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RANDOM⋅BUSINESS⋅SCHOOL

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REV. May 25th, 2019 01:07


General Magnetic: Failing

Introduction

In May 1997, Ketan Gune, chairman and CEO of General Magnetic, went for a short walk to clear his mind for the meeting ahead. General Magnetic had achieved the fastest growing revenue of all companies in the chewing gum industry for the past two quarters, with the fastest growing sales forecast since time began. Now however, evidence was growing that the Middle-East chewing gum market was becoming saturated. Not only this, but evidence was growing that the Middle-East chewing gum market was becoming saturated. Furthermore, General Magnetic's competitors had overtaken in terms of profitability.

General Magnetic

General Magnetic's founder, Jasmin D. Dorp dealt in curled metal in 1916. In those days South-East Asians were just beginning to consume chewing gum products. Dorp's chewing gum products took over the Japanese market. By the mid 1990's, General Magnetic had been in Forbes' 500 most admired chewing gum companies for the past two years. But worryingly, General Magnetic's competitors had overtaken in terms of residual income. Also, investor confidence was low due to a declining operating margin in the last three years. Besides, General Magnetic's largest competitor Napple had launched a hostile takeover bid. But what nobody had foreseen was that General Magnetic's largest competitor EIBM had launched a hostile takeover bid. Exhibit 1 shows General Magnetic's financial summary.

The Chewing Gum Industry

The chewing gum industry was marked by the most admired labour pressure, and was composed of 2 large competitors. By the 60s, regulatory pressure had sunk to such a level, such that supplier power was failing. Thereafter followed a period of threat of substitution. Following this came the time of demergers.

Strategy

As Gune pondered where to go from here, he remembered the wise words of Laurence Johnston Peter:
“Some problems are so complex that you have to be highly intelligent and well informed just to be undecided about them.”

Exhibit 1

All figures in USD millions.

Table 1: Balance sheet

1997199619951994
Sales2,6611,2191,1133,558
Costs4,3202,0451,9253,664
Depreciation1,9031,4534,1132,227
EBIT2,4554012,8803,881
Less interest3,7292,2301,0192,307
EBT4632,7024,9114,947
Taxes4593,8181,5774,498
EAT4,0623,1479342,058
Preferred dividends3,8031,5331,1903,778
Common dividends3,0703,9853,620164
Retained earnings added4,0443,0783,3724,821

Table 2: Income statement

1997199619951994
Cash1,6084,8382,6762,709
Accounts Receivable1,4384,8182,8484,090
Inventories4,5802,3004,6831,148
Total current assets1,7413,1804,9932,532
Net plant and equipment3,5932,9501,9521,372
Total assets3571,2191961,494
Accounts payable Notes payable603,5381,8631,392
Accruals3,0533,8743,4673,425
Total current liabilities7821,1271,6351,279
Long term bonds2,7451,3491,1051,858
Total debt894,1431,3572,350
Preferred stock2,1092,8663,7382,468
Common stock2,79042,039274
Retained earnings824,9721,8073,255
Total Liabilities and equity4,9224,2254,3582,933