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Category: Business and Industry
Date Submitted: 03/16/2014 12:22 AM
Harvard Business School
9-283-065
Rev. January 24, 1989
American Home Products Corporation
I just don’t like to owe money,” said William F. Laporte when asked about his company’s almost debt-free balance sheet and growing cash reserves.1 The exchange took place in 1968, four years after Laporte took over as chief executive of American Home Products (AHP). The subsequent 13 years did not improve his opinion of debt financing. During Laporte’s tenure as chief executive, AHP’s abstinence from debt continued, while the growth in its cash balance outpaced impressive growth in both sales and earnings. At the end of 1980 AHP had almost no debt and a cash balance equal to 40% of its net worth. In 1981, after 17 years as chief executive, Laporte was approaching retirement, and analysts speculated on the possibility of a more aggressive capital structure policy.
The Company
AHP’s 1981 sales of more than $4 billion were produced by over 1,500 heavily marketed brands in four lines of business: prescription drugs, packaged (i.e., proprietary or over-the-counter) drugs, food products, and housewares and household products. Consumer products included a diversity of well-known brand names, such as Anacin, Preparation H, Sani-Flush, Chef Boyardee, Gulden’s Mustard, Woolite, and the Ekco line of housewares. AHP’s largest and most profitable business—prescription drugs—included sizable market shares in antihypertensives, tranquilizers, and oral contraceptives. AHP’s success in these lines of business was built on marketing expertise. Whether the product was an oral contraceptive or a toilet bowl cleaner, “they sell the hell out of everything they’ve got,” said one competitor.2
AHP’s Corporate Culture
AHP had a distinctive corporate culture that, in the view of many observers, emanated from its chief executive. This culture had several components. One was reticence. A poll of Wall Street analysts ranked AHP last in corporate communicability among 21 drug companies. A...