Avon Products

1. Why was Avon restructuring its business in 1988? Did the changes make sense?

In the early 1980s, Avon made several major decisions to diversify its business, first to enter the health care field by acquiring a chemical company, Mallinckrodt, Inc. for $710 million in 1982. Before the acquisition happened, Avon’s beauty products sales and margin had already started to decline due to the decreasing number of housewives. Together with the cash spent on the acquisition, Avon was facing a sudden weakening cash flow position by mid-1982. By August 1982, Avon’s stock price has drop from $30 to $20.375 per share and dividend reduced from $3.00 to $2.00.

Then Avon acquired Foster Medical Company in 1984, Retirement Inns of America in 1985 and the Mediplex Group in 1986 to get more exposure to the health care industry. In 1986, Avon sold Mallinckrodt, Inc. at a loss of $35 million. However, a change in Medicare in 1986 made a negative impact on Foster Medical’s revenue, and caused the board to doubt their commitment to the health care industry. In 1988, the group began the process of selling the entire Foster Medical Corporation with an anticipation of loss of $125 million.

The beauty business of Avon improved in 1987 and the groups made acquisitions of Giorgio, Inc. for $165 million and Parfums Stern, Inc. for $160 million. Avon was restructuring its business by selling health care companies and acquiring beauty companies to broaden their beauty business.

As we can see from the following charts, both the margin ration and return on assets for health care have declined lower than 10%, as the ratios for cosmetics, fragrance and toiletries are reaching 20% and showing steadiness. Therefore it made sense that Avon was restructuring its business by replacing their health care business by beauty products, as we can tell from the business line weights