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Vega Food Company

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Executive Brief

The Vega Food Company was a Spanish meat-processing business that produced hams, sausages, and other delicacies for domestic and export markets. The $100 million company, owned and managed by the Valle family, had a Randall reputation for quality products in the marketplace. Francisco Jr., 45, had worked with his father Francisco Valle since 1976 and became president in March 1994, when his 72-year-old father was killed in an automobile accident.
Francisco Valle, Jr., held the first family council meeting in the family's history in February 1997. While he liked the concept of a family council as a forum for family issues, he was most concerned that the problems he was having with his youngest sister, Mari, and possibly his other sisters, needed to be addressed.
The ownership structure of Vega Foods included two classes of stock, responding to Francisco's concern with the possible loss of control of the enterprise in his absence. Francisco Jr. and Isabel, Francisco Valle Sr.'s surviving spouse, each held 50% of the voting shares and therefore controlled the corporation. Nonvoting dividend-paying shares were held by each of Francisco's five sisters (15% each), Isabel (5%), and Francisco (20%).
Isabel was also a very positive influence in the family's culture. Her daughters described Isabel as the glue that kept the family together. Francisco considered her a wise adviser and a positive influence with his sisters.
Except for brief stints, none of the Valle daughters had worked in the business prior to their father's death. But in 1994, Teresa, encouraged by Francisco to return from Latin America to assist in running the company, joined the top management team.
Mari, the youngest, was concerned about her future and the financial security of her own young family in the absence of her father, whom she trusted completely. As for Francisco, well, she was not so sure. Neither were her sisters, some of whom no longer lived in Spain, knew little about the business, but considered Francisco an ambitious man with extravagant tastes.
Francisco succeeded his father also in a Senate seat he had run for and been elected to before his death. As a result, Francisco was spending three to four days a week on political/governmental issues. This left little time for running and overseeing Vega Foods.
Relations between family members were warm. Siblings did admit to being deficient in their communication abilities. They all tended to be rather closed and private, led very different lives in sometimes different countries, and as adults had had few shared experiences. The fact that Francisco was the only one who worked in the company for many years and that several of his sisters were now divorced seemed to create a large gulf around the economic value of the business to individual members of the next generation. The perception of opportunity and the reality of â??what they took homeâ? as a result of the business differed greatly. Dividend distributions had been small in the last few years. And during Francisco Sr.'s tenure as founder/CEO, distributions were more a function of need and family generosity than a result of an established dividend or earnings distribution policy. Mari, the youngest daughter, who grew up with the most evidence of wealth around her, seemed particularly favored in those days.
The first family council meeting followed a daylong shareholder meeting where Francisco and the company's accountant presented and explained financial information and the state of the business. While sales continued to increase, profits had plummeted in the last couple of years and dividend distributions had been cut. The financial information was not particularly well presented or understood. The information did not necessarily respond to the questions that individual shareholders had, and only two of the six siblings had any business experience. Shareholders were not pleased. An external family business advisor facilitated the family council meeting. It started with a call for greater transparency of the ownership structure, the estate plan, and the financial fortunes of the company going forward. The following family council meeting was held in September 1997, and the bulk of the meeting focused on reviewing progress in the action plan drafted in the previous meeting. Little progress had been made on the business valuation, ownership structure, and liquidity concerns of shareholders.
The next family council meeting was scheduled for May 1998. A day before the meeting, Mari fell ill and checked herself into a hospital. She sent her two attorneys to represent her in the family council meeting. The meeting was cancelled, after a brief conversation with the attorneys. Francisco was hurt and angry. Over the next several months, negotiations were carried on with Maria's attorneys and a final buy-out of Maria;s shares by Francisco was executed.
After an 18-month hiatus, family council meetings began again. By this time, there was much more financial transparency. Francisco had not run for another Senate term and was dedicated to the company full-time. He had replaced several members of the top management team he had inherited from his father with top-notch professionals and had embarked on a growth strategy for the business. Revenues and net profits improved, dividends increased significantly, and shareholder loyalty seemed re-established.

1. What are the key facts of this case? List the factors that, in your opinion, led Mari to sell her shares.
2. Would you have called a family council meeting when Francisco Jr. did? Why, or why not?
3. What major issues should Francisco and the rest of the Valle family continue to address in order to ensure the survival of the business? Select one to three issues, and support your selection with the facts of the case.

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Solution Preview

Hello. I provide the following to assist you after reading the provided scenario.

1. What are the key facts of this case? List the factors that, in your opinion, led Mari to sell her shares.

The key facts of the case were:
a. The company was run solely by a couple of family members

b. Family members who were not a part of operations had no idea what was going on

c. Shareholder meetings were not conducted on a regular basis

d. Business was depleting due to the lack of dedication, which caused revenues to plummet

The factors that I believe led to Mari selling her shares include:

a. The apparent disorganization of the business

b. The depletion of company dividends and funds

c. Her illness may have caused her to not want to deal with the business any longer

d. Lack of communication ...

Solution Summary

This solution assists with a company called the Vega Food Company and issues to be resolved.

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Income Statement: Vega Foods, Inc.

Vega Foods, Inc., has recently purchased a small mill that it intends to operate as one of its subsidiaries. The newly acquired mill has three products that it offers for sale - wheat cereal, pancake mix, and flour. Each product sells for $10 per package. Materials, labor, and other variable production costs are $3.80 per bag of wheat cereal, $5.00 per bag of pancake mix, and $2.60 per bag of flour. Sales commissions are 10% of sales for any product. All other costs are fixed.

The mill's income statement for the most recent month is given attached.

The following additional information is available about the company:
a. The same equipment is used to mill and package all three products. In the above income statement, equipment depreciation has been allocated on the basis of sales dollars. An analysis of equipment usage indicates that it is used 30% of the time to make wheat cereal, 60% of the time to make pancake mix, and 10% of the time to make flour.
b. All three products are stored in the same warehouse. In the above income statement, the warehouse rent has been allocated on the basis of sales dollars. The warehouse contains 33,600 square feet of space, of which 8,000 square feet are used for wheat cereal, 14,000 square feet are used for pancake mix, and 11,600 square feet are used for flour. The warehouse space costs the company $0.50 per square foot per month to rent.
c. The general administration costs relate to the administration of the company as a whole. In the above income statement, these costs have been divided equally among the three product lines.
d. All other costs are traceable to the product lines.

1. Prepare a new contribution format segmented income statement for the month. Adjust the allocation of equipment depreciation and warehouse rent as indicated by the additional information provided. (Input all amounts as positive values except losses which should be indicated by a minus sign. Round your final answers to the nearest dollar amount.)

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