Heartland Transformation

Out in the heartland where Archer Daniels Midland is headquartered, the farm economy has been recovering, and so has the company. And when Chief Executive G. Allen Andreas flies to New York City, he reaps another kind of harvest: kudos from Wall Street about the company’s recent strong numbers. ADM reported a 56-percent surge in operating profit for the second half of 2003, as analysts scrambled to raise their estimates. And that followed a climb in sales for the prior fiscal year to $30.7 billion, from just $22.6 billion the year before.

“We’ve made a radical change in the last six or seven years,” says Andreas, emitting a confident glow as he sits in ADM’s 40th-floor suite at the Waldorf Towers, in between meetings on the Street. He took over as CEO in 1997 in a traumatic transition after a price-fixing scandal forced his uncle, Dwayne Andreas, from the post and landed a cousin, Michael Andreas, in prison for three years. “We needed more open leadership. We have become a major global organization with an asset base vastly diversified across the product chain. And almost everywhere in the world we have a presence now.”

Headquartered in Decatur, Ill., ADM is the world’s largest processor of soybeans, corn, wheat and cocoa. Everything it does is aimed at squeezing, crushing and, if necessary, conjuring the last drop of value out of raw commodities and shipping them to food processors as flour, meal, oil, syrup, starch, livestock feed and fuel. While ADM has roots in rural America, its 6,000 employees are dispersed throughout the world, running 270 processing facilities, 500 grain elevators, 2,380 barges, 85 towboats, 650 trucks and 17,000 rail cars.

After a slow start because of the mess made by his uncle and cousin, his own inexperience and the “Asian flu” recession, the 59-year-old Andreas has turned ADM into a dexterous, globally sourced player in a highly competitive business. He has overhauled practically everything about the company, including the globe-girdling deployment of its physical assets, its information-technology system, his corps of senior executives and even ADM’s board. “He’s made a tremendous difference in how this company is run,” says Leonard Teitelbaum, a food-industry analyst for Merrill Lynch who has followed the company for about 30 years.

Of course, Andreas benefits from the great tailwind now being generated by a world economy that finally is improving across the board and from the long-term trend toward consumption of more proteins and fats in developing countries. But many challenges remain. Andreas still has to hope that expected bountiful crops in coming months ease the prices of soybeans and corn, helping the CEO to boost margins as handsomely as he has the top line. The company hasn’t performed nearly as well in expanding sales of value-added ingredients-such as Enova, a cholesterol-fighting cooking oil developed by a Japanese partner-as Andreas had forecasted even a year ago. “People have a great bias toward conventionality in their food supply,” he says. “We’re trying to stay on the cutting edge. But in the final analysis, we have to produce what the customer wants.”

Moreover, the company’s struggle to regain credibility with the financial community isn’t over. Moody’s changed to negative its outlook for ADM’s long-term bonds in May, citing among other factors a rising debt load. The stock price has remained mired between $10 and $16 a share for three years, compared with a split-adjusted high of nearly $25 just as Andreas was taking over. “They still score relatively low among people who run money,” says John McMillin, Prudential Securities’ long-time food analyst.

Perhaps most burdensome, Allen Andreas still must spend considerable energy trying to distance himself from the mixed family legacy at ADM. The Andreas clan began supplanting the founding Archer and Daniels families in the ’60s and still own a few percent of the century-old company. While chief competitors Cargill and Bunge Ltd. established a broad global network of suppliers as well as customers during the last half of the 20th century, the charismatic Dwayne Andreas built ADM as “supermarket to the world” almost entirely on the crops of American farmers. The elder Andreas was an advisor to several U.S. presidents and could count on his Washington connections to prop up prices for key ADM products domestically, including high-fructose corn syrup and ethanol, a gasoline alternative made from corn. Dwayne Andreas also secured ADM a key position in international sales, symbolized by a mid-1980s meeting in which he got Soviet Premier Mikhail Gorbachev to taste-test a soy burger.

Dwayne Andreas was an archetypal top-down CEO, avatar of a highly closeted corporate culture whose insularity frustrated professional investors, among others, for decades. The elder Andreas preferred to issue “only one-sentence press releases where ADM wouldn’t even reveal pretax earnings,” recalls Bill Leach, food-industry analyst for Bank of America Securities. And he packed ADM’s 14-member board with family members and cronies who could help him navigate the political terrain that was so crucial to his modus operandi.

But all the wheeling and dealing blew up in Dwayne Andreas’s face in 1996 when the Justice Department nailed ADM for its role in a global conspiracy to fix the price of lysine, a widely used additive in animal feed. The company had to pay a $100-million fine, and Michael Andreas, then the vice chairman, and two other top ADM executives were jailed. (A civil suit still looms.) The scandal scorched ADM’s reputation and stunted its growth for a while. The additional burden of the late-’90s depression in crucial Asian markets held ADM’s sales to $18.5 billion in 1999 compared with $19.8 billion in 1998, extending revenue stagnation that began in 1994.

Waiting in the wings was Allen Andreas. The son of an Iowa small-town banker, the 1969 Valparaiso Law School graduate joined Uncle Dwayne in 1973 after a stint with the U.S. Treasury Department. He did tours of duty throughout the company, finally becoming CFO in Europe, where he gained notice for building a critical mass for ADM by shrewdly acquiring assets amid the post-Cold War turmoil. After heading back to Decatur in 1994 as counsel to the board’s executive committee-just as the company was dealing with the full press of the government’s price-fixing allegations-Allen Andreas emerged as a strong voice for internal reform.

When his uncle and cousin were toppled, Allen Andreas became the heir apparent because he was the only candidate who had one foot planted in ADM’s heritage and the other striding toward a different future. Sure, he was an Andreas, but the deliberate, mild-mannered Allen was not a simple extension of his uncle. He relied on integrity as well as intellect, on collaboration as well as his Rolodex. “He hadn’t run a feed mill or a corn plant,” says Glenn Webb, an ADM director and the retired chairman of Growmark Corp., a Bloomington, Ill.-based cooperative. “But his understanding of the financial picture and of global opportunities in our major businesses, such as joint ventures, were compelling arguments.”

Allen Andreas quietly became president and CEO in 1997, and in 1999 he consolidated his power and became chairman. Yet the transition lasted longer than it should have and stymied the new chief. “You’d go to visit the company even a few years ago and Dwayne would still be hanging around,” McMillin recalls. Dwayne, who now is 85 years old and owns about 4 percent of the company, finally left the board in the fall of 2001 and was replaced by his daughter Sandra Andreas McMurtrie. And when Michael Andreas emerged from a Minnesota prison in the spring of 2002, ADM didn’t invite him back. “There’s a pretty strong measure of steel in Allen,” says Brian Mulroney, the former Canadian prime minister and an ADM board member. “He’s not going to be pushed around by anybody.”

Free to reshape ADM to his wishes, Andreas has been bold and deft. The collapse of the Asian economies had occurred just as ADM was opening several new grain-processing plants in North America to handle an expected flood of orders from Asia. At the same time, ADM’s customers-all of the world’s largest food-processing conglomerates including Unilever, Kraft, Nestle, Procter & Gamble and Coca-Cola-were concentrating their own buying strength through mergers and acquisitions. ADM’s margins screamed for relief. So Andreas shut down the construction cranes in the United States and began to shift production and transportation to China and South America, where both markets and harvests were growing quickly.

The company invested $1.25 billion in fiscal 2003 into property, plant and equipment, beginning a reversal of the belt-tightening that Andreas had to institute early in his tenure. Improving cash flow also has allowed Andreas to be opportunistic, such as in its bargain-basement purchase of two major, new corn-processing facilities in the United States. Built by farmer-owned co-operatives in the mid-’90s in anticipation of a huge new corn-syrup market among Mexican soft-drink manufacturers after passage of Nafta, the plants had been generating losses because Mexico instead imposed an illegal tariff and later enacted a 20-percent tax on soft drinks to protect its sugar producers.

For Andreas, a significant road test of his more balanced portfolio of facilities has been the exploding popularity of low-carbohydrate, high-protein diets in the United States and, increasingly, across the world. The phenomenon has slashed demand for flour, and Andreas has closed a number of mills recently. At the same time, the new regimens are prompting consumers to renew historical growth in demand for poultry, pork and beef, raising demand for ADM’s livestock feed. “Small changes that we can make internally have a dramatic impact in how we can respond to this,” Andreas says. “That, and our strong balance sheet, are the strengths of ADM now.”

Determined to make ADM more transparent and to strengthen its understanding of other cultures and foreign regulatory bodies, Andreas also has turned the company’s previously cloistered culture inside out. As CEO, he has promoted or recruited 80 percent of the people who now are heading ADM’s business units. Many have come from within, including Paul Mulhollem, president and chief operating officer, who helped Allen Andreas build the company’s presence in Europe. “Now we’re giving people significant overseas assignments to give them that international experience, and they can come back to the U.S. with that and help us manage the business from here,” says Mulhollem, who spent 15 years with Cargill before jumping to ADM.

Andreas also dealt determinedly with the scandal by instituting a companywide ethics policy; nowadays, ADM is actually getting awards for corporate governance. More lately, Andreas has been using investors’ new fixation on ethics as a platform for streamlining the board. Paring down the board from 14 to nine directors over the last few years, Andreas has eased out some family members and old, politically minded associates of his uncle, such as Robert Strauss, former chairman of the Democratic National Committee, and Andrew Young, the Carter administration cabinet member and former mayor of Atlanta. In their place, he’s appointed a new breed that includes Patrick Moore, CEO of Smurfit-Stone Container Corp., and Kelvin Westbrook, CEO of Millennium Digital Media. “We have more people now with global, hands-on operating experience,” he says.

To be sure, Andreas has demonstrated that he’s willing to use arrows from the old quiver if necessary: ADM made nearly a million dollars in campaign contributions during the last election cycle, to both Democrats and Republicans. Not surprisingly, the new federal energy bill included incentives that were expected to triple the domestic market for ethanol within a decade.

But by now, Allen Andreas’s own stamp on Archer Daniels Midland has become indelible. “He has engineered an enormous consolidation and restructuring of the company, and we’re well-positioned now to grow and prosper,” Mulroney says. His biggest remaining challenge, it seems, is to convince Wall Street that ADM’s transformation is for real.