7 Lessons to avoid fraudulent companies

The Ahold Fraud and what we can learn from it. Schemes, mismanagement, and deception...

Fraud, mismanagement, and investor deception are things every investor wants to avoid. Unfortunately, this is exactly what happened to investors in Dutch supermarket chain Ahold in the late 1990s. This to the stock price crashing 90% in 2003!

In this article, we’ll explore how to identify signs of fraud and mismanagement to help you avoid similar disasters.

To recover from a 90% drop in share price, you need a 900% increase to break even. Today, 20 years later, Ahold still has not fully recovered from its crash.

How the Ahold Drama unfolded

Ahold began as Albert Heijn, a Dutch supermarket founded and operated by the Heijn family. After several decades, the family sold the majority of their shares and stepped back from leadership.

Lesson 1:

In 1993, Cees van der Hoeven became CEO. He was charismatic, financially savvy, and had experience within the company.

But two important things he lacked: expertise and passion for the grocery business. He also served as CFO for several years while simultaneously acting as CEO. In holding both roles, he maintained complete control, with no one to temper his entrepreneurial drive.

Lesson 2:

Van der Hoeven set an ambitious goal: achieving at least 15% annual growth in earnings per share (EPS). If only investors at the time had known the methods that would later be employed to reach this target…

To reach this target, he turned Ahold into a serial acquirer, leading to numerous share issuances. He promised synergies through acquisitions, focusing heavily on the eastern U.S. with expensive purchases like Giant Foods, Stop & Shop, and U.S. Foodservice.

There are three (!) lessons we can learn from this:

Lesson 3:

Lesson 4:

Lesson 5:

Studies, such as those by Harvard Business Review, show that 70-90% of acquisitions fail to meet their goals due to over-optimism, integration challenges, cultural differences, and poor synergy assessments.

Another major error at Ahold was cronyism within the board of directors and supervisory board. Van der Hoeven surrounded himself with people who didn’t challenge him. According to the book Het drama Ahold by Jeroen Smit, the board lacked sufficient financial expertise and failed to adopt a critical attitude.

Lesson 6:

Through acquisitions, Ahold became the world’s third-largest supermarket chain by 2001, with €67 billion in revenue. However, after the fraud was exposed, the share price plummeted, and many subsidiaries had to be sold. Today, Ahold dropped to the 13th largest chain worldwide.

Van der Hoeven and CFO Meurs also manipulated accounting rules. Joint ventures were consolidated into Ahold’s financials, even when Ahold only owned 49% of the shares. This is allowed under Dutch GAAP, but only if the parent company exercises actual control over the subsidiary. Ultimately, it was revealed that this was not the case and Ahold had misled both its investors and auditors.

The result was that the company appeared more profitable than it truly was. The CFO was sentenced to 240 hours of community service and received a suspended six-year prison term.

Lesson 7:

That’s it for today! A special thanks to Jeroen Smit for writing the book ‘Het drama Ahold’ and shedding light on this case.

We hope that these 7 lessons will prevent you from buying into fraudulent companies.

Have a wonderful day and happy investing.

The Dutch Investors.