Example of good management

**Barry** Mon Aug 13, 2007 3:29 am

Example of good management
American Standard (ASD) is a great example of a company management which thinks about the investors. I don't recommend buying it, but only want to show how good managements think and act.

First, some background: American Standard, until a month ago, was assembled of 3 departments: air conditioning, bath&kitchen and WABCO, the vehicle control system department. As you can see, the three departments have nothing in common and using different brands. A glance at the last 5 years shows constantly rising sales. The earnings are more volatile, but overall it is possible to say they are rising. The problem in the company, and the reason why I don't recommend buying it, is found in the balance sheet. The assets to liabilities ratio is closer to a ratio of a bank, instead of a manufacturing company. Despite the normal quick ratio (above 1), the post retirement benefits are 862 million- almost like shareholder's equity. The company also received many asbestos related claims, and though it has some insurance against it the liabilities minus the receivables (asbestos related) are 316 million. Another problem is the Goodwill- 1.2 billion, which contributes to the balance in the books but not in terms of real assets. Despite that, the company began to pay dividends two years ago. It also began a stock repurchase plan- both this acts show that the investors are the head priority for the management, and that it believes it's situation is better than that appears from the books. The fact that the money designated to the repurchase program is much higher than the dividend indicates that the management evaluate that the company shares are trading low to their real value.

Additional background: Let's check the independent performance of each department. The sales of the air conditioning dept., which makes 60% of the company’s sales, are consistently rising. So are the profits from this dept., which is one of the leading in the world in her area. The condition of WABCO is similar- rising sales and profits, thanks to good products and vide customer range. On the other hand, the bath&kitchen dept. isn't doing so well. The sales are constant, and the profits are dropping- 192 mil in 2004, 102 mil in 2005 and a loss of 18 million in 2006.

To sum up: Two great departments, and a third department which negatively affects the results of the whole group. The departments are not related (operationally), and the liabilities are very high.

What have the directorate decided? In order to maximize shareholder value they decided to sale the bath&kitchen dept, and to spinoff WABCO to the shareholders.

The results of this act:
- Each company can focus on it's activity.
- The shareholders will hold two good companies, which pay dividend similar to that they got before the split.
- The company will use the money from the sale of the bath&kitchen dept. to repay some of it debt, and to buyback more shares.

I think it's a great example of a management who puts the shareholders in the head of their priorities- they analyzed the situation and choose an act which improves the value held by the shareholders.