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At Cargill, The Ties That Bind Aren't Binding Anymore


The Corporation

AT CARGILL, THE TIES THAT BIND AREN'T BINDING ANYMORE

For more than a decade, the four silver-haired men met every month in a wooded compound tucked away near the shores of Minnesota's Lake Minnetonka. Sitting in a circle of upholstered armchairs beneath paintings of their great-grandfather and his descendants, the men would talk family business. But for cousins Whitney, Duncan, and Cargill MacMillan and Jimmy Cargill, family business meant Cargill Inc., with its $13.5 billion in assets. The family leaders command the operations of the nation's No. 1 grain merchandiser, second-largest beef packer, and eighth-largest steel company. "We've always tried to do what's best for the family and for the business," says Duncan MacMillan, chairman of Waycrosse Inc., holding company for the family's investments, including its Cargill stock.

Doing what's best for both has gotten difficult lately -- so difficult, in fact, that tensions have forced the council of elders to suspend its monthly gatherings. "We have not met because there's been a little bit of anger," says Duncan MacMillan. "It's not as much fun as it used to be." At the root of the trouble are disagreements over a possible employee stock-ownership plan and how many shares respective family members could sell under the plan.

The company that was founded 126 years ago with a grain warehouse in frontier Iowa is now one of the world's largest privately held corporations, with 800 locations around the world, 70 product lines, and 50,000 employees. The magnitude of those operations and the hectic pace of modern business are tugging at the ties that have bound the Cargill and MacMillan clans to their company for more than a century.

SLOWDOWN. Like many family-held companies before it, Cargill is feeling pressure from the younger generation, which doesn't have the parents' and grandparents' emotional bonds to the enterprise and wants to cash out. At the same time, the ranks of management have become filled with outsiders. And after the expected retirement of 62-year-old Cargill Chairman Whitney MacMillan in three years, Cargill will be led by a nonfamily member. Since the other three members of the elder council are also all over 60, none of them will take over the helm. A sign of the times: This spring, the secretive grain giant sought the help of consultants McKinsey & Co. for advice on management succession and company structure.

While family members struggle to redefine their role in managing the company, Cargill is facing growing pressures from the outside world. Once-hungry customers such as China are producing more grain and importing less, while financially strapped countries such as the Soviet Union can't afford the grain they need. Meanwhile, ferocious competition for market share among the grain giants -- including Brazil, Argentina, the U. S., Canada, and Australia -- has kept prices low. That means lower margins for Cargill when it sells to its customers.

The growth slowdown has forced Cargill to undertake wrenching changes that will realign the company toward new markets. The No. 1 aim: to break with Cargill's wholesaling roots and enter higher-margin markets, even selling consumer products. Increasingly, Cargill is pinning its hopes on selling branded products, from poultry to corn oil. But the company is late to this game. Traditional agricultural companies such as ConAgra Inc. and CPC International spent the 1980s acquiring and developing consumer brands.

For most of its history, Cargill had little reason to look beyond its traditional businesses for growth. Its size and early lead in information technology kept it growing faster than such global agribusiness rivals as Bunge-Borne, Continental Grain, and Archer Daniels Midland. With its teletypes clacking out information about weather and shipping conditions worldwide, Cargill could shave enough pennies from its competitors' grain prices to make billions in competitive global markets.

The pennies added up quickly: In the 22 years since Cargill first revealed its sales data, revenues have grown from $2 billion to $49 billion today -- though this number is somewhat inflated because the company often acts as a middleman. But the information age has leveled the playing field for Cargill and its competitors, and the world's grain trade is shrinking.

DOUBLE DARE. The result? Cargill no longer is meeting its internal financial objectives. Company documents obtained by BUSINESS WEEK, show that it has been more than a decade since Cargill met its sales targets (chart, page 96). "We believe we still have the ability to double the company every five to seven years," says Chief Financial Officer Robert Lumpkins, a leading contender to become CEO after Whitney MacMillan, who declined to be interviewed. "But there's just not a stair-step earnings growth for us." True enough. The $49 billion in sales for the year ended May 31 was up 17% from 1990. But Cargill's return on capital averaged 6.8% from 1985 to 1990, while Archer Daniels Midland's was 9.1% over the same period.

Cargill is taking some blows to the heart of its business, the merchandising operation that produces the majority of its revenues and profits. Squeezed by fierce competition, merchandising -- buying and selling commodities such as grain, coffee, and sugar in markets from rural Iowa to Sao Paulo to Nairobi -- no longer offers the kind of profit Cargill wants. But despite efforts to diversify, it still has 18% of its net worth invested in merchandising. The company won't break down revenue figures. "If you've got that kind of enormous business locked into low margins," says Paul Grangaard, a specialist on privately held companies with Minneapolis brokerage Piper, Jaffray & Hopwood Inc., "you're not going to double your company every five years, like Cargill wants to do."

That's why Cargill has been frantically trying to reduce its dependence on merchandising. The company has expanded into everything from grain processing to meats, steel, and financial services. These ventures now account for more than 80% of Cargill's net worth, up from around 60% in 1980. Even so, most of the new investment is still in commodity-oriented businesses.

To reduce its reliance on commodities, Cargill is trying to market to consumers with such names as Fresh Cargo shrimp and Honeysuckle poultry. Research in the corn-milling division could lead to name-brand products in the sweetener business, too. And Cargill is hiring packaged-goods marketers to manage some of its businesses.

But Cargill has plenty to learn before it becomes a consumer-goods player. Beef eaters didn't bite earlier this year when Cargill put its Excel brand vacuum-packed beef on grocery shelves. The meat's purplish look turned them off, and Cargill abandoned the experiment, at least temporarily. "They're not consumer-savvy," says Ed Jenkins, vice-president for meat processing at Sara Lee Corp.

Maybe not. But Cargill shouldn't be counted out of consumer markets -- not with the kind of muscle it has flexed in wholesale businesses. Look at what happened shortly after Cargill opened a $55 million beef-processing plant in High River, Alta., in 1989. It was a gutsy move, considering the glut in the Canadian beef-packing industry. But Cargill figured it could penetrate the market by using modern technology, paying employees up to one-third less than prevailing wages, and underselling competitors. Cargill may have lost $15 million on the plant last year, but its hardball tactics have helped persuade Toronto-based Maple Leaf Foods Inc., one of Canada's largest food processors, to exit the beef business.

AGITATION. As it confronts other competitive foreign markets, Cargill is relying more on joint ventures, which it once shunned. "We'd rather do it ourselves," says Cargill North Asia President J. Norwell Coquillard. "But it's all case by case." Cases in point: a new pork-processing venture with Taiwan's government and an effort by Showa Sangyo and Excel Beef to supply precut beef to Japan's fast-food and hotel industries. Cargill's conditions for joint ventures are always the same -- majority ownership and management control. "This corporation is not a financial investor," explains Cargill President Heinz Hutter. "We're managers."

As Cargill wrestles with new markets and new challenges, it also must resolve issues of ownership and management structure. True, the ultimate control of Cargill lies in the hands of the 40 family members who own 100% of the company's voting stock. But a growing contingent of younger insiders is agitating for the opportunity to turn their Cargill stock into cash.

The company's normally placid corporate campus in Wayzata, Minn., was jolted this spring by rumors of a public stock offering, which proved to be false. Such talk is tantalizing for the younger generation, only two of whom currently work for the company. The company's annual dividends to family owners are less than 3% of net income, but Prudential Securities Inc. food analyst John McMillin figures Cargill's public market value would be $10 billion. "The kids go just bonkers when they hear about that," admits Duncan MacMillan.

To enable family members to cash in their holdings, the clan is considering an employee stock-ownership plan. But approval has been delayed for more than three months as family advisers wrestle with the details. The issue appears to be most troublesome for Whitney MacMillan. Those who know him say the intensely private CEO is adamantly opposed to nonfamily ownership. But at Cargill, both the family and the family business are changing so rapidly that he may have no choice.David Greising in Wayzata, Minn., with William C. Symonds in Toronto and Karen Lowry Miller in Tokyo


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