Monday, August 25, 2003

Strategic discards I have elsewhere compared the practices of oligopolies in acquiring and de-acquiring other companies to a card game, namely gin rummy, where players pick up and discard constantly to keep improving their hands. That model is hardly a new phenomenon, as companies have been dealing away non-performers as much as they have grabbed up firms that they though would improve their position. And by this analogy, a card that is useless to one player may be the perfect fit for another. Reading in that classic business tale Barbarians at the Gate this weekend I was struck by how that model has persisted. The first part of the book is about the way in which stodgy Nabisco, which had acquired stodgier Standard Brands, was pressured by rising star Ross Johnson into selling off its losers. As he stated to then CEO Ross Schaberle "You know, it doesn't make sense to have anything that's not number one or number two in its industry." So the selling began to lop off the barnacles. In the last quarter of 1982 alone, Johnson sold J.B. Williams, Freezer Queen frozen foods, Julius Wile wine and spirits, Hygiene Industry shower curtains, and Everlon Fabrics draperies. At the same time, he cut some of Standard Brands's old businesses: Chase & Sanborn and high fructose syrup. Johnson was a master at selling them off. "Nobody thought that J.B. Williams, home of over-the-hill brands such as Geritol and Aqua Velva would fetch more than $50 million. Johnson sold it for twice that, applying his usual charm and telling potential buyers how badly Nabisco has been running the business. He convinced them that Williams had world of unexplored potential." All this Johnson soon followed by selling Nabisco itself to R.J. Reynolds, the event which eventually led to the leveraged buyout of the R.J. Reynolds, but that's another story. Johnson, it turns out, was one of the masters of the gin game of oligopolies, one who showed how strategic de-acquisitions were as critical as acquisitions. 3:51:05 PM

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