The Ahold Crisis

1 Royal Ahold is one of the largest international food retailers and food service companies in the world. At its peak in 2001, Ahold’s reported sales and profits were respectively €66.6 billion and €1.1 billion. The company operated 9,000 stores in 28 countries, with nearly half a million employees. Since 1989 Ahold generated over a 1,000 percent return for its shareholders and had a market capitalization of €35.2 billion by July 2001.

2 On Monday February 24, 2003, the Ahold-empire suffered a complete meltdown. On that day

Ahold announced that it had overstated earnings by $500 million as a result of an accounting fraud at its subsidiary US Foodservice. In addition, several of Ahold’s joint ventures should not have been fully consolidated in its financial statements. Side letters alongside contracts with these joint venture partners were kept secret to the external auditor. Finally, fraudulent transactions were discovered at Ahold’s Latin American subsidiary Disco.

3 That Monday, Ahold’s shares lost more than 60% of their value, and its credit ratings were

drastically reduced. The discovery led to the immediate resignation of the CEO and CFO, followed by 39 other employees. The company found itself subject to probes from the U.S. Securities & Exchange Commission, the U.S. Justice Department, the Dutch public prosecutor, and the Euronext stock exchange.

4 For two weeks Ahold was on the verge of bankruptcy. However, contrary to other corporate

scandals, the company was able survive. An expensive $3.1 billion emergency credit facility from a syndicate of banks could save Ahold from entering a liquidity crisis, and having avoided immediate bankruptcy Ahold was still able to ask itself: ‘What went wrong?’

Historical Background1

5

ostzaan to the north of Amsterdam. The product range, although predominantly groceries, also included alcohol, wooden shoes, fishing gear, and other items that catered for the everyday needs of the local farmers and fishermen. This store represented the country’s first attempt to develop a wide and ‘demand-led’ assortment. Up to that point, existing retail operations were predominantly ‘product-led’ and, consequently, had a narrow assortment. Albert Heijn’s ‘demand-led’ concept was a huge success: within ten years another 22 stores were opened.

The Dutch company Albert Heijn was founded in 1887 when Albert Heijn opened a small store in O

After the Second World War, in 1948, Albert Heijn was listed on the stock exchange. The fam

6

ily remained in control by owning two-third of the shares and retained the right to make binding nominations (see Exhibit 1) for the members of the Executive Board and the Supervisory Board.

1 An important source for this section was Kind, R.P. van der, Dreesmann, A.C.; Ahold Takes on the World. In: Oxirm, 1998, issue 19, p.72.

This case was prepared by Maurits Mens, MBA, under supervision of Professor Dr. Fred van Eennennaam. An important source for this case was the book by Smit, J. (2004) Het Drama Ahold. Nyenrode cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2005, Nyenrode Business Universiteit.

1

The Ahold Crisis

Albert Heijn embarked on a major expansion program across the Netherlands, mainly by acquiring other retail enterprises. Its big breakthrough came in 1951, when it opened the first self-service supermarket on the Continent. This highly successful format was the basis for its significant post-war expansion. Within ten years, Albert Heijn became a national player.

7 In 1962, the third generation of family took over the lead when the brothers Ab and Gerrit-Jan

8 financial ownership of the Heijn family was gradually diluted due

At the beginning of the seventies, Albert Heijn was the number one food retailer in the

Net

From Albert Heijn to Ahold

0 ctured into a holding company, Ahold NV, in order to facilitate the

The recession of the late seventies/early eighties prompted Ahold to reconsider its growth

stra

The Fourth Generation (1980 - 1994)

ad managed the company for almost 20 years, and wer

13

pearing at top level management. Ahold’s CFO Leon Coren had been

ill for some time and his colleague board member Hans van Meer would retire in a year from this time. CEO Ab Heijn was to resign in 1989 at the age of 62. Gerrit Jan Heijn would succeed his

Heijn were appointed to Executive Board (see Exhibit 2). Their uncle Gerrit and father Jan advanced to the Supervisory Board.

In the second half of the sixties to the issuing of new shares, which was needed in order to finance Albert Heijn’s strong growth.

The family lost even more power in 1972, when Ahold adopted the Dutch ‘structure regime’, a legal requirement that transferred decision rights from the Ahold’s shareholders to the Supervisory Board.

9herlands, capturing about 15 percent of the market. With such a large share, further organic

growth in the Netherlands, although still possible, started to become problematic. Thus, Ahold began to investigate the possibilities for overseas expansion, range extensions and new growth formats.

In 1973 the company was restru1overseas expansion and diversification. Albert Heijn legally became a subsidiary of Ahold.

Expansion primarily took place in Spain and the U.S. – in 1977 Ahold acquires Bi-Lo followed by Giant Food Stores in 1981– and the product range and services were broadened to include alcohol, in-store restaurants, take-away food, cosmetics and OTC drugs. Furthermore, new formats were developed such as Miro hypermarkets and catalogue showrooms. However, the Ahold’s attempts to simultaneously develop new markets and products were not a complete success, proving it to be very difficult to implement the two strategies at the same time.

11tegy. It withdrew from its non-food activities in the Netherlands – including hypermarkets – and

called a halt to expansion into other European countries. In short, Ahold went back to basics, having perceived that being too diversified was counterproductive. Furthermore, Ahold realised that ‘retailing does not travel well’. In particular, its attempt to transplant its Dutch format on the Spanish market was a complete failure. In the eighties, Ahold’s new growth strategy was focussed on one product area – food – in one channel – supermarkets – and predominantly two major markets, the Netherlands and the U.S..

2 The brothers Ab Heijn and Gerrit Jan Heijn h1e now thinking about the period when the company will not be lead by the Heijn family. With

the second generation gone and the third generation reaching retirement age, the company was facing another big challenge: the continuity of management.

As a first measure to achieve continuity of management, the Executive Board was extended from four to seven members in 1980 and 1981. Furthermore, it was agreed that members of the Executive Board should retire at the age of 62. For Supervisory Board members the mandatory retirement age was to be 70.

In 1984 breaches were ap14

2

The Ahold Crisis

brot

15

hold’s new CFO. After working at Royal Dutch Shell for fifteen years, the thirty-seven year old Van der Hoeven was ready for his next step. After his

16

aintained intensive contacts with everyone.

18

h the kidn

19

Heijn accelerated Aho

0 In 1989 CEO Ab Heijn was to be succeeded by Ahold’s first non-family CEO. There were two candidates for the CEO position: CFO Cees van der Hoeven Board knew that there was a fight for leadership going on, but

it w

21

as all abo

22

arkets in the U.S.. Through this takeover, Ahold should become the ninth bigg

her as CEO, but was to retire four years later. Within the Executive Board and Supervisory Board everybody agreed that the necessary strengthening of the management must come from outside Ahold. A special nominations committee, consisting of three Supervisory Board members, was assigned with the task to find new members.

In August 1985, Pierre Everaert and Cees van der Hoeven were appointed to the Executive Board. Cees van der Hoeven was appointed as A

studies, this bright student entered the management development program at Shell. Subsequently, Van der Hoeven worked at the Internal Audit Department of Shell’s subsidiary NAM, was responsible for Investor Relations for Shell in London, and in 1980, only 33 years old, he became the CFO of Shell’s subsidiary NAM.

In the same month the Supervisory Board acquired a new member; Jan Choufoer, who was also affiliated with Royal Dutch Shell (see Exhibit 3).

17 In the Executive Board three tandems arised: the Heijn brothers, Ahlqvist and Zwartendijk, originally recruited from the company Mölnycke, and the new executives, Van der Hoeven and Evereart. Peter van Dun, Director Social Affairs, m

On September 9, 1987, Gerrit Jan Heijn was kidnapped. A difficult period arised for both the

family and the company. Everything was overshadowed by this event, and the country sympathises with the family. While Ab Heijn, Rob Zwartendijk and Peter van Dun were dealing wit

apping nearly fulltime for more than half a year, Cees van der Hoeven and Pierre Evereart were concerned with the third takeover in the U.S.: First National Supermarkets (FNS).

On April 7, 1988, Peter van Dun received a phone call from the Dutch public prosecutor, who informed Van Dun that Ferdi E. had confessed the kidnapping of Gerrit Jan and indicated the spot where he had murdered his victim many months ago. The murder on Gerrit Jan

ld’s process of shifting from family control to professional management.

Ahold under Pierre Evereart 2

Executive Board members who wereand Pierre Everaert. The Supervisory

as not involved in the process; plenary meetings of the Supervisory Board were generally scarce. Initially, the Executive Board itself nominated Cees van der Hoeven as its CEO, but this decision was overruled by the Chairman of the Supervisory Board Jan Choufoer. Choufoer and Heijn were in favour of Pierre Everaert and convincd the other Supervisory Board members of their choice.

The new CEO Pierre Everaert had strong ambitions and expressed them immediately: ‘We want to be number one or two in Europe and the U.S.’. CEO Everaert and CFO Van der Hoeven agreed on one thing: ‘good investor relations are essential’. They were convinced that the stock market w

ut trust. Trust assure a good development of the stock price, which in turn is necessary to take over other companies.

Ahold was doing well under Evereart. In 1991 the company was working on a large takeover in the U.S.: Tops Market (see Exhibit 4). With a turnover of $ 1.1 billion Tops Markets was in the top-25 of the largest superm

est food retailer in the U.S.. But more importantly, these stores were also situated on the East Coast of the U.S., along with Ahold’s existing American operations. Rob Zwartendijk, who was responsible for Ahold USA, believed this to be important in terms of realizing back-end synergies, that only through synergies the takeover premiums could be paid back. In 12 months time Ahold’s newly acquired Tops Markets was already making a considerable contribution to Ahold’s financial results.

3

The Ahold Crisis

23

250 million (see Exhibit 5 and 6) we will be twice as big as were are now’.

24

n der Hoeven should here be given an opportunity to prove himself. According to the Chairman he had dem

5 When Van der Hoeven assumed the position of CEO, Ahold did not immediately appoint a new b. The Supervisory Board would have liked some more

ppointed as Financial Director the year before. In terms of internal controls there was a lot of trust in the Administration Department of company controller Cor

26

perating result, and also the debts, into its own statements. On another page in the annual report it was noted that Ahold had a 49-percent stake in the

27

to its own will. Furthermore, Ahold’s shareholders wer

28

9 However, Ahold’s listing at the New York Stock Exchange came with new obligations. From now

asis of Ahold’s current annual report. The most imp

ortized on a straight line basis over a period no longer than 40

30

In September 1992 Ahold acquired a 49-percent stake in the Portuguese company Jerónimo Martins Retail. The successes of these acquisitions stimulated the ambitions of CEO Everaert, and in the same month he added a little extra to Ahold’s goal: ‘In 1997, with a turnover of €20 billion and a profit of €

But only few months after presenting his ambitions, Evereart resigned from Ahold to continue

his career at Royal Philips Electronics. That same day Chairman Choufoer called with the other members of the Supervisory Board to let them know that he was of the opinion that Va

onstrated the capabilities necessary to do the job.

Ahold under Cees van der Hoeven 2

CFO. Van der Hoeven simply kept his old jotime to examine Michiel Meurs, who was a

Sterk. Moreover, Chairman Choufoer himself had an expertise in finance. Finally, the board trusted that the recent strengthening of the Internal Audit Department (IAD) would lead to better supervision of financial controls. Particularly Choufoer himself had made a strong case for a powerful Internal Audit Department. He stressed that the boss of this department had to report to the CEO. Paul Ekelschot incorporated that role in 1993.

The first annual report that appears under CEO/CFO Van der Hoeven showed an important difference: For the first time Ahold fully consolidated its Portuguese joint venture Jerónimo Martins. As of 1993 Ahold included the complete turnover, o

joint venture, thus shareholders could adjust the turnover and the operating result themselves. For net earnings, Ahold adjusted the figures itself.

The reason for this change was threefold. First, according to the Dutch accountancy rules --Dutch GAAP-- a company should fully consolidate a subsidiary when it had de facto2 control. Second, Van der Hoeven believed it was important to show investors that Ahold was in control and therefore able to steer the subsidiary according

e provided with an improved picture of the entire company. Finally, this way of accounting was also favourable in terms of realising Ahold’s ambitions, such as doubling the turnover in the next five years. By consolidating the results, these goals could be achieved more rapidly.

At the end of his first year CEO/CFO Van der Hoeven took another important step: he became responsible for listing Ahold at Wallstreet. Ahold hoped to build a solid reputation in the U.S. and to get access to the largest capital market in the world.

2 on it was mandatory to supplement the annual report with a report that is based on the American

accountancy rules – US GAAP. These rules differ from Dutch GAAP, which is the b

ortant difference between Dutch GAAP and US GAAP is the treatment of goodwill on newly acquired companies. US GAAP requires that goodwill is capitalized on the balance sheet as an intangible asset and subsequently amyears. Dutch GAAP requires that goodwill is recorded as a reduction of shareholders’ equity. Hence, net earnings under Dutch GAAP are not affected by amortization.

Another important difference under US GAAP is that Ahold can only consolidate a subsidiary when it has de jure2 control, rather than de facto2 control under Dutch GAAP.

2 De facto is a Latin phrase meaning “in fact but not in law”. De facto contrasts with de jure which means “legally”. Ahold claimed de facto control in its Portuguese joint venture, but for de jure control Ahold would need to own 50 percent plus one vote.

4

The Ahold Crisis

31 In his second year as CEO, Van der Hoeven attained a better overview of his role. He felt

comfortable with the other members of the Executive Board and openly respected their knowledge and expertise. The other members were considerably older and had been members of the Executive Board for much longer. Of course Van der Hoeven was the boss, the CEO, but if he or anyone else had a flawed idea, other members had the ability to bring him into line. Ahold’s Executive Board was in some sort of balance.

32 The strategy did not change much. Globalisation was the mantra. There were only two

competitors who followed the same direction: the American Wal-Mart and the French Carrefour. However, these companies had a different approach to that of Ahold. Carrefour and Wal-Mart expanded both domestically and internationally under one name, whereas Ahold positioned itself as much as possible as a high-end full-service supermarket; in this line of thinking it was sensible to remain loyal to the local brand that customers knew, and to hold on to local management. Ahold made sure that money was saved at the invisible back end; synergies were realised through back office economies of scale, transfer of best practices, purchasing power, and restructuring of the balance sheet. To do this as well as possible, one thing was very important: scale.

33 After a disappointing earnings per share (EPS) growth figure in 1993, Van der Hoeven promised

an increase in EPS of at least 10 percent annually for the next five years. What was more, the CEO added something new to it: this growth figure had a high, if not the highest priority. To link the financial interest of shareholders more explicitly to those of Ahold’s managers, their bonuses were made dependent on the development of Ahold’s EPS.

34 On March 28, 1996, CEO Van der Hoeven announced that Ahold would acquire the U.S.

supermarket chain Stop & Shop. Stop & Shop was about the same size as Albert Heijn, and Ahold would pay 25 times its earnings, which amounted to a total of $ 2.9 billion. It was the largest takeover in the history of Ahold. If the antitrust authorities approved the deal, Ahold wiould become the fifth largest food retailer the U.S..

35 The takeover was large, but the Executive Board was convinced that the search for companies which were offered for a reasonable price could be replaced by searching for good expensive companies and making a bid. Van der Hoeven explained that Stop & Shop, despite its enormous price, would nonetheless immediately contribute to a growth in EPS. Investors were pleased as well: the stock price increased (see Exhibit 7).

36 The banks also supported the deal; they benefit from the huge underwriting fees which were earned by the issuance of new shares. The takeover of Stop & Shop was partly financed with ‘preferred financing shares’, a type of security not used before. Certificates of these preferred shares were stripped of their voting rights, and the voting rights were brought under control of a foundation that was friendly to Ahold’s management. The non-voting certificates were sold to four large institutional investors (see Exhibit 9)

37 Due to these ‘breakthrough results’ the CEO increased the expected EPS growth from 10 to 15

percent for the next five years. Just before his announcement the subject was raised for consideration in the sounding board3 where some retail experts cast their doubts on this target. The retail markets in the U.S. and the Netherlands, by far the most important markets for Ahold, grow with 2 percent annually, so how would it be possible to increase earnings with 15 percent in the coming 5 years?

The Road to Success (1994-2001)

Globalizing (1994-1996)

3 Ahold’s sounding board is a group of Ahold executives that meet twice a year to informally discuss Ahold’s strategic issues. The sounding board was initiated in 1993 in order to create support throughout the organization.

5

The Ahold Crisis

38 During the takeover process of Stop &Supervisory Board. On May 15, 1996, Ja

Stop there was a changing of the guards within the n Choufoer resigned as the Chairman of the board.

Choufoer was succeeded by his protégé Henny de Ruiter, who was also affiliated with Royal Dutch a member of the board two years earlier on nomination of

Hoeven and the new Chairman Henny de Ruiter immediately

39

40

iter had been responsible for this continent at his former employer Roy

41

rimarily dealt with the

Tim

42

43

44

Heijn. On Sterk’s position Bert Verhelst was appointed. Ver

45

the internal control procedures were being followed, and subsequently being supervised by the Internal Audit Department.

46 g and

Shell. Henny de Ruiter was appointed as oufoer himself. CEO Van der Jan Ch

got along well.

Within the next six months, Ahold entered four new markets: Thailand, Malaysia, Spain and China. The company was currently operating in 11 countries (see Exhibit 10).

Early November 1996, Ahold entered the fourth continent: South-America. Ahold announced that it acquired a 50-percent stake in the Brazilian supermarket chain Bompreço. New Chairman of the Supervisory Board De Ru

al Dutch Shell. He warned the CEO Van der Hoeven about the unstable economic climate in this part of the world. De Ruiter had a strong argument with the CEO, who was convinced of the opposite but the Chairman eventually agreed. Bompreço’s turnover and operating results were fully consolidated with Ahold’s financial statements.

At Ahold’s external auditor Deloitte & Touch Mr. John van den Dries was appointed as the new lead client service partner. He was responsible for the independent auditors’ report on Ahold’s annual financial statements. The work of Van den Dries and his team was also assessed by the Risk Audit Team of Deloitte & Touch. The Risk Audit Team monitored the risks involved in approving certain accounting procedures on request of its customer. The external auditors p

Administration Department of Cor Sterk and the Internal Audit Department of Paul Ekelschot (see Exhibit 11). But external auditor Van den Dries also maintained good contact with CEO Van der Hoeven and Ahold’s Financial Director Michiel Meurs.

e out (1997)

On May 7, 1997, the seventy-year-old Ab Heijn bade farewell as a member of the Supervisory

Board and left behind a vacancy. The Supervisory Board asked the Executive Board to think about the nomination of a new member. This was a usual practice within Ahold; the Executive Board made recommendations for new members of the Supervisory Board.

In the meantime Michael Meurs was appointed CFO. After having served as a Financial Director

for four years he could now really join. Some people doubted if Meurs should become the CFO. Meurs never made it a secret that he did not like control-oriented work activities. He also wanted to expand, make deals and play the takeover game, just like Van der Hoeven. This essentially linked the two. For Meurs Van der Hoeven was a good model.

At the top level there were other important staff changes. Van der Hoeven believed that Cor Sterk, after being Senior Vice President of Ahold’s Administration Department for 15 years, was ready for a new challenge. The Executive Board suggested that Cor Sterk would lead a new shared service division for its subsidiary Albert

helst was proposed by Van der Hoeven himself; he thought that Verhelst had the proper profile for this job. Verhelst was a good acquaintance of Van der Hoeven.

Verhelst’s predecessor Cor Sterk used to maintain a strong relationship to the external auditor Deloitte & Touch, who monitored Ahold’s Adminstration Department. The new Vice President Bert Verhelst paid less attention to this. His focus shifted to managerial economic analyses, assuming that

The job of Ahold’s external auditor Deloitte & Touche was primarily restricted to collectinprocessing the work that had been performed by Ahold’s Internal Audit Department. The real field

6

The Ahold Crisis

wor

47

too much on commercial aspects.

HSBC recommended inve

9 In November 1997 Ahold announced that it would acquire a 50-percent stake in a joint venture

that

0 In 1998, continuing its successful growth strategy in the U.S., Ahold made its largest acquisition t Food – even though it had the same name, this was a different company from n 1981. Giant Food was a supermarket chain with 173 stores and $4.2 billion

in sales, situated on the East Coast of the U.S. –. Ahold paid a price per share of 30 times its EPS, whi

51 e financed with the issuing of new

shares. The Executive Board did not have a single doubt concerning the success of this second offe

2 Chairman of the Supervisory Board Henny de Ruiter had several arguments with CEO Van der

Hoe

53 divorced his wife, after they had

been married for 25 years. Van der Hoeven’s new partner, the 34 year old attractive Annita van der Klo

k, for instance, double-checking internal control procedures and tough questions, was hardly done. The CFO's of Ahold’s operating companies received virtually no cumbersome questions from the external auditors.

Some even questioned if the external auditors could deliver such an important auditor’s report reliably at such a low cost. During that time it had been suggested that, in general, large auditing companies focused

48 Van der Hoeven talked about a ‘spectacular year’ when presenting the 1996 annual report. Most

analysts were optimistic as well, with the exception of HSBC James Capel. stors to sell their Ahold shares. The bank questioned Ahold’s acquisition strategy and contended

that its ambitions were fragile. HSBC also warned against the Ahold’s tendency to present a rosy picture of its EPS figure. HSBC was of the opinion that Ahold should express the risks of its takeovers more explicitly in its costs of capital. Moreover, if goodwill were to be capitalized on the balance sheet and amortized – according to US GAAP – it turned out that Ahold was hardly creating any value for its shareholders.

4 owned the largest supermarket chain in Argentina: Disco. Ahold appointed four of the eight

members in the Supervisory Board for the new joint venture. The other 50 percent of the shares were owned by Velox International, the investment vehicle of the Peirano family, who among other things opperated several banks in South America.

Accelerating (1998) 5

up to that point: GianGiant Food acquired i

ch the CEO describes as an ‘excellent deal’. Van der Hoeven did not think that Ahold paid too much; Ahold’s shares were currently trading at a P/E of 39 times EPS (see exhibit 8).

The market rewarded the announcement with an increased stock price. That was good news at the Ahold headquarters, because this takeover would partly b

ring in such a short time. They felt as if they were part of a money printing machine. CEO Van der Hoeven observed that the company found itself in a self-reinforcing spiral. The share price increased, which enabled the company to acquire better and more expensive companies, which allowed the share price to increase, etc.

5ven about his ever returning promise regarding the 15 percent annual EPS growth objective. The

Chairman thought it risky and simply not possible; growing at this rate would mean that in 40 years the entire world would be in the hands of Ahold. But Van der Hoeven was confident and so far he had kept his promise.

De Ruiter also did not approve of the manner in which Van der Hoeven increasingly showed up in the wrong type of media. Two years earlier Van der Hoeven had

oster, was introducing the CEO into new social circles. She wanted to become a television host, and sought out the world of showbizz. The CEO was frequently to be seen on fashion shows, and photos of the couple appeared in the gossip magazines. This created a growing distance between the CEO and other circles such as the old boys network4.

The old boys network is a term that refers to a network of top executives who sit on each other's boards. This

network was sustained as a result of the system of cooptation (see Exhibit 1). 4

7

The Ahold Crisis

54

of CFO Meurs and company controller Verhelst to keep the internal controls in c

ves be patronized by the Ahold headquarters. Regularly the issue of internal controls was discussed, also in the Audit Committee of the Sup

55

laim ‘de jure’ control, and hence, fully consolidate under US GAAP. CFO Meurs considered this a mere formality because Ahold already claimed ‘de facto’ control.

ntent of the first control letter was undermined by the second comfort letter.

7 Ahold CEO Van der Hoeven signed one of the two side letters drawn up for the Brazilian joint venture. However only the control letter was sent to Deloitte & Touche.

58

he industry.

59

xtent to Ahold’s stock price. Via bonuses and stock options they had the outlook on huge extra incomes, many even on financial independence.

60

62 CFO Michiel Meurs was assigned the task to set things right. The shortcomings identified by the local

.

The Internal Audit Department was critical about the quality of Ahold’s financial controls. Too frequently the poor internal controls were an issue at the weekly meetings of CFO Michiel Meurs. It was the responsibility

heck. However, Verhelst’s Administration Department only had ten employees; not many if they were to address all those new operating companies. Moreover, the question remained as to what extent the different joint ventures would let themsel

ervisory Board, led by the Chairman of the Supervisory Board Henny de Ruiter.

Due to the growing importance of Ahold’s operations in the U.S., Deloitte & Touche became stricter in following the US GAAP rules. Therefore, Deloitte & Touche informed CFO Meurs that the full consolidation of Ahold’s subsidiary Bompreço, as well as some other 50/50 joint ventures, was to be no longer accepted under US GAAP. In the absence of an absolute majority of votes Ahold needed a written confirmation of its joint venture partner to state that Ahold was in control. Only in this way Ahold could c

56 Joã Carlos Paes Mendonça of Bompreço agreed with CFO Meurs that Ahold was in control over the Brazilian company. He did not object to sign a letter – a control letter – which confirmed this. However his lawyer believed it to be important to draw up a second letter – a comfort letter– ensuring that the value of his possession, the other 50 percent, would not be decreased by giving away the control so explicitly. Hence, the co

5

Speeding (1999)

During Van der Hoeven’s six years as CEO Ahold’s turnover tripled, earnings quadrupled, and stock prices increased with an average of 35 percent annually. So it was not surprising that in January Van der Hoeven was voted the ’Executive of the year’ by his colleagues from t

Ahold has been going full throttle over the past two years, and its operating companies had been

pressured to meet strong growth targets. Some would like to slow down or take more time to integrate the new companies, but along with Van der Hoeven’s growing popularity he became more difficult to approach. The CEO seldom saw a complaining employee in his office. A factor that could contribute to this was the fact that managers in the direct surrounding of the Executive Board had tied their financial future to a large e

Over the first quarter of 1999 Ahold showed excellent financial results. The company’s

operating profit increased by more than 30 percent. The majority of this success originated from the U.S., because it could fully consolidate its newly acquired company Giant Food.

61 Meanwhile, the further deterioration of internal controls was raised for discussion in the Audit Committee of the Supervisory Board. The Internal Audit Department observed that the quality of internal controls had worsened again. For the Supervisory Board that was the limit. Chairman Henny de Ruiter expected the Executive Board to solve the problems quickly. In spite of the excellent relation with Van der Hoeven he thought it necessary to take this a step further. His threat: “if the financial control does not improve, no new takeovers may be done until further notice.” However, it remained a threat; no follow up was given.

Internal Audit Department in the January/February reports were translated into action plans bycontrollers. It was agreed to discuss the progress in July and August

8

The Ahold Crisis

63 Over a two-year period, from 1997 to 1999, there was an 80 percent turnover in the Executive Board. Rob Zwartendijk, who was responsible for Ahold USA, was the last member to leave the original team which started under Van der Hoeven in 1993. After Zwartendijk, nobody in the Executive Board was senior to Van der Hoeven, who himself had served on the board for fourteen years. CFO Michiel Meurs was the oldest member after CEO Van der Hoeven, and Meurs had been on the board for two years only. The dynamics were changing, due to the changes of management.

In the new board composition, the CEO had an enormous knowledge advantage compared to the other members of the Executive Board. Moreover, the two Americans, Noddle a

64 nd Tobin, had

different expectations towards a CEO. – Culturally, in the Netherlands the CEO is a primus inter par

Los 65

as Germany, France and the UK. Ahold was not even among the top 10 Eur

t seemed as if Ahold was reaching its limits. Compared to six months previosly the company’s stock price lost 25 percent of its value; this performance was much worse than the Amsterdam Stock Exchange, which increased

ame months.

6 Ahold continued its tendency towards fragmented and large acquisitions and acquired a 50 perc

supermarket industry. US Foodservice was the second largest company after Sysco Corporation; toge

67

eakening of the balance sheet.

68 e analysis at US

Foodservice. They observed the absence of a system for the recording of supplier discounts. The acc

69 uickly expanded through takeovers; consequently they

would need time to coordinate things.

es, Latin for ‘first among equals’. In principle the voice of the CEO is equal to the other members of the Executive Board. In the U.S. this perception is different; the CEO is the boss and is more dominant in his decision making –. Noddle and Tobin were used to a strong CEO and encouraged Van der Hoeven to show more leadership.

ing the Brakes (2000-2001)

The second half of 1999 revealed some setbacks. Ahold continued to make losses on its activities in Asia, and the financial results of Ahold’s fragmented operations in Latin America were disappointing. Furthermore, Ahold had difficulties in establishing a strong foothold in the large European markets such

opean retailers by sales. When the two French retailers Carrefour and Promodès merge in 1999, analysts started to question Ahold’s fragmented European operations. I

considerably during those s 6

ent stake in the Scandinavian supermarket chain ICA. And only a few months later Ahold entered the American foodservice5 market with a major takeover of the company US Foodservice. The American foodservice sector was then a $200 billion industry, less consolidated than the

ther they controlled almost 20 percent of the market. Ahold had no experience in the foodservice industry and the company’s sudden move into this sector was generally not well understood.

The stock market was also not pleased with the price Ahold paid for neither the acquisitions, nor its financing, which consisted of issuing shares and convertible bonds. In order to finance the 50 percent stake in ICA and the takeover of US Foodservice, Ahold offered an issuing of shares of €4.4 billion in May 2000. Credit rating agency S&P is not convinced about this move; they downgrade Ahold’s credit rating from ‘single A’ to ‘single A-minus’ in fear of a further w

At Ahold’s headquarters some people were critical about the takeover as well. Ahold’s Internal

Audit Department, together with Deloitte & Touche, performed a due diligenc

ounts of US Foodservice showed an amount of approximately $200 million for an item called ‘promotional allowance receivable’. These were discounts that US Foodservice had already recorded as a profit, and that were to be received from its suppliers if certain projected volume targets would be met. However, it is not very clear to exactly which revenue flows these discounts applied and which suppliers had to pay this money. Internal auditor Paul Ekelschot detected a risk of fraud.

Associates from US Foodservice answered critical questions by saying “we simply do business in a different way” and the company had q

5 The foodservice market covers the out-of-home food supplies to restaurants, hotels, hospitals, etc.

9

The Ahold Crisis

70 At the same time Ahold’s 1999 annual report was published. The report was full of boasting language. On page three, the most important facts were presented: “Ahold operated 4,000 stores on four continents with sales of €33.6 billion, employed more than 300,000 associates, and served over 30 million loyal customers every week.” The annual report was made to look like a lifestyle magazine, with many large colourful pictures and big numbers printed across the pages.

72

, only the control letter was send to Deloitte & Touche.

3 With the full consolidation of ICA and US Foodservice, Ahold’s turnover jumped to €52 billion, reaching a third place on the world rankings, after Wal-Mart and Carrefour. CEO Van der Hoeven

ld's aim is to be the biggest supermarket group and food ears” This would be achieved, the CEO said, through

"sig

74

tive Board had observed that Superdiplo was a group of stor

75

76

7 ary 1, 2001, the rules for Dutch GAAP would change. The new Dutch GAAP rules requ

78

info

71 In May 2000, Deloitte & Touche requested more clarity about the 50/50 ICA joint venture: ‘does Ahold have ‘de jure’ control?’ Only then could Ahold fully consolidate under US GAAP.

Jan Andrea, member of the Executive Board and responsible of Ahold Europe, ensured that the partners in the ICA-Ahold joint venture signed a side letter – a control letter – stating that Ahold had the decisive voice. However, three days later Jan Andrea and CFO Michiel Meurs received a letter from their Scandinavian partners, in which they consider the control letter invalid. However once more, similar to the Bompreço joint venture

7

was clear about Ahold’s future: “Ahodistributor in the world within 10 y

nificant" organic growth, further acquisitions and joint ventures. The stock market reacts favourably and the stock price increased considerably again, although some experts suggested that an important cause was investors’ massive flight out of the technology stocks.

In August 2000, Ahold announced its tenth takeover of that year. For €1.8 billion the company acquired the U.S. based food distributor PYA Monarch. Despite the Executive Board’s intentions to take some time to absorb the integration of US Foodservice, the board believed that they could forgoe this unique opportunity. Three weeks later there was another big hit: the acquisition of the Spanish chain Superdiplo, a company which the Executive Board had disapproved no less than half a year prior to the acquisition. The Execu

es which was bought together by investors who were hoping to make a quick gain on Spain’s consolidation trend.

In 2000, by means of 13 large and small acquisitions, Ahold added 4000 stores to its existing 4000. The company now operated in 24 countries. In these eight months Ahold spent approximately €6.8 billion on takeovers. Less than half of that was financed by the issuing of new shares, and for the remaining part a considerable increase in debt was arranged. In 2000, the outstanding debt had more than doubled, from €3.6 to almost €8.9 billion.

Over the accounting period 2000, Ahold wrote off €5.1 billion in goodwill against shareholders’

equity according to the Dutch GAAP. By not capitalizing goodwill on the balance sheet there was also no amortization, which meant that net earnings were unaffected. CFO Meurs disregarded the fear of analysts that the solvability6 may decreas to 8 percent, from 19 percent a year ago.

As of Janu7ired that goodwill is capitalized on the balance sheet as an intangible asset and amortized a on

straight line basis over a period no longer than 20 years. With this amendment Dutch GAAP would have been similar to US GAAP. However, the rules for US GAAP also happened to change in 2001. Under the new US GAAP rules goodwill was not amortized, but subject to an annual impairment test, with impairments charged to the income statement.

On January 2, 2001, Ernie Smith, former CFO at Ahold USA, started his new position as CFO of Ahold’s subsidiary ‘US Foodservice’. Ernie Smith was shocked by the poor quality of the

rmation systems he found, and argued for centralising all the different systems. Therefore, he decided to implement a new software package which succeeded at PYA Monarch.

ebt. 6 Solvability is the Dutch version of the debt-to-equity ratio, measured as equity as a percentage of d

10

The Ahold Crisis

79 However, in March, CFO Smith concluded that virtually no data were entered into this new control system, while in the meantime the strange item of ‘promotional allowances receivable’ of $200 million continued to increase up to $500 million. Then again, it was still unclear to which revenue flows these discounts applied, and from which suppliers these discounts were to be received.

CFO Smith asked CEO James Miller to make sure that his people feed the new s80 ystem with information, but it did not happen. Smith realized that he cannot obtain control over the situation and he i

e a big

81

s critical about internal controls. He wondered why CFO Meurs does not make the CFO's of the ope

82

icious and insisted on intervention. Additionally, the subject was raised for discussion in the Audit Committee of the Sup

83

84 hold struck again! For $2.2 billion Ahold acquired the number three in the

U.S. foodservice market: Alliant Exchange. At the same time Ahold paid $500 million to buy the U.S

85 company with very low margins. What was

more, the supermarket chain Bruno’s had been turned down several times by Miller’s predecessor Rob

86

87 der Hoeven was worth his salary: For the seventh time Ahold was awarded the annual Dutch Investor Relations Prize. In the eyes of pro

nformed Corporate CFO Michiel Meurs. Smith told Meurs that he did not succeed in getting insight into the information flows. He warned: “If we do not get a grip on this situation, we hav

problem.” A week after his warnings Smith decided to leave US Foodservice: two weeks after his resignation he put the whole story in a memo and sent it to CFO Meurs.

In 2001, the Senior Vice President of the Internal Audit Department, Paul Ekelschot, took early retirement and appointed Thijs Smit as his successor. Smit followed the course of Ekelschot and wa

rating companies his assistants. The new Senior Vice President of Internal Audits believed that this was necessary in order to get a grip on all those new and often unknown companies. CFO Meurs did not agree. Meurs believed, like CEO Van der Hoeven, in the strength of local management.

CFO Meurs discussed with internal auditor Smit and the rest of his staff how they should react to the doubts of former US Foodservice CFO Ernie Smith, who sent Meurs the memo about the situation at the US Foodservice. They all believed that the situation was susp

ervisory Board. The Audit Committee also pressed for action in the direction of US Foodservice. CFO Meurs and Senior Vice President of the Internal Audit Department Smit decided to travel

to US Foodservice together. Just like his predecessor Ekelschot, Smit concluded that the internal controls at US Foodservice were saddening, and spoke about a high risk of fraud. Together with Ahold’s external auditor Deloitte & Touche it was decided to improve US Foodservice’s confirmation system of suppliers’ discounts.

In September 2001 A

. supermarket chain Bruno's. James Miller, who was the CEO of US Foodservice and simultaneously appointed as a member of the Executive Board, was responsible for the deal. He was very enthusiastic about this opportunity.

Supervisory Board member Bob Tobin had his doubts. The former CEO of Ahold’s subsidiary ‘Stop & Shop’ believed Alliant to be a disorganized

Zwartendijk. Bruno’s has been operating under bankruptcy protection since early 2000 and was situated at a distance of Ahold’s other U.S subsidiaries (see Exhibit 12), which complicated the realization of operational synergies. However Miller received the approval of the Executive Board and that was enough to go through with the deal.

The Chairman of the Supervisory Board Henny de Ruiter could not get his hands on Van der

Hoeven. The enormous growth and the returning promises; De Ruiter thought it was going too fast. Ahold’s stock price seemed to agree with the CEO. On July 3, 2001, the share price was trading at its old record at a price of $37.50.

According to investors, analysts and journalists, Van

fessional investors, individuals, analysts and financial journalists Van der Hoeven was a ‘top executive who makes a positive contribution to the image of his company’.

11

The Ahold Crisis

e Poisonous Mix (2002 - 24 February 2003)

Ahold’s large institutional investors explicitly asked Van der Hoeven to slow down. Since 1995 Ahold had spent almost €19 billion on the acquisition of 74 companies. The major shareholders

Th 88

89

erican Bruno's, caused the company to lose 17 percent of its value on the stock exchange since the beginning of the year.

90

002 Aholobli

91

pro92

ed by the dramatic write-off of the goodwill in Ahold’s Argenti

93

enture owning Disco, the Peirano family, entered

into financial distress.

rrived at the Internal Audit Department, including reports about brib

95

6 On July 30, 2002, the Sarbanes Oxley Act 2002 was signed into law by President George Bush. After the corporate scandals at Enron, Tyco and Worldcom, investors had lost confidence in corporate America. Analysts, investors, and external auditors were getting more cautious after the Enron scandal. If the reputable Andersen could collapse due to a few associates that play along with Enron, it could also happen to Deloitte & Touche.

considered this enough and strongly advised Van der Hoeven to take a time-out and calm down. They were concerned about the outstanding debt of €12.8 billion and the economic downturn, and believed that Ahold should focus on strengthening its existing operations.

The continuing bad news regarding the difficult integration of the moderately performing Alliant, and the disappointing performances of Spanish Superdiplo and Am

About €7 billion in market capitalization had evaporated. Compared to its competitors, Ahold was performing increasingly badly. Stock of Carrefour was trading at 26 times its EPS, compared to Ahold at 14 times.

Shortly after closing the 2001 accounts, Ahold discovered that the Peirano family, Ahold’s Argentinean partner in the joint venture owning Disco, was in poor financial shape. Early April 2

d decided to warn the public. In its 2001 annual report Ahold inserted a passage reporting its gation to buy out the remaining 44 percent stake of the Peirano family, in case they enter in

financial distress. Ahold would need to pay a total of $490 million; a price much too high. During the presentation of the annual report there was another uncertainty. At the back of the

annual report Ahold reconciliated its financial statements with US GAAP. According to US GAAP Ahold’s net earnings over 2001 were only €119.8 million, almost one billion Euros less than its

fit under Dutch GAAP, presented a month ago (see Exhibit 13). It appeared that Ahold gained €137 million on the sale and leaseback of real estate property.

According to US GAAP, such capital gains should be deferred over the years that these revenues were earned, but according to Dutch GAAP such profits were fully recognized at once. However the biggest difference in net earnings was explain

nean subsidiary Disco. Starting 2001, goodwill under US GAAP was not amortized but tested for impairment. The impairment test required Ahold to assess the fair value of its goodwill at the end of every year, and any impairment loss must be written-off immediately. The internal and external auditors concluded that Ahold’s assets were over-estimated by €728 million, of which three quarters came from Disco. Investors were beginning to lose their confidence in the reliability of Ahold’s figures.

During the General Meeting of Shareholders Ahold surprised investors again. For the first time

Van der Hoeven issues a profit warning. The CEO doubted the feasibility of the 15 percent annual growth in EPS. Van der Hoeven stated that the realization of this goal was dependent on the developments in Spain and Argentina, and described the situation in Argentina as ‘most uncertain’.

A few weeks later Ahold’s partner in the joint v94 Moreover, three of the four brothers were arrested for fraud. Ahold was

obliged to buy the Peirano’s shares for a previously agreed-upon-price, much to expensive. The disaster cost Ahold almost $490 million. Now that Ahold owned 100 percent of the shares, and the Peirano's dropped out of the picture, several Argentineans suddenly felt the need be honest. Early August different alarming reports a

ery.

The situation in Argentina caused Ahold to make a net loss of €198 in the second trimester. For the first time in thirty years the company was seeing ‘red figures’.

9

12

The Ahold Crisis

It was late September, 2002, when Thijs Smit, Vice Presiden97 t of Ahold’s Internal Audit

Dep

98 oeven did not take this

side99

00 ded over the second ICA side letter – the comfort letter– to Deloitte & Tou

e news CEO Van der Hoeven exp

102

nagement at Ahold’s headquarters sent the letter to James Miller and his acc

103

con104

ort should be presented on March 5.

d become intolerable. De Ruiter agre

artment, was informed about the second ICA side letter – the comfort letter– in a meeting with CFO Meurs and his colleague Jan Andrea, responsible for Ahold Europe. Auditor Smit was shocked; he immediately concluded that Ahold was not in control over the ICA joint venture and could not fully consolidate its financial statements, and had misled the auditor.

Mid October auditor Smit and Van Tielraden, Ahold’s Director Legal, had a meeting with CEO Van der Hoeven. They confronted the CEO with their decision: if Van der H

letter issue to the Supervisory Board, they would. On Monday October 14, CFO Meurs discussed the ICA side letters with company controller

Bert Verhelst. Verhelst even mentioned the word fraud. Together they went to Van der Hoeven. In that meeting it was immediately decided to inform the Chairman of the Supervisory Board. When De Ruiter was informed about the ICA side letters, he immediately decided that the external auditor must be informed at once.

Michiel Meurs han1che. He added that there was little importance because Ahold was de facto boss and therefore,

according to the Dutch rules, could fully consolidate. But the accountants were not pleased. Here they read a signed contract which entirely undermined the content of the control letter. The auditors strongly advised the Chairman of the Supervisory Board that an independent investigation needed to take place. De Ruiter agreed with this request.

101 On November 19, 2002, Ahold issued a second profit warning. To restore trust, CEO Van der Hoeven announced a three-year restructuring plan in order to generate higher cash flow and reduce Ahold’s debt levels. The plan was aimed at ‘organic growth, cost reduction, and the disposal of non-core investments’ In front of the tv-cameras of the Dutch prime-tim

lained that the members of the Supervisory Board had asked him to remain in his position until his retirement. Chairman De Ruiter explained in a Dutch newspaper that most Supervisory Board members “did not think this clear statement was necessary”, but De Ruiter nonetheless made the statement and remarked: “Cees is doing well. He gets full support of the Supervisory Board, the Executive Board, and the employees … the criticism of analysts, I think it’s nonsense”.

Early January CEO Van der Hoeven, CFO Meurs, and Chairman De Ruiter received an anonymous letter and an anonymous email. The email mentioned the alarming quantities of inventory being purchased by buyers of US Foodservice. It seemed as if US Foodservice was retroactively trying to realize the recorded discounts to be granted only if certain volume targets would be met. Ma

ountants.

Meanwhile, the results of the independent investigation on the ICA side letters were presented. The conclusion was unambiguous: the two ICA letters were contrary to each other. The accountants had been misled. As a result of the two side letters, the control letter and comfort letter,

solidation was neither accepted under US GAAP, nor under Dutch GAAP. Nonetheless, CEO Van der Hoeven made an important decision: Ahold will aim for full

consolidation. Just like CFO Meurs he is convinced that Ahold was the ‘de facto’ boss in Scandinavia. The CEO entered into discussion with the accountants of Deloitte & Touche. After many proposals by Van der Hoeven, the external auditors noticed that Ahold, relative to the other ICA partners, gained the control more explicitly on paper. It appeared that the 2002 figures could be fully consolidated after all. Early February several meetings were planned to discuss this issue. The annual rep

105 Michiel Meurs and Van der Hoeven repeatedly spoke about the position of the CFO. For Van

der Hoeven the outcome was clear: the position of Michiel Meurs haed with the CEO, even though he thought it unfortunate. The Chairman of the Supervisory

Board thought that Meurs was a pleasant and genuine person, who seemed to be acting a little clumsily.

13

The Ahold Crisis

106 In the first week of February 2003, Ahold’s Senior Vice President of the Administration and Con

d by US Foodservice. On this requ

107 hand. Deloitte & Tounch auditor Kesler rece

108 d the back of the Deloitte & Touche, ask their suppliers to lie about the

leve

109 dinavia, the largest Ahold scandal was about to

brea

trol, Bert Verhelst, traveled to the U.S. to meet with Alan Kesler – accountant of US Foodservice’s auditor Deloitte & Touche – and Michael Resnick – financial director of US Foodservice –. Kesler reported that he was satisfied about the new confirmation system. In October and November Deloitte & Touche sent a letter to almost 90 percent of the suppliers, asking them to confirm the level of promotional allowances which had been recorde

est Kesler and Resnick had received a considerable number of confirmations from suppliers over the past weeks.

But just after Verhelst left, the situation grew out of ived two phone calls from suppliers claiming that the confirmation sent by their sales

representative was not correct. Those salespeople did not have authority to sign. More importantly, the suppliers claimed that they did not owe US Foodservice these amounts of discount.

While these phone calls only concerned small numbers of suppliers, the auditor foresaw danger. Did US Foodservice, behin

l of discounts they owe US Foodservice? The auditors started to double check all the suppliers. Suddenly they noticed that the difference between the recorded discounts at US Foodservice and the discounts that suppliers actually owed US Foodservice increased rapidly. After a few days of investigation the external auditor Kesler had already estimated the gap to be at least $50-200 million.

After the problems in Argentina, Spain and Scank loose.

14

The Ahold Crisis

15

Exhibit 1 Takeover Defences and Shareholder Rights Period Description

Founders’ shares 1948-1979 Founders’ shares provide the Heijn family with the right to make binding nominations for all members of the Excutive Board and one member of the Supervisory Board. Furthermore, the shares entitle the family to part of the surplus profit. In 1979 the founders’ shares lost right to make binding nominations for board members.

Structured regime 1971-2001 This legislation requires large Dutch companies to appoint a Supervisory Board, which oversees the activities of the Executive Board on behalf of the shareholders. Under this law, important decision and appointment rights are transferred to the Supervisory board. For instance, it allows the Supervisory Board to elect all new members of the Supervisory and Executive Board, without approval of the shareholders. Although multinationals are exempted from this legislation, Ahold did not abandon the reuntil 2001.

gime

Preferred shares 1989-current The foundation Stichting Ahold Continuïteit (SAC) is granted an option to issue preferred shares up to a value that equals the nominal value of all outstanding common shares. In case of a hostile takeover bid the foundation can exercise the option and temporarily issue preferred shares among friendly parties. This will dilute a possible controlling stake of the hostile bidder.

Depository receipts of preferred financing shares

1996-current These are non-voting depository receipts of shares that gain a fixed dividend. The voting rights are brought on under control of a foundation that is friendly to Ahold’s management (SAPFA). The SAPFA foundation receives disproportionate voting power: 19% of the votes while the economic value is 6% of total equity.

Binding nominations

2001-2004 Ahold adopts the right for the Supervisory Board to make binding nominations for all new members of the Supervisory and Executive Board. These nominations can only be rejected with at a 2/3 majority of votes in the Annual Meeting of Shareholders, representing at least half of the capital.

Source: Data is collected from Ahold’s annual reports, newspapers, and Jong, A. de; Jong, D.V. de; Mertens, G; Roosenboom, P. (2005) Royal Ahold: A failure of Corporate Governance, European Corporate Governance Institute.

Exhibit 2 Ahold’s Executive Name Natio-

nality Star nd Expertise ‘ ‘82 ’85 ‘89 ‘9 ‘98 ‘02 Former E yment/affiliati

Board

t E 62 3 mplo ons

Heijn, Ab Dutch 1962 89 M C Heijn fami 19 Retail C ly Heijn, Gerrit-Jan Dutch 1962 87 † R Heijn famVethaak, Dirk Dutch 1962 80 Fi M N/A Glazenburg, Hilko Dutch 1962 Pro ion M N/A Meer, Hans van Dutch 1967 85 Confederation of Employers (CSW)Coren, Leon Dutch 1980 8Dun, Peter van Dutch 1980 9Ahlqvist, Frits Sweden 1981 9Zwartendijk, Rob Dutch 1981 9Everaert , Pierre U.S. 1985 9 nerHoeven, C. van der Dutch 1985 0 C heMoerk, Edward Norway 1994 9 ep iscuits Andreae, Jan Dutch 1997 0 MMeurs, Michiel Dutch 1997 0 MNoddle, Allan U.S. 1998 0 M GiaTobin, Bob U.S. 1998 0 M toRaad, Theo de Dutch 2001 0 G, er Grize, William U.S. 2001 0 toMiller, James U.S. 2001 04 S

19 19 19 19 19 19 19 19 20 19 20 20 20 20 20 20 20

etail nance duct

M M M

M

iliy

5 Finance 7 Organizatio8 Marketing9 Productio3 Marketing3 Finance 8 Internation4 Retail 3 Finance 2 Retail 1 Retail 4 Retail 4 Retail

Retail

M n M M

n M

al

M M M M M M M M M M C M M C

N/A SHV Mölnlycke

M Mölnlycke Goodyear, Ge

C Royal Dutch S Canada Dry, P

M Albert Heijn M ABN-Amro Management Management S

M SHV, Metro AM Management SM Management U

al Biscuits ll si, Campbells’ B

nt Food Stores p & Shop CSM, Hagemeyp & Shop Food Service

Source: Data is collected from Ahold’s an orts mb Ah Board from 1962 to 2002. The composition of bo mbe

nual repard me

5

and REACH rs is taken at t

database. Note: he end of each y

Table shows the meear.

ers (M) and CEOs (C) of old’s Executive

6

The Ahold Crisis

Exhibit 3 Ahold’s Supervisory Board Name N ty 2 2 5 8 2 ationali Start End Expertise ‘6 ‘8 ’8 ‘87 ‘93 ‘9 ‘0 Former Employment/affiliationsKreiken, J. 1969 1990 Business C Nationale Investeringsbank Dutch Hull, G. va

Source: Data is collected from Ahold’s annual reports and REACH database. Note: Table shows the members (M) and the Chairmans (C) of Ahold’s Supervisory Board from 1987 to 2002. The composition of board members is taken at the end of each year.

n ‘t e M s M parlement M old Executive Board

1 e M M mer dairy cooperation Finance/Politics M M M and minister

A.J. M M M esland Dairy al Dutch Shell

tch KLM rofessor at Harvard Business School

M ment and minister

M s h Shell

van Po em. parliament and minister s M

5 siness M M ic therlands

Ret eting M

en

Dutch 1972 1988 Financ Rempt, N. Dutch 1979 1992 Politic Member of Vethaak, D. Dutch 1981 1987 Finance AhSpaander, A. Dutch 1981 993 Bus./Financ ForNelissen, R.J. Dutch 1981 2001 ABN Amro, DNB, parliament Kranendonk, Dutch 1985 2000 N/A FriChoufoer, J.H. Dutch 1985 1996 Business M C RoySoet, J.F.A. de Dutch N/A 1988 Marketing M M Royal DuMeyer, R.F. U.S. 1988 2000 Academic M M Finance pHeijn, A. Dutch 1990 1997 Retail Ahold Executive Board Koning, J. de Dutch 1991 1994 † Politics M Member of parliaBogomolny, R.J. U.S. 1992 1998 Retail First National Supermarkets Ruiter, H. de Dutch 1994 2003 Busines C C Royal Dutc

fKemenade, J.A. Dutch 1996 2001 litics/Acad M Member oPerry, M. U.K. 1997 2004 Busines M Unilever Vink, L.J.R U.S. 1998 200 Int.Bu M Warner Lambert Fahlin, R. Sweden 2001 2004 Retail ICA Schneider, C.P. U.S. 2001 2005 Academ M US ambassador in the NeTobin, R.G. U.S. 2001 2004 ai/Mark Stop & Shop Boonstra, C. Dutch 2001 2001 Marketing Royal Philips

M Royal Philips Electronics and HeinekVuursteen, K. Dutch 2002 2004 Business

18

Exhibit 4 Ahold’s Major Acquisitions ing 1991-2003

dur

1991

(U.S.) - 100% stake ► Tops Markets / €333 mln

1994

► Red Food Stores (U.S.) – 100% stake / €116 mln

1996

Stop & Shop (U.S.) – 100% stake / €2,307 mln ►

► Bompreço (Brazil) – 50% stake / €216 mln

1998

r % e ► Disco Joint Venture (A gentina) – 50 stak / €340 mln

► Giant Food (U.S.) – 100% stake / €2,436 mln

1999

► ICA (Norway ) – 50% stake / €1,800 mln /Sweden

2000

US Foodservice (U.S.) – 100% stake / €3,776 mln ►

► Bompreço (Brazil) – 50% stake / €240 mln

► Superdiplo (Spain) – 97.64% stake / €1,250 mln

PYA/Monarch (U.S.) – 100% stake / €1,843 mln ► 2001

► Alliant Exchange (U.S) – 100% stake / €2,468 mln

► Bruno’s Supermarkets (U.S.) – 100% stake / €557 mln

2002

► Disco Joint Venture ( entina) – 44%/ €490 mln (the remaining 6% was acquired in 2001) Arg

Source: Data i cquisitions databa

s collectTable show

ed from Ahold’s annhold’s acqui

usiti

al reporons abov

ts, newspapers, ZEPHYe €100

R, SD991 to 2003.

C Mergers & Ase. Note: s A million, from 1

22

Geographical Segmentation of Ahold’s Net Sales and Operating Result Ye

es( n)

l

Exhibit 5

ar Netsal

€ bl

Nether- lands

Europe US Latin America

Asia Operating resu t

n)lands

(€ mln)( n) (€ mln) Americ

(€ml

Nether- Europe€ml

US Latina

(€ mln)

a (€ n)

Asi ml

1 5 - N/A - - 976 1. 100.0% - - - N/A - - 1 6 - N/A N/A - 980 2. 76.6% 0.9% 22.5% - N/A N/A - 1 8 - N/A N/A - 984 4. 55.1% 1.3% 43.6% - 86,1 N/A - 1 7 - N/A N/A - 989 7. 49.6% 0.0% 50.4% - 141,7 N/A - 1 7 - N/A N/A - 990 7. 52.5% 0.0% 47.5% - 163,7 N/A - 1 1 - N/A N/A - 991 9. 47.4% 0.3% 52.3% - 211,5 N/A - 1 8 - 101.5 ) 134.8 - 992 9. 47.5% 1.0% 51.5% - 235.9 (0.4 - 1 45 - 134.6 136.7 - 993 12.3 49.5% 5.0% .4% - 298.4 27.1 - 1 46 - 176.4 154.5 - 994 13.2 48.3% 5.2% .5% - 371.6 40.7 - 1 45 - 198.3 161.5 - 995 13.4 48.4% 6.4% .2% - 415.4 55.6 - 1 52 0.2% 250.4 272.1 - ) 996 16.6 41.0% 6.9% .0% - 588.2 75.1 (9.31 55 1.8% 275.4 508.4 36.5 (3 ) 997 22.9 31.5% 6.3% .2% 5.2% 865.9 81.2 5.61 6. 54 1.6% 1,0 304.6 639.0 62.8 (4 ) 998 26.5 29.1% 6% .8% 8.0% 57.2 97.6 6.91 31 57 10 1.4% 1,45 8 N/A 4 943.8 96.7 (40.8) 999 33.6 N/A .1% .0% .4% 8. 59.02 A 32 57.1% 9. 0.8% 2,320.2 N/A 669.9 1,466.0 204.1 (19.8) 000 51.5 N/ .3% 9%2 N/A 32.7% 59.3% 7. 0.6% 2,760.8 N/A 865.6 1,713.0 200.1 (18.0) 001 66.6 4%2 N/A 21.9% 74.0% 3. 0.7% 606.0 N/A -646.0 1,563.0 -33.0 (278.0) 002 62.7 4% 2 N/A 33.6% 62.3% 3.5% 0.6% 912.0 N/A 194.0 946.0 -166.0 (62.0) 003 63.6

Source: Data is include the Net

collected from Ahold’s annual reports. Note: Table is based on Dutch GAAP. Starting 1999, the figures reported under Europe also herlands. Furthermore, the numbers in 2000 and 2001 represent the figures before Ahold’s restatements.

Exhibit 6 Ahold’s Key Financial Figures Year N

Sal(€ bln)

tal sse bl )

rnings share

)

Debt-to- equity

ratio

Interest coverage

ratio

et es

Toa

(€ts n)

Opc

eratingas(€

h fl m

owln)

NeDu

t etch

arn GA(€

inA

mln

gs P

Net U

earS G

(€

ninAAP m

gs

ln)

Eaper

(€

1976 1. 4 N/A 12.9 A N/A N/A 5 0, N/1980 2. A N/A N/A 1984 4.8 A N/A N/A 1989 7.7 1, 1.70 2.70 1990 7. 1,9 1.67 4.10 1991 9. 2, 2.83 3.00 1992 9.8 2, 343.5 3.00 2.90 1993 12.3 3, 307.9 155.7 2.39 2.49 1994 13 3, 2.30 2.92 1995 13 4, 2.63 3.12 1996 16 6, 522.6 287.0 3.79 3.32 1997 22.9 8, 924.6 423.8 315.0 3.64 3.04 1998 26 4.75 3.18 1999 33 5.17 3.36 2000 51 2,600.7 793.6 6.45 2.80 2 66.6 32,2 2,375.7 1,113.5 119.8 3.59 2.65 2 62 7.47 0.24 2 63 3.31 0.70

6 0,1,

6 3 9

NN

23

/A/A2.8

234988

.5

.3

.3

N/N/0.29 0.34 0.38 0.41 0.42 0000011

1.7.85).04)

7 1

3034

2.8 9.1

1111

0.25.38.

4 2 4

4 9 6

157.7 .2 .4 .6

7 2 7 5

4669

2.23.6

12

85.07.

8 2

178.186.230.

001

.48

.52

.60

.76

.90

.13

.49 3* * *

.5

.6

.5

11,414,325,5

12

,25,69

7.69.8

57

1,1

47.52.15.

2 1 9

3957

7.53.5

001 002 003

.7 24,7

.6 23,4

21

,48,90

6.09.0

-1,2-4639.

.0 0

(4,3(7

2847

.0)

.0)

(0(0

Source: Data is collected from annual reports. Note: Table is based on D ss stated differently. EPS figures ar justed of exceptional items, a zation o odwil arges, amortization of goodwill and i irmen d € 1.34 per share in 2 2002 and 2003 Ahold reports EPS after dividends on preferred financing shares. EPS before dividends is € 0 in both 2002 and 2003.

utches

exc

GAAP unle the eptio

e adf gompa

fol ant is €

r sd

tocimp1.2

k sair5 p

plimeer

ts. nt sha

* Sin re

tarits in 2

tingEP00

2S f1 an

001igu

, Are.

ho EP

ld S

exaft

cluder

imna

002

pactl ch. In

morti

20

The Ahold Crisis

21

Exhibit 7 Ahold’s Stock :Performance

0%

250%

500%

750%

1000%

1250%

1500%

1750%

2000%

9

Fb-91

Feb-9

Feb-95

Fb

Feb-98

2250%

Feb-8

eb-90

Fe Feb-92 3

eb-94

F e F-96

eb-97

Feb-99

b-00

Feb-02

FeFe-01

ebFb-03

Royal Ahold Carrefour

Source: Data is collec m Th atastream : Figure e tot of Ah d

arrefour from February 1989 to December 2003.

Source: Data is collected from Thomson/Datastream. Note: From top to bottom the P/E bands show a ratio of: 40, 32, 24, 16, 7.

ted fro omson/D . Note shows th al returns old anC Exhibit 8 Ahold’s Price Earnings Ratio

24

xhibit 9 Ownership Structure of Ahold

994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

E Shareholder Description 1989 1990 1991 1992 1993 1SHV Family Firm 12.0

%

HAACAAAINFADC

eijn family Family 7.3% 7.3% 7.7% .7% SKO Retail firm 15.0% rgyll Retail firm 4.0% 4.0% .0% 4. 0% 4.0% asino Retail firm 4.0% 4.0% .0% 4. 0% 4.0% BP Pension fund 5.4% 5.4% EGON Insurer 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% % 5.8% chmea Insurer 7.2% 7.2% 7.2% 7.2% 7.2% G Bank/Insurer 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% 6.9%

ortis Bank/Insurer 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% - viva plc Insurer 5.1% 5.1% 5.1% 5.0% - eltaFort1 Bank/Insurer 9,5% apital Research & Mgt 6.9% 7.0% 7,0%

7

4 4

0% 4.0% 4.

6.1

Sore

urce: Data is collected from annual reports and the annual stock market guide De Om ijfers, published by Het Financieele Dagblad. Note: Starting 1997, the percentages fer to both Ahold’s common shares as well as the newly issued preferred financing sh .

DeltaFort is a combined stake of preferred financing shares of Aviva and Fortis. 1

zetcares

Exhibit 10 Year of C try

Foreign Markets

oun Entry mode first entry 1976 S arket

pain Opening superm s

1977 U d States BI-LO %) 1988 Belgium Opening drugstores 1991 Czech Republic e with Pra Ostrava 1992 P gal e with Jer o Martins (49%) 1995 Poland Joint venture with Al (50%) 1996 Brazil Superm ados Bompreço (50%) 1996 C e with Ch enturetech Investment Corp. (50%) 1996 Malaysia, Singapore e with Ku roup (60%) 1997 T nd e with Ce obinson Group (49%) 1997 Indo esia PT Pu erasi Pioneerindo (70%) 1998 A ina, Chile, Equado

P uay, Peru Joint venture with Ve etail Holdings (50%)

1999 El Salvador, Guatemala, Joint venture with La ua (50%) H uras 1999 E ia, Latvia, L

Norway, Sweden Joint venture with Ca and ICA Förbundet (50%)

2001 Denmark Joint venture with Da upermarked (50%) 2001 S k Republic Opening supermarket2002 Co Nicar Joint venture with CS national Holding (33%)

nite Acquisition of (100

menónimlkauf

ercina Vok Gntral Rtra Slox R

Frag

nica

nsk Ss U Inter

JJoinoin

t vet ve

nturnturortu

AJ

cqoin

uisit ve

tion of nturhina

JJAcqu

oinoin

t vet veisitio

nturntur

n of haila

nrgentarag

r,

ondston ithuania,

lovasta Rica, agua

Source: Data i lected from annual reports and newspapers, and Jong, A. de; Jong, D.V. de; Mertens, G; Roosenboom, P. (2005) Royal Ahold: A failure of Corporate Govern n Corporate Governance Institute.

s colance, Europea

23

The Ahold Crisis

Exhibit 11 Activity Chart

Supervisory Board

Audit

Source:

Committee

Group t SSuppor taff

U.S. Foodservice

Corporate Executive Board

Retail Operations

Data ua d the l Aud

t 12 l Distributio

is collected from Ahold’s annit Department are

l report. Note: Ahold’s Administration Department anInterna

part of the Group Support Staff.

Exhibi Geographica n of US Operations

Source: Graph is taken from Ahold’s annual report 2001.

24

The Ahold Crisis

Exhibit 13 Reconciliation of Dutch and US GAAP net earnings

ts US GAAP

Dutch GAAP

Adjust-men

Net earnings

Goodwill Provi-sions

Reorga-nization

Joint ventures

Software Financing Other Net earnings

1993 155.6 (11.3) 13.3 157.7 1994 185.8 (20.1) 12.3 178.0 1995 207.1 (34.1) 12.9 186.0 1996 286.9 (36.4) 22.7 (36.7) (15.2) (4.3) 13.0 230.1 1997 423.7 (100.6) 43.3 (19.9) (31.6) 315.0 1998 547.1 (96.1) (54.5) (7.4) 8.3 397.5 1999 752.1 (147.4) (28.6) (19.2) 10.1 6.5 573.5 2000 1,115.9 (300.3) (21.4) (1.1) (5.4) 5.8 793.6 920.0 (289.0) (1.0) (57.0) (128.0) (64.0) 61.0 442.0 2 9.8 001 1,113.5 (728.2) (57.6) 33.2 (5.4) (270.0) 34.2 11 (30.0) (311.0) 106.0 (254.0) 750.0 (214.0) 33.0 (588.0) 2 2 (1,208.0) (3,225.0) (26.0) 119.0 117.0 (97.0) (8.0) (4,328.0) 002 3 (1.0) (398.0) 14.0 (122.0) (133.0) (107.0) (747.0) 00

Note: Bold text represents the restatements in 2000 and 2001, due to the fraud and errors discovered in 2003. of th re, due to a reclassification from goodwill join tware’ concern differences between Dutch

AAP and US GAAP, such as: provisions allowances and reserves adjustments, reorganization cost justments and software cost adjustments. ‘Financing’ concerns differences between Dutch GAAP and US AAP, such as: sale and leaseback, derivatives, and options transactions.

g, A. de; Jong, D.V. de; Mertens, G; nce, European Corporate Governance

€505 million e €588 million is linked to the Disco joint ventupairment to t ventures. ‘Provisions’, ‘Reorganization’ and ‘Sofim

GadG

Source: Data is collected from 20-F forms filed with SEC, and JonRoosenboom, P. (2005) Royal Ahold: A failure of Corporate GovernaInstitute.

25