What's the motivation for the restructuring at Maytag?

by Norm Winick

Maytag president and CEO Lloyd Ward told the world last fall he plans on reducing expenses of the firm by $100 million -- including $25 million in their general and administration functions at every facility, including the one in Galesburg.

What's even more distressing about these cuts, which will inevitably mean some downsizing and the elimination of good-paying jobs, is the reasoning that led to this action.

It's not to make Maytag profitable. Net income for the firm in 1999 rose 15 percent over the year before to $328.5 million. Sales increased six percent in the same period to $4.32 billion. That means the company sold $172,802 worth of product for each of its 25,021 employees -- earning $13,419 in net income per employee and $3.66 per share.

It's not to maximize efficiency. Maytag's return on assets, return on investment and return on equity are all well above industry averages.

It's not to reduce the firm's debt; long-term debt is at a five-year low.

Maytag's net sales have increased in each of the last five years. So has the firm's income -- both before and after taxes.

It's not to make Maytag competitive in its industry. It's gross margin of 28.9 percent is only slightly below the industry average of 33.8 percent while the firm's profit margin is well above the industry average.

Maytag's management has decided to cut jobs and destroy lives to satisfy the traders and speculators on Wall Street. According to Ward in an internal e-mail memo, ''Everyone in this organization is acutely aware of the decline in value of Maytag stock over the past 12 months. From top to bottom, we are focusing on recapturing value for shareowners by strengthening our base business, executing business fundamentals, and, ultimately, extending our business model into new areas of value creation.''

Ward acknowledges that the eminent job cuts are related to the stock price and not the firm's performance: ''Maytag's business model is sound. Our innovation strategy is working. Our expectation is that this year will mark a fourth consecutive record year for the corporation's financial performance. In spite of that performance, our stock price has fallen severely. What is at issue for most investors is not our absolute level of earnings but our earnings momentum. Slowing momentum last fall created a gap between investor expectations and our ability to deliver. The result was a fall-off in Maytag's share price. Earlier this year our stock declined again as we gave investors an outlook of no momentum in our growth in the first half of the year even as we reaffirmed growth would accelerate during the second half. In today's financial marketplace, investors have a variety of choices for fast-paced high growth-rate stocks. Sales and earnings growth momentum that a company such as Maytag can generate is a key consideration for investors. If we are to be perceived as a great company to invest in, we will need to generate growth momentum in the future.''

Maytag's management sees the firm as competing for Wall Street dollars with the high-tech firms which have been the darlings of investors and day traders. They want to show the same trends in growth enjoyed by companies which started from scratch only a few years ago, don't need to build brick and mortar factories, don't ship heavy products around the world and don't have to compete with other huge multinational firms producing similar products.

That's not reasonable.

Maytag is a great American company. It is a blue-chip firm in every sense of the term. Management is reacting to temporary, cyclical stock market conditions and their perceived notions of what traders are looking for with permanent job reductions and restructuring.

The stock market has already started to realize that the tech stocks were overpriced and the blue chips too low. Maytag has benefitted with a stock price increase of 20 percent in the last month. That's still no solace for shareholders who remember it trading at nearly $75 a share last summer -- compared to $34.75 now. The last time it had traded below $35 was in 1997. But that's a risk investors in the market take.

Over half of the firm's stock is owned by institutions -- pension funds, mutual funds, etc. -- who tend to hold on to their equities for long-term gain. They are not the problem.

The problem could just be misplaced priorities causing the firm's management to try to please the aforementioned Wall Street traders or, even more cynically, it could be old-fashioned greed. Of the nearly 80 million Maytag shares outstanding, insiders own more than a quarter of them. That means that a handful of Maytag executives and Board members plus others (including employees) involved with the company lost over a billion dollars collectively (on paper) when the stock plummeted $50 a share. That includes Chairman and CEO Lloyd Ward who owned 179,715 shares as of January 22, 2000. (Most of his were purchased after the price dropped.) Former CEO Leonard Hadley owns 204,400 shares -- worth over $7 million now but over $15 million last summer. Vice-president and Treasurer David Urbani owns nearly 12,000 shares; Thomas Schwartz, Chief Administrative Officer, owns over 338,000 shares (including 335,477 indirectly controlled) and Divisional Officer Jon Nicholas owns 6,319 shares. These individuals took sizable personal financial hits when the stock crashed and that's too bad. But if this restructuring is motivated by a scheme to boost the personal income of the people who are making these decisions, something's really rotten in the city of Newton.

While making a company more efficient is clearly in the best interests of any firm, cutting jobs and outsourcing may only be a temporary cure for a problem that doesn't really even exist and may indeed lead to reductions in productivity and competitive potential in the future.

Uploaded to The Zephyr Online April 5, 2000

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