What went wrong at Maytag?
Investors and Maytag Corp. employees have been shaking their heads over that question since the embattled appliance-maker accepted a $1.13 billion buyout bid this month from a private investment company.
For Maytag, the proposed sale marks the culmination of a painful, yearslong decline that has seen the nation’s third-largest appliance manufacturer transformed from a darling of Wall Street to a dud.
But there is no single wrongheaded move that explains the Newton, Iowa, company’s fall from financial grace. Maytag didn’t make a particularly disastrous investment or blindly pursue some dead-end strategy.
Instead, experts suggest, the company is undersized and simply has been too slow in responding to the wrenching changes that have swept its industry. Most important, critics contend, while its industry has become ever more globalized, Maytag continues to purchase most of its components, and to build most of its products, in the United States.
As a result, Maytag’s cost structure has stubbornly remained higher than those of its bigger competitors. In the increasingly unforgiving appliance marketplace, that is a potentially fatal handicap.
“We definitely have an earnings problem, and it’s not getting better,” Chief Executive Ralph Hake conceded during a testy April 22 conference call with Wall Street analysts.
To be fair, the entire U.S. appliance industry has been experiencing an earnings problem for some time. Profit margins have been deteriorating in recent years, even though a boom in housing starts and a firming economy have combined to generate record-high U.S. appliance sales.
“Major appliance manufacturers are currently faced with a range of obstacles, including an increasingly demanding retail environment, accelerated product cycles, increased foreign competition and spent-out consumers,” said Citigroup Smith Barney analyst Jeffrey Sprague.
But while daunting issues like higher steel prices and increasingly aggressive Asian rivals have been creating turbulence for industry leader Whirlpool Corp. and No. 2 player General Electric Co., they have taken a much bigger toll on Maytag.
The unexpectedly weak first-quarter results Maytag reported last month, along with a downbeat profit forecast the company issued for the remainder of the year, injected an antagonistic note into the company’s normally dull earnings conference call between management and investors.
“Your world is being rocked here,” Sprague told Hake. “You’ve got an issue where you’ve got high-cost plants in the wrong places, and you need to work through it.”
Hake reminded the analysts of the cost-cutting measures he has taken.
“A lot has been done. It has been painful. And it has not been enough,” he said. “So we will move to do more, and we will do it rapidly.”
Less than a month later, Maytag announced it had agreed to be taken private by an investment group led by Ripplewood Holdings, a New York private-equity firm best known for buying troubled Japanese companies in need of turnaround help.
Ripplewood has praised Maytag’s portfolio of brands and said it wants to work with Hake and his management team to “restore the luster” of the “legendary” company’s earlier days, but offered little guidance to what comes next.
Maytag, founded in 1893 as a farm implement-maker, has been through numerous changes. It introduced its first washing machine in 1907–a hand-powered model made of wood–and followed up two years later with a power version known as the “Hired Girl,” which drew its energy by being attached to a tractor engine.
Over the following decades, Maytag dropped its farm-equipment roots in favor of appliances, adding dryers, stoves, refrigerators and dishwashers to its product line.
By the 1980s, however, Maytag had developed a reputation as a somewhat sleepy company with an aversion to change. It was periodically rumored to be a buyout candidate.
European misstep
In 1989 it tried to augment its offerings and position itself as an international player by spending $1 billion to acquire Chicago Pacific Corp. The deal not only gave Maytag the well-performing Hoover floor-care business in the U.S. but also provided the company with its first appliance-production operations in Europe.
“The appliance world is changing, and it’s important we look outside the U.S. for growth,” an official said then.
But Maytag’s international foray ended badly: After big operating losses and more than $100 million in writedowns, Maytag sold off the struggling European operations in 1993. Although its retreat from offshore markets drew kudos at the time, Maytag’s strict domestic focus would prove problematic.
Under the leadership of Leonard Hadley, who served as CEO from 1993 through mid-1999, Maytag enjoyed a rebound. Hadley focused Maytag’s brand toward the premium end of the market and spent heavily on development of the technically advanced Neptune washer, which proved a financial home run for the company.
Maytag briefly became a Wall Street favorite, and its long-dormant shares outgained those of Whirlpool and GE. Then in 1999, not long after Maytag shares peaked at more than $74, Hadley handed the top job at Maytag over to the successor he had been grooming for three years, one-time PepsiCo marketing executive Lloyd Ward.
Ward’s tenure, which lasted only 15 months, proved troubled. Although he drew high marks for upgrading Maytag’s marketing effort, he had the bad luck to be in the driver’s seat at the company when negative industry trends that had been building for some time began to wreak havoc on the appliance-maker’s earnings.
Those same troubles have continued to plague Hake, who was named CEO after directors pushed Ward out in 2000.
Appliance-industry profit margins have come under growing pressure as mass-merchant chain stores become more prominent players in appliance retailing. High-volume discount chains like Home Depot Inc., Lowe’s Cos., Wal-Mart Stores Inc. and Best Buy Co. can move an impressive number of appliances, but, in contrast to the mom-and-pop appliance dealerships of the past, the chains routinely use their purchasing clout to squeeze lower prices from vendors.
Maytag was hurt this year, for example, when Best Buy opted to reduce the amount of floor space for Maytag appliances in order to give more room to fast-growing Asian competitors.
A flood of low-priced rivals has similarly battered profit at Maytag’s premium Hoover brand.
In response to the margin pressures, Hake has hacked away at Maytag’s cost structure, with mixed success.
Maytag also has substantially boosted the amount of components it obtains from overseas sources to about 35 percent.
And in a move that generated a huge amount of negative publicity, Hake last year closed Maytag’s least-productive plant, a refrigerator factory in Galesburg, Ill., and transferred much of the unionized plant’s production to a lower-cost plant the company built in Mexico.
Also last year, in a move that eliminated the jobs of more than a thousand white-collar Maytag workers, the company undertook a plan to cut annual costs by $150 million.
High-cost plants
Although Maytag has a number of plants in relatively low-cost regions of the U.S., investor ire has focused on the company’s two remaining high-wage facilities: a laundry-equipment facility in Newton and a Hoover plant in North Canton, Ohio.
Ripplewood has given no indication of its plans for Maytag. But the pending ownership change is widely seen as a possible prelude to closure of the two costly plants or even more tumultuous changes.
While Maytag has been buffeted by the industry’s travails, “Many of its problems are specific to the company, as opposed to industry-related,” said B. Craig Hutson of the credit-analysis firm Gimme Credit.
Among other things, its pension plan is underfunded by $555 million, he noted, and the company, in an effort to focus on cash flow, has deferred capital expenditures and product-development spending it needs to stay competitive.
Ripplewood, Hutson predicted, “will face a very difficult task in putting Maytag back on solid footing.”
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jpmiller@tribune.com
