Intrigue and scandal may sell novels and newspapers, but they don’t sell stock. No one should understand that better than the embattled IR officer at WR Grace.
For years now, Grace has been rocked by one scandal after another, from nasty battles among its top officers to a recent swarm of subpoenas from the federal government and a series of scathing front-page articles in The New York Times.
Naturally, the stock has taken a beating. Between May 5, 1995, the day after one of Grace’s warring officers made a bid for the company’s health-care affiliate, and December 22, the stock rose a mere two points, to $60 a share. That was an increase of just 1.7 per cent during a period when the S&P 500 soared more than 18 per cent.
The problem isn’t Grace’s business sectors – specialised chemicals and health care. The stocks of its competitors did extremely well during the same period. Monsanto, for instance, another chemical industry giant, jumped a hearty 49 per cent, to $123.75 from $83.25. Others merely kept pace with the S&P. Baxter, the health-care company, matched the S&P, rising 18 per cent during the period, to $41.12, from $34.75.
The problem stems squarely from the scandals of recent years, which continue to have crippling effects on Grace’s ability to maximise the value of its shares. ‘It’s a very complex situation,’ explains Jaine Mehring, an analyst with Smith Barney, who says that Grace’s investor relations effort ‘has helped hold things together.’
But there’s a limit to what the investor relations staff can do. So bad has Grace’s managerial turmoil been that the company seems more like a soap opera than a huge corporation operating in 130 countries with annual sales of more than $5 bn.
Scandal Summary
The scandals, in brief, have been as follows.
Peter’s Perks In 1993, the late J Peter Grace, who ran WR Grace for 47 years and was the grandson of its founder, was forced to resign. (Peter Grace died of cancer last April.) The resignation was reportedly to avoid a scandal. News reports say that if he hadn’t gone, embarrassing information about millions of dollars in perks and unauthorised loans made to the Grace family would have been published in the annual proxy statement.
Bolduc’s Ouster Early last March, J P Bolduc, who succeeded Peter Grace as CEO in January 1993 and who is accused by some of having engineered Peter’s ouster, was fired, allegedly for sexual harassment. Until Bolduc – who denies the allegations – started dramatically restricting Peter’s perks, including taking away his private jet, the 55-year-old chief executive officer, had been the apple of Peter’s eye. Indeed, Peter’s father-like infatuation with Bolduc was such that even the Grace family became jealous of the relationship, according to sources close to the family. But as Bolduc began reining him in, Peter – using his influence over the board – struck back and, according to some, plotted Bolduc’s removal.
Costello or Hampers? A battle ensued for the CEO slot. Constantine Hampers, head of National Medical Care, Inc (NMC), Grace’s health-care affiliate, wanted the job. But on May 1 it went to outsider Albert Costello, ex-CEO of American Cyanamid.
Hampers’ Fight Back A few days later, Hampers offered to buy NMC for $3.5 bn in cash. To some, this seemed like a threat. Grace said in a form filed with the SEC that Hampers told Grace that to solve management and other issues at NMC, ‘Grace’s only viable options’ would be to sell the company to NMC’s management. ‘A failure to seriously consider his {Hampers’}proposals would result in further instability and distraction for Grace,’ the company cited Hampers as saying.
The board rejected the offer, proposing instead to spin the unit off to Grace’s shareholders.’ Because of the tax implications of selling NMC outright, analysts say Grace would have to be paid about $4.5 bn for the unit to match the value of a spin-off to Grace shareholders.
If NMC were spun off, the independent unit would have paid Grace a $1.2 bn dividend, which NMC would have had to borrow. It would also have assumed about $175 mn of debt that had been guaranteed by Grace, making it a highly leveraged company, with only $111 mn in equity and almost $1.7 bn in debt. Even if that deal had succeeded, Hampers would have done well. He would have been CEO of the independent NMC and the owner of up to 10 per cent of its stock.
Careless Practices? But in September the plan began to unravel. Grace announced that NMC’s LifeChem laboratory unit had overbilled Medicare by $4.9 bn. In October the federal government and Massachusetts began investigating billing practices at other NMC units, although NMC insists that it has been in ‘material compliance’ with all regulations.
Times Attack On December 4, The New York Times began a three-part series of front-page articles on NMC, implying that its drive for profits was risking the well-being of patients. The headline on the first article says it all: Death and Deficiency in Kidney Treatment. Whether the articles were fair is debatable, and the company certainly defended itself vigourously against them, but the impact was intense.
The result is that it is now extremely unlikely that NMC will be able to raise the $1.2 bn it needs to pry itself loose from Grace. And this, in turn, puts the value of Grace in the air. ‘The problems make it uncertain when Grace will be able to deal with its health operations,’ says Smith Barney’s Mehring. The investigations are a ‘large, open issue’ which will take a long time to be resolved, she says.
Mehring attended an analyst meeting held by Grace last December. She says she came away from the New York meeting with a ‘wait-and-see attitude.’ For now, she has a hold recommendation on Grace stock.
Are these woes just accidental, or are they part of the bitter feud among Grace’s former and present officials and directors? The air of intrigue that surrounds the company is prompting some to ask such questions. Were the recent actions of the government and the articles in The New York Times part of a continuing interpersonal battle?
Hampers believes it is. Investor Relations asked him through his secretary: do you think that the seeds of some of the problems that have cropped up recently, such as the government investigations and the articles in The New York Times, might have been planted by people who might want to discredit you?
His reply, phoned back by his secretary later in the day, was ‘yes.’ He declined to comment further.
In any case, Grace’s travails provide a lesson for directors of other large companies. The root of its problem seems to stem from a CEO who forgot that the corporation he headed was not his personal fiefdom in which he could shower power and perks on the basis of intensely personal feelings and on family relationships.
It was Peter Grace’s near obsession with Bolduc and Peter’s granting of jobs to his sons that not only got him in specific trouble, but that created a state of affairs at the company that turned professional differences into personal vendettas.
That state of affairs lies at the heart of Grace’s problems. It was particularly easy for the company to have fallen into this kind of trap because WR Grace started out in the middle of the 19th century as a family business, and despite its size and the fact that it became a publicly held company in 1953, it remained very much a family enterprise – at least in the eyes of the Graces themselves. Indeed, top management stayed in the family until the point when Bolduc was put in charge.
It was Peter who, through mergers and acquisitions, shepherded WR Grace into the giant it became. He began the push for size and diversification in the 1960s, acquiring businesses as diverse as restaurants, sporting goods stores, home improvement retailers and book shops.
In that era of corporate expansion and diversification, Peter was becoming the icon of American industry. During the Reagan Administration he was named to chair a panel to find ways to root out waste, fraud and abuse in the federal government. The panel became known as the Grace Commission, and Peter’s name became synonymous with American corporate expertise. It was at the Grace Commission that Peter met Bolduc.
Beginning in the mid-1980s, much of what Peter had accomplished had to be unraveled. Diversification, it turned out, led to a lack of focus and the company began shedding many of its businesses. The sell-off process accelerated after Bolduc became CEO in January, 1993. Business Week attributed much of the growing tension between Peter Grace and Bolduc tothe need to ‘dump’ what analysts regarded as Peter’s vanity holdings – a cocoa company, a stake in a gourmet food retailer, Dean & DeLuca, and bath-products retailer Caswell/Massey.
Despite the scandals, some analysts are bullish about WR Grace. Andrea Schaefer of UBS Securities in New York, has a ‘buy’ recommendation on the company. ‘It is undervalued in terms of its health-care division, and it can do significant cost-cutting in its chemical business,’ she says.
Schaefer describes Grace’s stock as ‘a timing issue.’ She is confident the company will find a profitable way of separating out the health care business from Grace’s chemical business; and she believes, anyway, that there is inherent value in the group that is not reflected in the current stock price.
At the embattled W R Grace headquarters, such words must be music to the IR department’s ears.
