Corporate Governance at Ahold
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Case Code: CGOV005 Case Length: 14 Pages Period: 2000 - 2005 Pub Date: 2006 Teaching Note: Not Available |
Price: Rs.400 Organization: Ahold NV Industry: Retail Countries: Holland, USA Themes: - |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
Ahold's Acquisitions
Albert Heijn made its first acquisition in 1951 when it acquired the Netherlands-based Van Amerongen store chain. In 1977, Ahold entered the US market by acquiring the BI-LO supermarket chain (which had stores in Georgia, North & South Carolina). This was followed by the acquisition of Giant food stores (based in Carlisle, Pennsylvania) in 1981 and Finast (based in Ohio) in 1988. With these acquisitions, Ahold strengthened its position in the US. The 1990s was a period of rapid expansion. In 1991, Ahold opened a wholly-owned supermarket chain called Mana in the Czech Republic (later renamed Albert). In 1992, Ahold entered into a joint venture with the Portuguese chain Jerónimo Martins to form Jerónimo Martins Retail (JMR)...
The Scandals
On February 24, 2003, Ahold announced that its earnings for 2002 financial year would not be as high as previously estimated. It also declared that its 2000 and 2001 financial statements did not reflect its true financial status and would have to be restated...
US Foodservice
US Foodservice was a service company which distributed food. Its clientele included hotels, restaurants, cafeterias, health care facilities, schools, etc. The company was headquartered in Columbia, Maryland, and had more than 100 distribution centers spread across the US. The Ahold group acquired US Foodservice in 2000. US Foodservice came to become the epicenter of the scandal that shook Ahold. The scandal involved US Foodservice executives colluding with employees at Sara Lee Corporation (Sara Lee), ConAgra and some other companies to mislead auditors...
Other Operating Companies
In February 2003, almost simultaneously with the US Foodservice scandal, Ahold announced that four joint ventures namely - ICA, Jeronimo Martins Retail, Bompreco (sold in March 2004), Disco (sold in March 2004) and Paiz Ahold (sold earlier) should not have been fully consolidated in its accounts. The Ahold group did not hold a 100% stake in the joint ventures and its consolidation of 100% of the joint ventures' profits in its accounts was tantamount to fraud. Investor associations felt that Ahold and its auditors D&T were aware or irresponsibly ignored the fact that Ahold never had a basis for consolidating the financial results of the joint ventures...
The Aftermath
The accounting scandals had a significant impact on the market standing of Ahold. Soon after the news about the scandals spread, Merrill Lynch gave a neutral rating on Ahold's stock and one of its analysts, Andrew Fowler, published a note titled 'The beginning of the End' in which he said "The emergence of the accounting irregularities and the fact that Ahold will now be a forced seller in a global bear market prevents us to turn any more positive on its shares." Ahold's long term debt was downgraded by Standard & Poor to BB+ or junk status. Criticism poured in from all quarters.
Christopher Gower, Analyst, Lehman Brothers observed, "With no management, no clarity on accounts, no clarity on financing, future strategy, or disposals, it's a long road back." However, some industry observers expressed optimism about Ahold's revival, given its high sales turnover...
Major Investigation
On January 6, 2005, the Enterprise Section of the Amsterdam Court of Appeals granted the request made by VEB to verify Ahold's practices and whether the company was professionally managed during the period leading up to the scandal. VEB had filed the request on February 12, 2004. The court concluded that the request was valid and that there was a need to check whether sound management principles had been followed in Ahold...
Ahold's Atonement
The magnitude of the accounting frauds at Ahold shook Europe, particularly the company's home country, Holland. The irregularities at Ahold brought to the fore the need for a revision of existing corporate governance standards in the Netherlands. At the instance of several government and non-government bodies, the Tabaksblat committee adopted and published the Dutch Corporate Governance Code (Refer Exhibit VII for a brief write-up on Dutch Corporate Governance Code) in December 2003, which replaced the Corporate Governance in the Netherlands Reports: the Forty Recommendations of the Peter's Committee...
Exhibits
Exhibit I: Ahold's Acquisitions (1991-2001)
Exhibit II: Ahold's Financial Data
Exhibit III: Restatements
Exhibit IV: Ahold's Stock Market (NYSE) Performance (2001-05)
Exhibit V: Ahold's Divestment Spree
Exhibit VI: Brief Write-Up on Dutch Corporate Governance Code
Exhibit VII: Revised Corporate Governance Structure at Ahold
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