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IiItlEI

Harvard Business School

9-289-049
Rev. August 5.1994

Avon Products, Inc.
On June 1, 1988, Hicks B. Waldron, chairman and chief executive officer of Avon Products, Inc., was reviewing a package of proposals that he and his financial advisors were to present to the Avon board of directors for final approval the following day. These proposals included (1) a public announcement that Avon would explore plans to divest two of its businesses, probably at a considerable book loss; (2) a reduction of the dividend on Avon's common stock; and (3) an exchange offer under which Avon would issue an unusual preferred stock in exchange for up to 25% of its common shares.

Background
Avon Products, Inc., founded in 1886, was one
Mediplex and Retirement Inns both managed retirement living centers of various types. Consistent with this increasing focus on the provision of health care, Avon sold Mallinckrodt in 1986 for $675 million. Although Mediplex and Retirement Inns served patients who paid for care themselves or through private insurers, Foster Medical's revenues came primarily from Medicare, the largest public health insurance program in the United States. A change in Medicare in 1986 effectively cut Foster Medical 's charges for Medicare patients by 18%. Foster Medical was not able to respond successfully to this change, and in 1987, Avon's management recommended to the board that it review Avon's commitment to the health care industry. The board concluded that Foster Medical, Mediplex, and Retirement Inns could no longer grow at an attractive rate and still show acceptable profits. In addition, by 1987 the performance of the Beauty Group had begun to improve markedly. The board decided that the Beauty Group's strength permitted Avon to shed the Health Care Group companies. It started by selling Foster Medical Supply, a distribution company, in November 1987. Early in 1988, Avon also began the process of selling the entire Foster Medical Corporation. Avon anticipated an after-tax loss of $125 million on the sale. Also in 1987, Avon acquired Giorgio , Inc. for $165 million in cash and Parfums Stern, Inc. for $160 million. These acquisitions not only added prestige fragrances, sold