Rahul Pathak, student reference no.

F5540595Q

Background
Ben & Jerrys Homemade Inc. (B&J) is one of two major players in the super-premium ice-cream market in the United States of America. From its humble beginnings in an old, refurbished gas station in Burlington | Vermont, and in just over two decades, B&J commanded a 45% share of its market. The company had established a great brand name, successfully rolled-out new products, and its highly differentiated offer with a luxury character was seemingly not as affected in times of economic slowdown. Yet, at $21 a share and despite regular sales and increased earnings, the B&J stock had hovered around the same level for years. B&Js average return on shareholders equity, a measure of how well its employing shareholders money, stood at 7% in 1998, up from 5% in 1997. While this had improved to about 9% in 1999, at a return of 9 cents to every dollar of equity invested, B&J wasnt necessarily providing optimal value to an investor. Moreover, a rise in health conscious consumers and increased competitive pressure had begun to decelerate its financial performance, exposing it to a number of takeover offers. This, alongside B&Js anaemic stock performance and its tradition of generous donations1 of its corporate resources, had some investors argue that the companys social image was a luxury it could no longer afford. From the outset, Ben Cohen and Jerry Greenfield were deeply committed to Vermonts economy and environment. They relied heavily on local suppliers and as the companys need for capital increased, they resisted venture capital financing, which would typically require relinquishing significant control over the business. Instead, B&J sold stock to Vermont residents2, thereby also reinforcing the companys local roots. The company pioneered the pursuit of business with a double bottom line3 profit and people. This lead to high employee satisfaction on one hand, but also increased their cost structure on account of high labor intensive practices, coupled with above average wages. B&Js social objective permeated every aspect of the business, with instances of its management choosing to sacrifice profits for social gains. In fact, and as a consequence of a policy to buy ingredients only from small farms, one presumes that their costs were likely to be even (higher and) more inefficient.

1 2

Since 1985, Ben & Jerrys donated 7.5% of its pretax earnings to various social foundations and community-action groups. B&J issued 75,000 shares at $10.50 a share exclusively to Vermont residents. By restricting the initial public offer to Vermonters, they hoped to offer those who had first supported the company, with the opportunity to profit from its success. A traditional broad offering was later placed when the shares were listed and traded on the NASDAQ. What Ben Cohen and Jerry Greenfield referred to as the double dip.

Page 1

Rahul Pathak, student reference no. F5540595Q

The B&J management discovered quite early on that economic factors and social contribution were not often in harmony. The pursuit of a non-profit orientated policy and the companys social orientation required not just corporate independence, but also stringent restrictions on corporate control. This was done through elements of the companys corporate charter, its differential voting rights, and a supportive Vermont legislature. (See Exhibit 1) Differential voting rights
The charter gave the board greater power to perpetuate the mission of the firm. The board of directors was divided into three classes with one class of directors being elected each year for a three-year term. A director could only be removed with the approval of a two-thirds vote of all shareholders. Finally, the stockholders increased the number of votes required to alter, amend, repeal, or adopt any provision inconsistent with those amendments, to at least two-thirds of shareholders. B&J had three equity classes: class A common, class B common, and class A preferred. The holders of class A common were entitled to one vote for each share held. The holders of class B common (reserved primarily for insiders), were entitled to 10 votes for each share held. Class B common stock was not transferable, but could be converted into class A common stock on a share-for-share basis and was transferable thereafter. The companys principals Ben Cohen, Jerry Greenfield, and Jeffrey Furman held 47% of the aggregate voting power but with only 17% of the aggregate common equity outstanding. Non-board members, however, still maintained 51% of the voting power. The class A preferred stock was held exclusively by the B&J Foundation, a community-action group. The class A preferred gave the foundation a special voting right to act with respect to certain business combinations and the authority to limit the voting rights of common stockholders, in certain transactions such as mergers and tender offers, even if the common stockholders favored such transactions. An amended provision of the Vermont Business Corporation Act gave the directors of any Vermont corporation the authority to consider the interests of the corporations employees, suppliers, creditors, and customers, when determining whether an acquisition offer or other matter was in the best interest of the corporation. The board could also consider the economy of the state in which the corporation was located and whether the best interests of the company could be served by the continued independence of the corporation.

Exhibit 1

These mechanisms strengthened B&Js ability to remain an independent, Vermontbased company, and to focus on carrying out its threefold corporate mission4, which management believed was in the best interest of the company, its stockholders, employees, suppliers, customers, and the Vermont community at large.

Problem recognition
B&J grew in financial and social stature, but its strengths lead to some inevitable weaknesses, which created a variety of potential threats. Reputation for quality with a stress on the origin of the ingredients and the companys name Homemade worked well in the eyes of the customer. Launch of new innovative flavors, created the cutting edge to stay ahead of the competition. Its belief in social responsibility earned them brand loyalty amongst a generation of socially aware citizens. It also helped B&J save on advertising, since it provided free marketing from media coverage of social events. High employee satisfaction and low turnover, further
4

Social orientation balanced with Product and Economic objectives; stressing on seeking new, creative ways of fulfilling each, without compromising the others.

Vermont Legislature

Corporate charter

Page 2

Rahul Pathak, student reference no. F5540595Q

built its reputation from a work environment perspective. Its low ratio of debts over total assets gave them credibility and the opportunity to finance future investments and expansion. (See Exhibit 2)
1994
Gearing Ratio
Long-term Debts Assets $ $

1995
24%
$ $ 32.00 131.10 $ $

1996
23%
31.10 136.70 $ $

1997
18%
25.70 146.50 $ $

1998
14%
20.50 149.50 $ $

1999
11%
16.70 150.60

27%
32.40 120.30

Exhibit 2

While the philosophy of Caring Capitalism earned B&J credibility, brand loyalty and employee/supplier fidelity, it put strain on its costs, thereby lowering its profit margin5. B&J remains a solvent and profitable business with a positive Return on Assets, which would have been greater with a lower and more efficient cost structure. A lack of dividend policy and a lower opportunity of gains for a common stockholder in the short term, as reflected in the Return on Equity6, combine to lower shareholder value. A collective 47% stock held by the Principal Stockholders7 is no cause for concern, but without decent return on investment, potential investors would be more reluctant. (See Exhibit 3)
1994
Net Sales Cost of Sales Net Profit Margin $ 148.80 $ 109.80

1995
$ 155.30 $ 109.10

1996
$ 167.20 $ 115.20

1997
$ 174.20 $ 114.30

1998
$ 209.20 $ 136.20

1999
$ 237.00 $ 145.30 * 3.4%

-1.3%

3.8%

2.3%

2.2%

3.0%

Return on Assets Return on Equity

1.4% 2.6%

4.5% 7.5%

2.8% 4.7%

2.6% 4.5%

3.7% 6.8%

* 3.5% * 8.9%

Exhibit 3

A weakening US economy, rising cost of cream and milk, plus increased health awareness of the public at large, while being outside B&Js control, were potential threats to slowing down the sales. B&Js dependence on a single supplier Dreyers, too posed a potential threat, if Dreyers were to enter the super-premium ice-cream market8. Lastly, the B&J shares carried a P/E multiple of 19.8 times, which in itself was healthy, but more so for a prospective acquirer, given the opportunity to re-address some of B&Js present shortcomings and convert them into greater opportunities9.

5 6

In times of competitor price pressure, the importance of cost control only becomes greater. E.g. for every dollar in equity, B&J generated 9 cents profit in 1999. 7 Bill Cohen, Jerry Greenfield and Jeffrey Furman. 8 Dreyers (who had the backing of Nestle) announced the formation of an ice-cream joint venture with Pillsbury the makers of Hagen-Dazs Ben & Jerrys biggest competitor. 9 Lower wages to industry average, open new distribution channels and new markets, including international markets; seek productivity gains from resultant increase in production. * Adjusted by the case writer for 50% of 1999, due to $8.6 million special charge for asset write-off and employee severance associated with frozen novelty manufacturing facility.

<>

Page 3

Rahul Pathak, student reference no. F5540595Q

As B&J attracted interest from prospective buyers who thought they could manage the company more profitably, an agency problem was gaining ground. With 17% of the aggregate common equity Ben Cohen, Jerry Greenfield and Jeffrey Furman10 controlled 47% of the aggregate voting power. The dispersion of ownership on one hand, but effective management control on the other, had allowed them to pursue their own form of Philanthrocapitalism. This meant that they were of the opinion that B&Js social orientation needed it to stay independent. Chief Executive Officer, Perry Odak in contrast felt that it was in B&J stockholders best interest that they sell-out to the highest bidder. After all, the pending offers were substantially higher than the present share price of B&J. He was presumably, in his capacity as CEO and as part of the management, aware of probable agency cost of a lost opportunity for the stockholders. Perry Odak though, may have had a vested interest, since as a stockholder he too would have maximized his wealth from the sale. In fact the two founders, Ben Cohen and Jerry Greenfield along with Jeff Furman, effectively controlled enough votes to steer the board towards a decision of their choice. In cashing-out, Cohens and Greenfields shares would be worth close to $40 million and $10 million respectively. (See Appendix A)

Option listing
Dreyers Grand Ice Cream tried to buy B&J in 1998, but were turned down. It is understood that Ben Cohen and a group of investors11 offered to take the company private at $38 a share, but nothing concrete came of it. But, as soon as the DreyersPillsbury joint venture was announced, the B&J board authorized Perry Odak to pursue joint venture or merger discussions. By the time Unilever approached B&J in early 2000, Dreyers alongside two private investment houses had tabled their takeover offers as well. (See Exhibit 4)

Exhibit 4

10 11

Principal Stockholders. Including Body Shop founder Anita Roddick.

Page 4

Rahul Pathak, student reference no. F5540595Q

It must be said that, B&Js defenses made the company virtually impregnable to hostile takeovers. As already illustrated (See Exhibit 1), because elections to B&Js board were staggered, an acquirer needed at least two elections scheduled a year apart to elect the board of its choice. In addition, the Principal Stockholders effectively controlled enough votes to direct the election of board members. Furthermore, Ben & Jerrys Foundation held 100% of the class A preferred stock which gave it veto rights over mergers and tender offers12. Lastly, the amendment to the Vermont Business Corporation Act meant that the board could have over-ruled any acquisition or takeover on the grounds that it would not serve the best interest of the corporation and its stakeholders, which in B&Js context meant selflessly maintaining its social mission. Yet, the board unanimously agreed the sale of B&J to Unilever at an offer price of $43.60 per share. B&Js directors had a primary responsibility in their capacity as directors to accept or facilitate a transaction that was in the best interest of the shareholders. They had no such duty in their capacity as shareholders, and as such were empowered to support or oppose the transaction as they saw fit. As shareholders though, they were entitled to enjoy the benefits of share ownership. The dual nature of their responsibility towards B&J as management and as stockholders, raises agency relationship issues. In their overwhelming approval to sell, the B&J directors acted in the best interest of the shareholders. As shareholders they chose to forego the companys best interest in favor of the accrual benefits from their personal holdings. The tenets of corporate governance allow the possibility of a conflict of interest between the principal and the agent. Notwithstanding its virtues and regulatory framework, which for most part B&J applied (See Appendix B), whether the law of publicly traded corporations allows for the preservation of a double bottom-line, where for-profit corporations foster a different set of norms than the obligation to maximize shareholder wealth, with no perceived risk of personal liability should a board reject a takeover offer, allowed a sale like B&Js to go through. As Yves Couette, the first Unilever appointed CEO of B&J said, Unilever was buying the integrity of the brand. The acquisition of B&J opened a new market segment for Unilever, one where they believed that products with a high social content would become a salient component of the future marketplace. Unilever has continued to work within the parameters of B&Js pro-social activities, even though some have been stopped, like the donation of 7.5% of profits to the B&J Foundation. By opening new distribution channels and taking it international, Unilever has unlocked B&Js potential and has fast-tracked their growth13. B&J identified and developed socially conscious ice-cream. By expanding the market that B&J pioneered, Unilever may have created more social value than what B&J could have done, alone and independent.
12 13

Two of the three directors of the foundation were the same Principal Stockholders. B&J sells three times more ice-cream since Unilevers takeover.

Page 5

Rahul Pathak, student reference no. F5540595Q

Appendix
A.

B.
Corporate Governance Indicators
YES CEO and Chairman Duality Independent Directors (% outstanding share holding) Management Shareholding (%) Dividend Policy Transparent Ownership Structure Employee Stock Options
^ directors who are neither employed at Ben & Jerrys nor the Ben & Jerrys Foundation, Inc.

NO 6.7% 9.1% X

X X

Page 6