EXECUTIVE SUMMARY

COMPANY HISTORY

American Home Products Corporation was created in 1926 when a group of managers from Sterling Products and Household Products resolved on how to cheaply combine their resources in acquiring small companies as cheaply as possible. They successfully created products to have become household names such as Black Flag, Woolite, Chef Boyardee, Easy-Off, Anacin, Preparation H, Sani-Flush, Gulden’s Mustard and Ekco in the line of houseware. One the other hand, their largest and most profitable business included prescription drugs, antihypertensives, tranquilizers and oral contraceptives.

The company was able to acquire Anacin, Bisodol Co. (Bisodol laxative), A.S. Boyle Co. (Old English floor wax), Kolynos Co., (Kolynos dentifrices), Wyeth Chemical Co. (Hills nose drops, Jads salts), Midway Chemical Co. (Aerowax), Preparation H hemorrhoid ointment, Three-in-1 Oil and Black Flag insecticide in the 1930s.

Their marketing strategy started with a modest advertising budget in 1930 that eventually rose sharply in 1934 as it penetrated radio sponsorships with Blackett-Sample_Hummert. As 1936 entered, Advertising Age figures released that they were already ranking as number 8 advertiser in radio and they were able to maintain this for the rest of the decade. The company’s total spending in radio advertisements rose to more than 2.5 miliion in 1937 and remained as is until World War II.

Come 1940s, Amercian Home Products Corporation additional products were included in their product line, namely: * Heet * Freezon * Mystic Hand Cream * Neet Depilatory * George Washington Coffee

They also bought Canadian marketer Ayerst Laboratories for their prescription drug business and Chef Boyardee Quality Foods. Hence, in the mid-1960, American Home Products Corporation were able to establish five (5) core businesses:

* Prescription Drugs * Over-the-counter Drugs * Food * Housewares * Household Product

During this period, they were known to hold the largest line of food, drugs and other household brands vis-à-vis any company in the United Sates. They were the leader in prescription and OTC Drugs.

In 2002, American Home Products rebranded itself by returning to its roots from a diversified consumer products company into just a pharmaceutical company. It is now more known as the Wyeth Corporation.

http://adage.com/article/adage-encyclopedia/american-home-products-corp/98307/
Problem
To determine how to maximize the company’s high liquidity advantage and whether to achieve a higher debt ratio in restructuring AHP’s capital structure policy in order to maximize profits for shareholders.

Corporate Objective
For American Home Products Corporation to maximize profits for its shareholders through an aggressive capital structure policy.

Areas of Consideration SWOT Analysis Strengths * Strong financial performance with a stable, consistent growth and profitability. Sales, earnings and dividends increased for 29 consecutive years through 1981 ranging between 10% and 15% annually. Return on equity rose from 25% in 1960 to 30%i n 1980. * Even during the market-wide collapse of price-earnings ratio of growth companies, AHP obtained 60% price-earnings ratio, which was still higher than the others. * Strong marketing prowess- The company avoided the development and introduction of new products in the market. Instead, new products were acquired or licensed only after the development of competitors. Some products were even copied from other firms. By producing “me-too” products, the company only invested in its strong marketing prowess to overtake their competitors. * The company has a distinct corporate culture, which includes: * Reticence (reserved and reluctant)- The company was ranked last in corporate communicability among the 21 drug companies. By the early 1970, they have developed a reputation of being old-fashioned, hard-nosed and dollars-and-cents basis type of company. Their expenses were minutely tracked and employees even had to buy tickets to attend their Christmas part. * Frugality and tight financial control- Apparently, all costs over $500 have to be personally approved y Mr. Laporte regardless if it had been authorized in the corporate budget * Centralized authority in the Chief Executive- Marked as a brilliant marketer and tight-fist spender, Mr. Laporte’s management style was management from the top with the objective of: “We run the business for the shareholders,” thus, maximizing profits for its shareholders by minimizing costs.

Weaknesses * Conservatism and risk aversion- The company’s R&D did not invest in developing new products. Rather, most of their new products were acquired or licensed after the development by other firms. They keep responding to their competitors through a “me-too” product. * Low debt ratio which is prone to tax issues

Opportunities * The company was very liquid. Many of their competitors were unleveraged and none could match AHP’s capital structure. * Expansion and maximization of the company’s R&D department. Should they deviate from “me-too” products,” they can generate a head start from their competitors and widen their competitive advantage

Threats * Retirement of Mr. Laporte, which would result to the restructuring of the capital structure policy. The concern was more on the magnitude impact of the payoff from such a policy.

Environmental Opportunities & Threats
Political
While the radical and countercultural movements of the 1960s and 1970s along with the Watergate scandal, Vietnam war, and the Middle East and economic crisis undermined the American’s confidence to their fellow citizens and to their government, the closing of Jimmy Carter’s presidency downed the idealistic dreams of the ‘60s due to inflation, foreign policy turmoil and rising crime. Hence, in the rise of President Reagan’s leadership in the 1980’s, the people embraced a new conservatism in their social, political and economic life led by his new policies. The epoch was remembered for its materialism, consumerism and the rise of the “yuppies.” It was also during this decade that the emergence of cable networks such as MTV and blockbuster movies rose many iconic artists to fame. http://www.history.com/topics/1980s Economic
The pharmaceutical industry was of in a relatively small scale until the ‘70s when it suddenly expanded at a higher rate. At the same time, legislation for strong patents that would cover both the products and the processes it undergoes came into force in many countries. By the mid-1980s, small biotechnology firms were struggling to survive, which resorted to mergers, buyouts and other mutually beneficial partnerships with large pharmaceutical companies. Thus, a few large companies that distribute in a global scale dominated the pharmaceutical industry. Only a few remain that produce medicines within each country. In 1980s, the pharmaceutical industry was pressured with economics as new regulations involving safety and environmental concerns were brought out and DNA chemistries and new technologies were set for analysis and computation. Drugs for heart disease and AIDS involving challenges brought about by regulatory bodies for faster approval process were also a feature in this year. While managed care and HMOs were also widely spreading to contain and control the rise in medical costs, the development of preventive and maintenance medications became more important. Market Profile & Outlook
Products
American Home Products Corporation carries the following products: * Prescription drugs * Package drugs * Food products * Housewares * Household Products * Antihypertensive Drugs * Tranquilizers * Oral Contraceptives

Resources
Corporate Franchise (What is the company good at?)
American Home Products has its strengths in marketing. Being headed by a brilliant marketer, the company has taken advantage of its strong marketing strategy after manufacturing “me-too” products to overtake their competitors. In return, the company resulted to a stable and consistent growth and profitability rates.

Marketing Profile
Products
* Oil refinery * Pipeline Transportation * Industrial Chemical Fields * Exploration and Production of Crude Oil * Marketing of Refined Petroleum Products * Plastics * Agricultural Chemicals * Real Estate Development

Promotion and Advertising
The company blasted their radio advertising campaign in 1934 through radio sponsorships with Blackett-Sample-Hummer. They ranked as the 8th highest advertiser in radio for the rest of the decade. The company spent over 2.5 million until World War II. Financial Profile
Profitability/Efficiency
Return on sales gradually increased for 10 years. A growing ROS is clear indication that the company has developed efficiency and maintained stability in the market. (in millions) | 1972 | 1973 | 1974 | 1975 | 1976 | 1977 | 1978 | 1979 | 1980 | 1981 | Return on Sales | 10.9% | 11.2% | 11.0% | 11.1% | 11.2% | 11.4% | 11.4% | 11.6% | 11.7% | 12.0% | Net Income | 172.7 | 199.2 | 225.6 | 250.7 | 277.9 | 306.2 | 348.4 | 396 | 445.9 | 497.3 | Net Sales | 1,587.1 | 1,784.4 | 2,048.7 | 2,258.6 | 2,471.7 | 2,685.1 | 3,062.6 | 3,406.3 | 3,798.5 | 4,131.2 |

Return on assets of the company indicates a stable rate of 19% from 1972 to 1981. This indicates their capability of covering operating expenses and converting investments into profit/net income. It means that they are able to generate more returns on fewer investments.

(in millions) | 1972 | 1973 | 1974 | 1975 | 1976 | 1977 | 1978 | 1979 | 1980 | 1981 | Return on Assets | 17% | 18% | 21% | 18% | 18$ | 19% | 19% | 19% | 19% | 19% | Net Income | 172.7 | 199.2 | 225.6 | 250.7 | 277.9 | 306.2 | 348.4 | 396 | 445.9 | 497.3 | Total Assets | 1,042.0 | 1,126.0 | 1,241.6 | 1,390.7 | 1,510.9 | 1,611.3 | 1,862.2 | 2,090.7 | 2,370.3 | 2,588.5 |

Competitive Advantage * The company has a strong marketing force * The company has no debt * The company has high cash reserves

Alternative Strategies
To restructure the capital structure policy to: 1) 30% debt 2) 50% debt 3) 70% debt 4) Or retain their current capital structure policy
Conclusion & Strategic Decision
To engage in a 70% debt increase in capitalization.
Grand Design & Execution While the company has been implementing a very conservative policy, engaging in a 70% debt increase in capitalization would significantly increase their shareholder’s value. Dividends per share would jump from $1.90 to $2.10, which would greatly attract more investors. However, this would also entail a high risk for the company. But with the way the market is moving, it’s probably high time for them to step up and lead the pharmaceutical industry rather than just following the footsteps of their competitors. In this manner, they can take the lead in market share especially that they have the best marketing force in the industry. Since their primary goal is to maximize the share of their stockholders, using this leverage could help them meet their target as debt tax shields would permit them in distributing higher dividends per share.

Subject: Debt Policy