Nearly 20 years ago, fast-track Quaker Oats Co. exec William D. Smithburg was content to borrow his boss's Colorado townhouse for ski trips with the eclectic group of friends he calls the A-Team. These days, the group still skis together, but its trips have become more daring. Instead of riding the chairlifts at Vail, the A-Team helicopters to remote peaks in British Columbia. And while these old buddies are careful not to get too competitive, the gung-ho, 58-year-old Smithburg usually takes the lead. "There's some pride in keeping at the front, and he's out front," says Chicago ad man and A-Team member F. Byron Nahser.
If only Smithburg's business were as responsive as his trusty "fat boy" skis. Early in his 15-year career as chief executive, Smithburg took Quaker on a perfect run with the acquisition of Gato-rade. But in his zeal to repeat that triumph on a grander scale, he bought Snapple Beverage Co., dragging Quaker over a cliff. At $1.7 billion, the check Smithburg signed for Snapple in late 1994 was about $1 billion too much.
Even as other heads have rolled, the board of directors, mindful of Smithburg's past success, has given him chance after chance to dig out. So far, though, he hasn't revived Quaker's moribund stock, and he could be running out of time. A breakup of the company that Smithburg has spent 30 years helping to build looms large. He's not ruling out any options. "I know the many ways a chief executive can build value," he says. "I've never run away from a challenge, and I'm not running away from this one."
Under pressure, Smithburg's mercurial leadership style has been thrown into sharp relief, especially his tendency to run hot and cold in his feelings toward subordinates. Last October, he cast off well-liked President and Chief Operating Officer Philip A. Marineau, the heir apparent he had groomed through 23 years at Quaker. According to Smithburg, "tough chemistry" developed when he began taking over Marineau's operational duties as Snapple's problems mounted. Marineau "was not accomplishing his personal goals, and I was rolling up my sleeves a lot," he explains. For his part, Marineau says he "walked away" from Quaker because there was room at the top for only one executive, and "Bill is pretty firmly implanted as CEO."
As Snapple has continued to tank, Smithburg has changed course more frequently. Earlier this year, he ditched most of his Snapple management team and turned to an outside consultant, Tom Pirko of Bevmark Inc., for key advice. In midsummer, he dropped his plan to make Snapple break even for the year, opting instead for a $40 million giveaway aimed at reviving sales at the cost of operating losses. The restless energy he once lavished on visible public roles, such as fundraising since 1988 for Republican Vice-Presidential nominee Jack Kemp, is now turned inward as he delegates less than ever. But far from keeping a low profile while under siege, he is facing off with critics, including those who believe he should be long gone. "I'm the right person because I know what to do," he insists. "Snapple has to be improved, and I'm ready, willing, and able to do it."
Most painful for the proud Smithburg, perhaps, is the drubbing his image has taken. Relentless media scrutiny of Snapple has overshadowed his carefully cultivated civic leadership roles and eroded memories of his early success transforming Quaker from an overdiversified hodgepodge to a consumer-marketing innovator. After evolving gracefully in his first decade as CEO from flashy boy wonder to seasoned executive, Smithburg has become the goat who gave Wall Street a new phrase for a bad deal--"a Snapple."
TOO COMPLACENT? Like a headache that won't go away, Snapple has come to dominate his life. Online, cyber critics weigh in on investment guide Motley Fool's message boards, blithely forecasting, as one put it, Smithburg's "last gasp before his much-deserved fall." In conference calls, analysts burned by his earlier rosy projections pepper him with barbed questions about the $600 million beverage brand. His peers are talking about it, too. "He's a very good guy, but, my goodness, they paid $1.7 billion for something that at its best was worth $700 or $800 million," sighs John D. Bowlin, president of Kraft Foods International. Recently, when Smithburg arrived at his father's 93rd birthday party, the retired railroad executive wanted an update on--what else? "Even my dad," Smithburg laughs. "He says: `What are you doing with Snapple?"'
Yet Smithburg shows little evidence of wear and tear. His boyish good looks remain intact, and his trademark suspenders are stretched taut over the muscular shoulders he has developed from years of tournament handball. "It's amazing to me how well he's taking these attacks," says Illinois Governor Jim Edgar, a close friend. Critics believe Smithburg has a reason to be upbeat--a supportive board. While Smithburg defends it as "a good board" that closely monitors Quaker, and it has withheld bonuses for him and other top executives because of Snapple's woes, others see problems. The directors' average tenure--15.4 years--has made them far too complacent, contends Anne S. Hansen, deputy director of the Council of Institutional Investors. "If there was a lot of fresh blood on that board, everybody wouldn't have been looking at the company with the same eyes," she says. Not one of Quaker's eight outside directors would comment for this story.
Still, even a faithful board can't save Smithburg from the consequences of Quaker's stock price, which has fallen 10% since just before the acquisition, even as the Standard & Poor's 500-stock index has climbed 41.5%. As investors have lost faith, Snapple has preoccupied the $6 billion company, and morale has suffered. Former executives say something's got to give. "Given the choice between breaking up the company and being canned, he'll break up the company," predicts one veteran. Smithburg, who owns 1.3 million shares, is no stranger to sales, spin-offs, and other shakeups, having divested retail, toy, and pet-food operations during his time as CEO. Will he spin off Snapple to shareholders, perhaps under the wing of booming Gatorade? He won't say. But he may have tipped his hand as to timing: A few weeks ago, he asked Quaker Senior Vice-President and Director Luther C. McKinney, the company's No.2 executive, to postpone a long-anticipated retirement for one year. Insiders predict that any scheme Smithburg hatches will be completed within that period.
Difficult as it may be to salvage a victory for shareholders, Smithburg's background suggests he won't surrender easily. Growing up in a quiet Chicago suburb, Smithburg contracted polio at age seven. He says he remembers how his heart sank when he heard doctors tell his parents he would never walk again. But the virus did no permanent damage, and physical therapy put him back on his feet within weeks. The experience left him a fitness fanatic. "As soon as I started to walk and run again, I said, `I have to stay healthy,"' he recalls, "and it just became part of my life." During his long term as CEO, that passion has shaped Quaker, too. The company's extensive fitness programs include a heavily subsidized health club in its Chicago tower, and it's a rare day when Smithburg misses a turn at the treadmills and exercycles. Quaker's product line, too, increasingly emphasizes low-fat foods for healthy lifestyles.
Smithburg's career got off to a bumpy start when, defying his father, he quit his first job after college on the third day to attend Northwestern University's business school. In 1966, with an MBA and five years of ad agency experience--at Leo Burnett and McCann Erickson--under his belt, he joined Quaker as brand manager for frozen waffles. "I was tired of being a professional recommender," he says. "I wanted to be where the purse strings are." Early on, he impressed his production-minded bosses by pleading for stepped-up marketing expenditures even as commodity costs soared.
Smithburg's finest hour also depended on defying skeptics. After becoming CEO in 1981 and chairman two years later, he went after Stokely-Van Camp Inc., topping Pillsbury Co.'s $62-per-share bid with a $77 offer his own investment banker considered too steep. Wall Street and the press, including BUSINESS WEEK, bashed the deal. But Smithburg had done his homework. Stokely had $123 million in cash from a divestiture made just before the bidding war, and Smithburg soon sold off $70 million in peripheral assets to defray much of the $238 million price. Most important, he recognized the potential in Gatorade, a sport drink meant to replenish lost salts and fluids, then a $90 million brand. "I'd been drinking Gatorade myself, and I knew the product worked," he says. Today, with $1 billion in sales, Gatorade holds 80% of the growing sport-drink market.
If he's so smart, how did he trip up so badly with Snapple? Overconfidence played a part. Success with Gatorade persuaded Smithburg he had a knack for the beverage business. In fact, his lack of experience with Snapple's system of independent distributors led to crucial miscalculations. More surprising for a supposed marketing whiz, he underestimated how Snapple's advertising had run out of steam. When he failed to quickly fix distribution woes and restore marketing, the brand collapsed in its first summer under Quaker. "Things got out of hand before he could get his arms around it," explains Robert Brockway, president of Canada Dry of Delaware Valley, a top Snapple distributor.
Besides misreading the growth potential, Smithburg might have chased Snapple for the wrong reasons. Though he denies it, investors suspect he was aiming to make Quaker, a hotly rumored acquisition candidate for much of the previous decade, less vulnerable to a takeover. Others believe that, just as he eventually sought thrills beyond the slopes of Vail, Smithburg grew bored with Quaker and sought the excitement of a splashy deal. It's no secret that he loves to hang out with basketball star and Gatorade spokesman Michael Jordan, hobnob with Republican politicos, and act as elder statesman on industry issues such as NAFTA. Sure, Snapple was falling apart when he bought it, but it had a sexy aura he found lacking in pet food--the mature but moneymaking unit he divested to help pay for the acquisition. Pet food, he says, "was a dead, flat business with five or six big companies beating their brains out in it." Smithburg was certain that once in his hands, Snapple would would regain its sizzle in no time.
While he's a proven survivor, Smithburg's future is by no means secure, as he admits: "If I don't deliver and succeed and produce, then clearly I don't deserve long term to be in this job." Many shareholders still consider him the best chance Quaker has to pull itself out of its current hole. As money manager and Quaker investor Donald A. Yacktman puts it: "This isn't a case where a guy has gone from a genius to a dummy. Who's better at running the company?" It's a question that should be answered definitively within a year.