PRIMERICA CORPORATION History
Telephone: (203) 552-2000
Sales: $2.864 billion
Market Value: $2.737 billion
Stock Index: New York
Throughout the 20th century, the American Can Company has been making containers for everything from green beans to soda pop and soup. However, its product line goes well beyond the manufacture of cans. The company has recently put a great deal of research and resources into plastics. In 1984, for example, Amcan developed the plastic "squeeze-bottle" for Heinz Ketchup. Since its introduction to the marketplace, grocers have not been able to keep enough of them on the shelves.
Once the dominant canmaker in a fairly closed industry (only the Continental Can Company was a serious rival), American Can has seen a gradual decline in its market share over the last 30 years. Yet it remains a very large operation with annual gross sales exceeding $4.3 billion. More than 50% of its revenues come from such areas as specialty retailing, direct marketing, record distributing, insurance sales, and a number of financial services. In the words of American Can's recently retired chairman, William S. Woodside, "When I started with this company in 1950 cans were the prima donna of the opera. Thirty-one years later, they're the last row of the chorus."
American Can's metamorphosis from being a large and exclusively one-industry corporation to one with formidable interests in a handful of unrelated fields is reflective of a more general business trend toward diversification, especially among corporations involved in capital intensive production. However, the change did not happen quickly.
Incorporated in New Jersey in 1901, American Can emerged as one of the "twin giants" of the canmaking industry, the other being Continental Can. Throughout the 1920's and 1930's, canning became the most effective way of containing, preserving, and storing both industrial and consumer goods. American Can's business grew even during the Depression, becoming twice the size of its nearest rival.
Despite wartime rationing measures and often unpredictable supplies of metal resources, Amcan continued to prosper during the 1940's. Continental and Amcan were so much larger than their other competitors that both were able to offer large volume discounts to the major can customers. This had the effect of putting even greater distance between these two companies and the smaller canmaking operations which constituted the rest of the industry.
This arrangement of the industry's structure was challenged by the United States federal government and ultimately dismantled. In 1950 a federal court struck down the volume discount practice employed by Amcan and Continental, reducing the leverage of the two can making companies over their smaller rivals. This particular ruling altered the complexion of the canmaking industry forever. Not only was competition reintroduced to the business but many major can customers, no longer able to receive volume discounts on their containers, began manufacturing their own cans to consolidate their operations.
All of these developments spelled trouble for American Can. Canmaking, because it is so capital intensive, needs wide profit margins to be a perennially successful enterprise. More competition, loss of revenues due to "self-manufacturing" of cans by large clients, and higher labor costs due to unionization (American Can employees belong to the United Steel Workers labor association) made such margins difficult to obtain. In addition, there were changes in the technology of the industry itself that required large capital outlays by the company if it was to maintain its position. This involved a definite shift away from tin and steel cans to those of lighter metals such as aluminum. Moreover, the recycle value of glass and plastic was also recognized. This meant that the canmaking plants themselves would have to be modernized or at least modified to keep pace with changing consumer demand. It became clear to the directors at American Can that the cost of surviving on the can business alone would have been so high as to financially damage the company. The only alternative, therefore, was to diversify.
American Can's first step outside canmaking was a large one. In 1957 it purchased the forest products operations of Dixie and Marathon paper products, the company which makes Dixie cups, Brawny and Aurora paper towels, a variety of types of toilet tissue, and a number of other related items. The purchase proved to be a good one; the growth potential of the paper industry was much better than that of cans and containers. However, after this initial success, American Can's diversification record was marred by a number of failures. During the 1960's the company ventured into chemicals, commercial printing, and glass bottle making. Company management had neither experience nor expertise in these spheres. As a result, the company was forced to divest from all of these operations.
The 1960's were not all bad, however. In fact, the sixties were the "Golden Years" of the can industry. In 1963 the pop-top or ring-tab can opener was introduced. This innovation revolutionized the beverage can business and ushered in what has been called the "era of the six-pack." Consumers no longer had to look for the can opener or poke holes in their beer cans with screw drivers, knives, and ball-point pens. The hole was already built into the can, one had only to pull the ring. Beer and soft drink sales, spurred on by the new, more convenient can, increased markedly, and the canmakers enjoyed their most profitable decade ever. Yet, even with this increased profitability, it became clear once again that can manufacturing alone would not sustain American Can. Due to "in-house" can operations by former customers and increased competition from other canmakers, the company lost a substantial portion of its market share.
By early 1970 there was no denying that American Can needed a new approach to both diversification and the business of canmaking if it was to remain competitive. The job of reorientation fell to chief executive officer William May. His plan called for a company "think-tank" which would attract the best young business and technical minds in the country. Within the container industry and others, American Can was to become the innovative and creative corporation. In order to bring this about, May hired a group of talented business theorists who, though short on practical experience, were supposed to lead American Can into the 1980's.
These men led American Can into the areas of aluminum recycling and resource recovery, both of which enjoyed a period of growth in the late 1970's when ecology and environmentalism were in vogue. These operations, however, have since stagnated. The new leadership at American Can also encouraged the company to invest in smaller fields such as records and mail order retail products so as to benefit from the excellent short-term returns these businesses were enjoying. Consequently, American Can purchased Pickwick record distributing in 1975 and Fingerhut direct marketing in 1978. The latter became the only successful investment in May's diversification portfolio, while the former continues to be an unprofitable business venture.
May hoped to arrange the company's various operations so that by the end of his tenure the container manufacturing portion would be less than 50% of the business. Yet future acquisitions in other sectors depended upon a healthy canmaking operation. It was can manufacturing, by way of the stock market, which generated the capital necessary to invest in other things. Hence, May took the difficult but necessary steps to modernize American Can's aging canmaking network. In 1972 he began selling and closing those plants considered to be antiquated and beyond modification. Throughout the decade, approximately 105 factories which annually produced $1.2 billion in sales were shut down or sold; in the process, the company incurred $300 million in total write-downs. The old system was supplanted by a new network of 62 plants. Eight of these, at a total cost of $200 million, were built to make the newer, more cost-effective two-piece can (which two-piece can (which requires only one seam) that was quickly replacing the old style three-piece can (which requires two).
At first May's strategies were successful and paid out considerable dividends to investors. 1974 represented one of the best business years in company history. American Can posted both record sales and record earnings, and the future indicated both continued growth and profitability. However, this was soon to change.
The major area of concern was the recently purchased Pickwick company, the world's largest record distributor and retailer. Pickwick's problems began when the bottom fell out of the record buying market in the late 1970's and early 1980's. Record prices increased significantly during this period, alienating younger customers (who make up the bulk of the industry's clientele) and leading them to record borrowed albums on blank cassette tapes rather than buy them new in the stores. Despite the stabilization of record prices in recent years, the trend toward home recording technology has kept Pickwick from recovering completely. It is a $500 million a year operation that has trouble making a profit.
To make matters worse, the Sam Goody record store chain, part of Pickwick's retail network, was investigated by the Justice Department. A number of the top officials at Goody were indicted for allegedly dealing in counterfeit records and tapes. American Can reported the improprieties quickly and in good faith, but the damage had been done. Many Wall Street analysts and members of the container industry thought American Can had gone too far afield in entering the record business and that it was unsound financial planning. The Goody scandal seemed to confirm these misgivings and shake the confidence of investors in American Can's ability to make successful acquisitions.
Fingerhut, the direct-marketing firm purchased by the company at the height of the mail-order retail explosion, carved out a market for itself by catering to a group often overlooked by others in the industry, namely, the low to medium income household. Fingerhut developed computerized profiles of each of its four million customers and then marketed products corresponding to their demands. This established for Fingerhut a loyal (and growing) consumer block.
In the meantime, the corrective modernization measures taken by May were not enough to keep the company from losing more and more of its market share. In the beverage can market alone, American Can's portion dropped from 28% in 1971 to approximately 18% in the 1980's. The company was still lagging behind Continental Can and others in the shift away from steel to aluminum and plastics. Moreover, recycling laws of various types were passed in a number of states, resulting in greater consumer interest in glass which is cheaper and easier to "send through the mill" a second time. These things served to worsen American Can's already unstable financial situation and depressed employee morale.
In 1980 William May retired to become the dean of New York University's Graduate School of Business. Taking his place and inheriting his problems was William Woodside, a man with a reputation for being a brilliant business strategist and a tough administrator. Woodside joined American Can in 1950 as an economist, and then later became the marketing director at Dixie Paper in 1962. In 1975 he moved back to the home company to become second in command at American Can under May.
When Woodside took the helm of American Can he soon learned that his largest problem was money; he did not have enough of it to keep the company from lapsing into permanent stagnation. American Can's 1980 profits were off 33% and it was having trouble making even 5% on its assets. Woodside was faced with a dilemma: American Can needed growth via acquisitions in order to generate investment funds, but these acquisitions required capital outlays that the company simply did not have.
Rather than circumvent this problem, Woodside developed a plan designed to overcome it. He called it "asset redeployment," a program in which tangential and unprofitable business would be sold so as to generate the liquid capital needed to invest in areas of greater growth potential.
Woodside's first significant move in this direction was to put up for sale the company's forest products operations, worth almost $1 billion. Both the Dixie-Marathon paper operation and the American Can container plants were highly capital intensive. Woodside understood that no company could withstand the financial strain and resource costs of maintaining large interests in two such industries. One of them had to be sold, and there was really little choice as to which it was going to be. Dixie had been marginally profitable throughout its history, despite losing ground to competitors like Northern Paper, and timberlands were highly regarded by Wall Street at the time; selling Dixie-Marathon would not be difficult. The company's can operation, on the other hand, was considered part of a dying industry; what is more, it maintained a very costly labor pension plan. "We simply would not be able to unload it." said Woodside.
The sale of Dixie, however, was not as smooth as American Can had hoped. Woodside waited too long before accepting offers from potential buyers and before long interest in timberlands began to wane. Ultimately the company sold its forest operations for $423 million, a figure far below what most analysts thought them to be worth. Woodside, too, recognized the error in strategy. "If ever there was a bad time to sell those assets, we picked it."
Before the sale of Dixie was finalized Woodside sought to acquire new businesses, particularly those in the sectors of financial services and insurance. In fact, American Can bought Associated Madison Insurance for $140 million in 1981 before it had received any payment on its forest operations. Woodside was encouraged to make the purchase by Gerald Tsai, the "boy wonder" of the stock market who had financial interests in Madison.
Tsai, who was born in Shanghai and then educated in the United States at Boston University, made a reputation for himself on Wall Street during the 1960's. As an expert trader he made a great deal of money in a short period of time. In 1966 he started the Manhattan Fund, raising millions of dollars by convincing investors he would yield them high returns. The project turned out badly, however. Tsai lost most of the money and the confidence of investors.
Following this fall from grace, Tsai spent 12 years positioning himself for a possible comeback. He quietly became a major force in the insurance trade; and associating with American Can was just what he needed to make his return. By 1983 Tsai was a vice chairman and major stockholder at American Can, and proved to be an indispensable ally to Woodside in his sometimes unpopular attempts to redirect American Can's capital into financial services. Indeed, between 1982 and 1986 Tsai and Woodside spent $800 million to acquire all or part of five major insurance companies, including American General Capital Corporation which runs $4.3 billion worth of mutual funds. These acquisitions paid off handsomely. In 1984 American Can reported $4.1 billion in revenues and $100 million in net income, the company's best figures in years.
Tsai, who became chairman at American Can in 1986 when Woodside retired, claimed that direct marketing and financial services would soon make up 75% of its business, further relieving the company of its dependence upon canmaking. This figure was an understatement. When Triangle Industries, National Can's new parent company, approached American about purchasing all its U.S. packaging businesses, Tsai responded enthusiastically. The sale earned American $600 million in cash and stock and completely divested the company from the last of its packaging operations.
In keeping with its growing image as a financial services and specialty retailing conglomerate, American changed its name to Primerica. The company is now the largest underwriter of individual life insurance and the largest retailer of audio and video products in the United States. Other areas of increasing activity include the management of mutual funds and home mortgages.
Primerica continues to use the two billion dollars earned from the sale of all its paper and packaging operations to acquire new businesses. Using American Express as a model of a successful diversified financial services company, Tsai announced his company would purchase Smith Barney, a Wall Street investment firm. This action marks Tsai's return to the position of his former years as a mutual fund manager on Wall Street.
By infusing capital into Smith Barney's operations, Tsai hopes the firm will expand its international business and corporate financing services. Although this latest acquisition marks the last major purchase that Tsai claims his company is able to manage for the time being, Primerica is well on its way to becoming a leader in the financial services industry.
Principal Subsidiaries: Associated Madison Companies, Inc.; AC Insurance Co.; AC Securities Inc.; American Capitol Corp.; American Services Associates; Associated Direct Marketing Services Inc.; Berg Enterprises, Inc.; Mass Marketing Systems International; PennCorp Financial Inc.; Voyager Group Inc.; Performance Plastics Packaging; Worldwide Metal Packaging; Fingerhut Companies; Sam Goody Inc.; The Musicland Group, Inc.
Source: International Directory of Company Histories, Vol. 1. St. James Press, 1988.