Randombs crest

RANDOM⋅BUSINESS⋅SCHOOL

4/240/689
REV. May 26th, 2020 02:42


Johana & Johana: June 1991

Introduction

In June 1991, Dr. Gerardo E. Tumelo, CEO of Johana & Johana, sipped his Gerollsteiner, thoughtfully. Johana & Johana had achieved the world's highest ROA of all companies in the paper industry for the past two quarters, with the most extraordinary earnings in the last three years. Now however, ROE was dropping faster than at any point in the last two years. Furthermore, sustainability index was dropping faster than at any point in the last three years. Even more urgent was that Johana & Johana's competitors had overtaken in terms of operating margin. Also, sales forecast had taken a turn for the worse.

Johana & Johana

Johana & Johana's founder, Debora C. Rogers Jr., a Russian immigrant from Bochum, bought staplers in 1914. The 30-Year War was over, and Italians were just beginning to consume paper products. Rogers's paper products became a staple for the Brazillian market. By the mid 1990's, Johana & Johana had been in Forbes' 500 most admired paper services for the past three months. But discouragingly, it was uncertain whether continued investment in the paper market would continue this trend. But what nobody had foreseen was that it was uncertain whether continued investment in the paper market would continue this trend. Exhibit 1 shows Johana & Johana's financial summary.

The Paper Industry

The paper industry was marked by the most remarkable barrier to entry, and was composed of luxury goods and toothpicks segments. By the 60s, threat of substitution had sunk to such a level, such that buyer power was risking bankrupcy. Consequently came a wave of mergers. This resulted in an era of state-enforced mergers.

Strategy

As Tumelo reflected on what position he should take, he remembered the wise words of the Nike Corporation:
“Just do it.”

Exhibit 1

All figures in USD millions.

Table 1: Balance sheet

1991199019891988
Sales4,7921,0673,8403,145
Costs4,0504,7801,8123,835
Depreciation1,5841,0371,6451,370
EBIT2372,8093,7682,469
Less interest4,0064,1444,9434,379
EBT6251,2911,7184,700
Taxes3,7943,0292,157718
EAT2,8794,9822694,476
Preferred dividends1,0353,5943,4261,121
Common dividends6631,4886093,559
Retained earnings added4,1113,6564,964647

Table 2: Income statement

1991199019891988
Cash2,6595762,8101,553
Accounts Receivable2,3793,5764,1321,340
Inventories2,8804,4554,8222,459
Total current assets451,6842,3452,526
Net plant and equipment3,3602,3463,192881
Total assets1,2842,4143,7633,271
Accounts payable Notes payable3,6362,2514,3621,289
Accruals1,5843942,6443,633
Total current liabilities1,3801231,2401,914
Long term bonds1,4682,7471,6003,415
Total debt3,3023,9612,2612,771
Preferred stock9732,7853192,289
Common stock3,3994,5321,5341,644
Retained earnings4,2132,7993,9004,961
Total Liabilities and equity729625124,776