Much about Royal Ahold’s fall from grace remains a mystery.

So far, U.S. and Dutch investigators have yet to determine what led Ahold management to overestimate the amount of supplier discounts that would be received by its U.S. food distribution subsidiary, U.S. Foodservices. Ahold’s management claims the accounting treatment is the main reason the parent company had to slash its reported profits for 2000 and 2001 by $500 million, or about 50 percent.

It’s also unclear why Ahold must partially deconsolidate results for its three retailing affiliates in Europe and Latin America — a move that will apparently reduce the retailer’s sales by an estimated 7 percent (according to Dutch GAAP).

What is clear, however, is that the company’s recent acquisition spree cost CFO Michael Meurs and CEO Cees van der Hoeven their jobs. It’s a comeuppance of operatic proportions, given that just two years ago Meurs was crowing to CFO about the very deals that have nearly capsized the company.

“We only buy good companies,” Meurs asserted in “Royal Ambition,” an interview with CFO that we published in April 2001. “A shareholder never has to be worried about being diluted in the case of an Ahold acquisition.”

And Ahold was doing plenty of acquiring. Beginning in 1995, the Dutch company went on a wild buying spree, spending some $19 billion on purchases over a six-year period. The acquisitions helped turned Royal Ahold into the world’s third-largest food retailer, behind Wal-Mart and Carrefour, the French grocer.

In the 2001 interview (and at a conference sponsored last winter by CFO Europe), Meurs emphasized the careful and thorough discipline that Ahold’s management exercised when evaluating and integrating business partners. “Ahold knows precisely both who and what it wants to acquire,” Meurs boasted at the conference. “Ahold is both explicit and clear on its expectations of its targets.”

He also said the company continually discussed its expectations with a target company’s management. As he put it, Ahold made a practice of “continuous top-level involvement.”

If so, what went wrong at U.S. Foodservices? At the very least, the accounting scandal seems to belie Meurs claims about Royal Ahold’s “top-level involvement.” Indeed, Ahold seems to have failed to secure enough control to operate U.S. Foodservices according to U.S. or Dutch accounting standards. (Management at Ahold did not respond to a request for an interview with CFO).

What’s more, Ahold appears to have paid lip service to the virtues of transparency and disclosure. “We have an obligation to be predictable to both the equity markets and the bond markets,” Meurs told CFO in early 2001. “And what we do is be as transparent and predictable as possible.”

In truth, the recent revelations about U.S. Foodservice and Ahold’s affiliates are by no means the first time that insufficient transparency and predictability have dismayed Ahold’s investors.

When the company first reported its results for 2001 (in April 2002), differences in accounting treatment led to a 90 percent disparity in earnings under Dutch and U.S. GAAP. The company’s explanation for that divergence, however, was buried in a footnote to its 20-F SEC filing (the equivalent of a 10-K for a foreign company listing its shares on the New York Stock Exchange).

The company’s share price fell some 10 percent on the news, and another 30 percent over the next three months as investors slowly grasped the full ramifications of the wildly differing set of results.

Granted, the company did not violate any rules in making the disclosure in this fashion. And Ahold claimed — with some justification — that the disparity was no reflection on the company’s fundamental operating performance.

Still, the company’s management could have expected that investors would not be thrilled by the news that gains on sale-leasebacks of real estate accounted for 12 percent of its profit last year (under Dutch GAAP), but that none of that would count under U.S. standards. Likewise, gains on derivatives transactions produced another 12 percent of Ahold’s bottom line in the Netherlands — but again did not count as earnings in the United States, where U.S. GAAP deemed the transactions to be ineffective hedges.

What should have been even more worrisome to shareholders: the U.S. GAAP treatment for goodwill stripped away 728 million euros from the company’s books, or about 65 percent of 2001 earnings. But many investors believed Ahold rarely overpaid for acquisitions, and Meurs did nothing to dispel that impression in our 2001 interview. “We have a very rigorous way of looking at valuation of companies,” he said, adding that “we have been very, very consistent in using our parameters.”

Moreover, Meurs insisted that Ahold’s management knew the value of good reporting data. In the 2001 interview, Meurs told CFO that “we’re absolutely convinced that adequate, reliable, predictable information is the best way to convince people to invest in your company.” But it now appears that the company itself didn’t have such reliable data. In the press release issued last week, Ahold management explained that the retailer would have to change its accounting treatment for the affiliates because of information that had not previously been made available to the company’s auditors, Deloitte Touche Tohmatsu.

That assertion surprises some observers. Simon Raggett, an analyst for Williams de Broe in London, remarked, “How is it that new information has suddenly emerged” when the deals in question were struck years ago?

Raggett and other analysts can only guess that Ahold did not win sufficient voting rights when acquiring large equity stakes in the three companies (50 percent in the cases of Disco and ICA, 49 percent in that of Jeronimo) to assert true control. But that assumption only raises more questions about Ahold’s once-vaunted ability to make and manage acquisitions. And given Ahold’s perceived lack of credibility, the absence of a better explanation, says Raggett, is “pretty troubling.”

Troubling indeed. Royal Ahold took on heavy debt to finance the growth of U.S. Foodservice and now must convince bankers and bond investors that its operations are worth keeping alive. Raggett, for one, believes the company can do so on the strength of its retail operations in the United States and the Netherlands. He thinks the assets will have to be sold for lenders to realize any value from them, however.

In our April 2001 article, some observers suggested that Ahold would have to keep acquiring companies lest it be acquired. Now it appears that the Dutch grocer is ripe for the picking.

The price would be right, that’s for sure. Since last week’s stunning announcement, Royal Ahold’s market capitalization has shrunk by about 66 percent.

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