock price.