Early years
The Monterrey Group empire derived from the founding in Monterrey of Cerveceria Cuauhtemoc, a brewery, in 1890 by Jose Calderon Penilla, Isaac Garza Garza, and two others. In 1936 the family holdings, already vast, were divided into two separate industrial groups. One of these, Valores Industriales S.A. (Visa), established Hojalata y Laminas S.A. (Hylsa) to make steel sheet for the bottle caps of its beverages during World War II, when the United States cut steel supplies to Mexico to meet its own needs. Hylsa became the largest privately run steel mill in Mexico, a fully integrated complex with activities ranging from mining and processing iron ore to finished products. In 1957 it patented HyL, a system of direct reduction known as fire sponging.[1]
One of the two heads Eugenio Garza Sada, of the Monterrey Group, was murdered in 1973 in what was described as an abortive kidnapping by left-wing terrorists, but before this happened, he and his brother Roberto Garza Sada had divided the company into two parts. Bernardo Garza Sada, Roberto's son, became chairman of Grupo Industrial Alfa, S.A., which inherited Hylsa and many other industrial enterprises, including Empaques de Carton Titan, a packaging company founded in 1926; Nylon de Mexico (synthetic fibers), founded in 1952; and Polioles (chemicals), founded in 1962. "There is no falling out", one source explained to The New York Times. "But there was a real problem as to who would be next 'supreme,' so they juggled the shares within the family and divided the group."[1]
Under Bernardo Garza Sada's leadership Alfa diversified from its base into petrochemicals, synthetic fibers, capital machinery, farm equipment, television sets, and tourism. It also took a quarter share in Grupo Televisa, which virtually monopolized Mexican television broadcasting. Its assets grew from $315 million to $1.5 billion between 1974 and 1978, its sales from $194 million to $836 million, and its income from $21 million to $83 million. In 1978 Alfa was the only Mexican company in the Fortune 500 list of the biggest companies outside the United States, except for state-owned Petroleos de Mexico (Pemex). Himself a graduate of the Massachusetts Institute of Technology, Garza Sada staffed top management with graduates of MIT, Harvard, and the University of Pennsylvania's Wharton School of Business. One observer said they "always picked the kid with the Harvard MBA over the guy who really knew the business. The Alfa man had to look good on paper."[1]
Although Alfa formed joint ventures with Hercules and American Petrofina to produce polyester, Du Pont to produce other synthetic fibers, Ford to turn out aluminum cylinder heads, and Hitachi to make electric motors, it insisted on control. "We manage these ventures, always", Garza Sada told Forbes in 1979. "We demand that!" Alfa received $2.4 billion in loans from more than 130 foreign creditors and was planning to invest $3.5 billion by the end of 1984, almost three-fifths of it in money to be borrowed, mostly from sources outside Mexico. It was not only the leading private firm in Mexico but in all of Latin America. By 1980 it had 157 subsidiaries in 39 branches of the economy.
In retrospect, following Alfa's near-bankruptcy in 1982, Alfa's success bred arrogance. Many of the lower-management people had no practical experience, while the experienced upper management took charge of firms about which they knew very little. The company unwisely abandoned its prudent traditional policy of only integrating firms that had similar or complementary products. One observer said that Alfa "bought businesses like someone would buy candies for their children." A foreign bank representative recalled, "They were on the same kind of role that the Mexican government was on then. Oil prices would know no limit. Grupo Alfa profits would know no limit."[1]
Restructuring in the 1980s
As an era of high prices for Mexico's oil exports suddenly came to an end, in late 1981 Alfa dropped its projection of earnings for the year from $80 million to $2 million. By the end of the year it was predicting a $60 million loss and it finally reported an actual loss of $120 million. Before the year was out the government had extended Alfa an emergency aid package of 12 billion pesos ($480 million). In 1982 the Mexican economy hit the rocks. Largely because of the collapse of the peso and heavy interest obligations, Alfa lost $233 million and suspended principal as well as interest payments. In July 1982 it presented a restructuring plan that called for it to sell one-fourth of its assets over a five-year period. The corporate staff was slashed from 4,000 to 1,000, and later to 400. Manufacturing ventures in television sets, bicycles, and tractors were sold.[1]
Eventually, in 1986, Alfa paid off about five dozen foreign banks in stock. Under a complex arrangement, the creditor banks forgave $920 million in Alfa's debt in return for 45 percent of its stock. A 15-member board was named to govern the company, of which nine would be named jointly by the foreign banks and the Garza Sada family. A five-year voting trust for the stock was formed under which 16 percent of the Garza Sada family stock would be held with the 45 percent of the bank stock. The creditors also were paid $25 million by Alfa and $200 million in Mexican government debt.[1]
1990s
The early 1990s were not as good a period for Alfa, as world demand for petrochemicals and steel slowed. In 1993 the company had revenues of 8.56 billion pesos ($2.5 billion), but operating income fell to 444 million pesos ($130 million). That year it sold its 51 percent stake in one of the Monterrey Group's oldest holdings, the paper and packaging subsidiary Empaques de Carton Titan.[1]
When Dionisio Garza Medina, a nephew of Bernardo Garza Sada, became chairman in 1994, he fired half of Alfa's middle managers and focused on restoring higher profitability to the company's three main business sectors: steel, petrochemicals, and food. Hylsa (now Hylsamex) and Sigma Alimentos, the food subsidiary, received their own separate stock listings to reduce their dependence on the parent company. "If you look at the profile of our strategy", Garza Medina told a The Wall Street Journal reporter, "we are going from a commodity company into more value-added products", with higher profit margins. He also said Alfa would enter retailing by opening 25 home-improvement stores over the next five years.[1]
The collapse of the peso
