Kohler Co. (A)

Topics: Stock, Stock market, Balance sheet Pages: 20 (5460 words) Published: June 29, 2014
9-205-034
REV: MARCH 31, 2008

BELÉN VILLALONGA
RAPHAEL AMIT

Kohler Co. (A)
Herbert V. Kohler, Jr., Chairman and CEO of Kohler Co., faced a difficult decision at the beginning of April 2000. A trial was scheduled to start in a few days to determine the value of Kohler Co., one of the oldest and largest privately held firms in the U.S, with 17,500 employees and over $2 billion in sales. Well known as a maker of plumbing fixtures, Kohler Co. also had a long history as a manufacturer of small engines and generators. More recently, the company had diversified into furniture and luxury resorts and expanded operations from its Kohler, Wisconsin headquarters into 12 countries.

The upcoming trial was to resolve a dispute between the company and some of its shareholders. The dispute originated in the recapitalization of Kohler Co. two years earlier, in May 1998. The recapitalization required non-family shareholders to sell their shares back to the company. Family shareholders could either sell their shares to the company or exchange them for a special class of shares that could not be sold to outsiders. While the Wisconsin court had upheld the company’s recapitalization plan, a group of shareholders had filed a lawsuit against Kohler Co., charging that the buyout price offered by the company undervalued their shares by a factor of five. Although Kohler considered the share price offered to be fair, he recognized that taking the dispute to trial could be risky. While the statutory valuation standard to be applied in dissenters’ rights cases in Wisconsin in determining the value of the shares held by the dissenters was known to be the “fair value” of such shares, there was legal ambiguity about the precise meaning of “fair value” in this context.

The economic implications for Kohler Co. and the family were considerable. In addition to raising the overall cost of the recapitalization, a share price determined by the court would potentially establish a precedent for two very different purposes. First, the assets of the Kohler Foundation, established in 1940, were almost entirely composed of Kohler Co. stock. The Foundation, by law, annually pledged a minimum of 5% of its assets to charitable causes. If a court-determined share price for Kohler Co. shares was markedly different from the company’s own valuation, then the Foundation’s current plans and its longer-term development could be affected. Second, a courtdetermined share price would likely be considered by the IRS among the factors used to determine the value of Kohler Co. stock owned by the estate of Kohler’s only brother, Frederic, who had died in March 1998.

________________________________________________________________________________________________________________ Professor Belén Villalonga and Professor Raphael Amit of the Wharton school prepared this case with the assistance of Research Associate Kathleen Luchs. HBS 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, 2006, 2008 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

205-034

Kohler Co. (A)

If Kohler wanted to avoid getting the court involved in the valuation of Kohler Co. shares, then he would have to settle with the plaintiffs very quickly. This alternative raised the question of at how high a price he should be willing to settle.

Kohler Co. and the Kohler Family
The origins of Kohler Co. as a manufacturer of...

Cited: in Richard Blodgett, A Sense of Higher Design: The Kohlers of Kohler, Greenwich Publishing Group, Inc., Lyme, CT, 2003,
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