Can Group 5: Emir, Hary, Ichsan, Seno, Susana, Utomo

Background:

Avon, founded in 1886, as the world’s largest manufacturers and marketers of beauty products and had owned
strong cash-flow. However, due to wrong strategic expansion from 1970s to 1984, Avon entered into high end
jewelry business: Tiffany; healthcare industry such as Mallinckrodt, Foster Medical Company, Retirement Inns of
America and Mediplex Group. Because of these aggressive expansions and most of its healthcare industry got
loss, Avon’s performance got declining and lost most of its strong cash flow.

In 1986, Hicks B. Waldron, Avon CEO and the Board of Avon tried to reorganize Avon back to its beauty business
and fix its dividend policy by reducing dividend to conserve cash. However, Avon cannot just cut its dividend policy
abruptly, because it already stated on Avon’s 1987 annual report that it would maintain current annual $2 dividend
and since the last 5 years, Waldron always mentioned no dividend cutting. So, if there were sudden dividend
changes by cutting dividend policy, it would backfire to Avon stock, where the stockholders would sell Avon stocks
abruptly. To anticipate the stock sell off, Avon asked its advisor: Morgan Stanley to give recommendations to
avoid stock price downfall when they started to cut the dividend.

Below is Morgan Stanley’s recommendation:

1. Proposed an exchange one share of a new $2.00 Preferred Equity-Redemption Cumulative Stock ( PERCS )
for each of up to 18 Million of Avon’s 71.7 Million outstanding common shares.
2. The new PERCS would pay cumulative quarterly dividends of 50 cents ($2 a year from Sep 1, 1988 to Sept
1, 1991. It would enjoy a liquidating preference of $1 per share over Avon’s common stock.
3. On PERCS Expired date: Sep 1, 1991: the holders would receive 1 common share for every PERCS share if
the price of the common stock was less than or equal to $31.50, or $31.50 worth of common stock per
PERCS share if the commons stock was above that price.

With this expected recommendation, Avon could save $53.78 Million from dividend cutting.

This recommendation could be applied to Avon’s stockholders’ Yield and Mixed with total more than 25%
from total stockholder.

Avons' Stock Holder Characteristics

TYPE % Assumed Total
Yield 17.60% 100% 17.60%
Turnaround 5.10%
Mixed 15.50% 50% 8%
Index 8.50%
TOTAL 46.70% 25.35%