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Simplot heir peels away tradition

BOISE — In August, J.R. Simplot, the 95-year-old billionaire who founded the food and fertilizer company that bears his name, buttonholed his son Scott. He wanted to talk about Scott Simplot's plan to cut the company's cattle holdings — reversing his father's decades-long practice of maintaining large feedlots.

The pair became ensnared in a drawn-out argument about strategy. Scott says he kept walking away, muttering, "whatever you say, Dad." Exasperated, the father shot back. "Well, dang it — you're fired."

For J.R. Simplot, the outburst was futile because he no longer owns voting stock in the company and doesn't have any real control over its operations. For his son, it was the latest episode in a long struggle to modernize a storied American company and the legacy created by his own father.

As an eighth-grade dropout, J.R. Simplot left home in the early 1920s to set up his own pig farm. Restless and ambitious, he went on to become one of America's most prominent farmers and ranchers. From the 1950s onward, he supplied McDonald's Corp. with most of its frozen french fries. License plates on his pickup truck proclaimed him to be "MR SPUD."

He plunged into whatever interested him, holding to a belief that the American West was chock-full of opportunities and that go-getters like him could strike it rich. As his holdings grew, he reveled in their sheer size, frequently sweeping over his acreage in a small private plane.

Today his youngest son, 57-year-old Scott, is guiding J.R. Simplot Co. with his own personal style. Gone is the swagger about huge land holdings in the western United States and random investments in offbeat businesses. Instead, with the help of outside management, Simplot is closing long-cherished though inefficient plants, standardizing accounting systems and moving away from selling commodities by the ton. Job cuts are common now, dismaying Idahoans who regarded a job at Simplot as lifetime employment.

Scott Simplot, now the company's chairman and largest stockholder, is a soft-spoken man who collects pebbles — in particular, phosphates from Western riverbeds — and regularly reads the Economist magazine. Armed with a Wharton MBA, he talks about "expected value calculations" and says his approach represents the best hope of shoring up growth prospects after years of uneven results.

"You have to understand that out here, farmers had sons so that the sons could run the farm," Scott Simplot says. "Our farm was a little bigger than average, but the idea still applies."

Within the Simplot family, father and youngest son have been clashing — and making up — for as long as anyone can remember. In Scott's childhood, they quarreled over gin-rummy techniques and eventually stopped playing each other. In the 1970s, they battled over Scott's plan to augment the use of computers at the company. Scott, who won the argument, argued with data; J.R. bet on his hunches.

Both men agree Simplot isn't performing as well as it could. The closely held company doesn't report earnings, but insiders say margins on its potato and cattle businesses have slipped to single-digit percentages after hovering at 10 percent in the late 1990s. Annual sales have inched up to $3.1 billion from $2.7 billion in the past five or six years. Employment, which peaked at 13,000 three years ago, now stands at about 11,500.

The Simplot business began to take off after J.R. bought his first electric potato sorter in 1928. By the start of World War II, he was running the biggest potato-sorting operation in Idaho, filling 5,000 rail cars each season. As his company expanded, he dried onions, mined iron ore, ran a fish farm and sold hamburger patties.

"It was as if my father had this belief: 'Try everything,' " says Scott Simplot. "We went into a lot of things that didn't work." A gold mine in the Dominican Republic was nationalized. Plywood and coconut operations in Colombia were abandoned. A plan to install concrete floors in cattle pens for better cleaning foundered when the uncomfortable cows quit gaining weight.

The Simplots scored big in 1946 when company chemist Ray Dunlap invented a way to make frozen french fries that wouldn't turn soggy. Those became a huge hit with McDonald's and other fast-food chains. In the early 1970s, analysts estimated, 40 percent of Simplot's profits came from supplying McDonald's with fries.

As J.R. Simplot grew older, he started transferring power. In the early 1960s, he began signing over his Class A voting stock to his four children and invited them onto the company board. From 1973 onward, he promoted a series of trusted lieutenants to be president and chief executive officer while he remained chairman.

J.R. Simplot expected his children to eventually take over the company, but the process didn't run smoothly. J.R.'s oldest son, Richard, died in 1993, at age 59. His next son, Donald, dropped out of college, married five times and — according to company biographer Louie Atteberry — "displayed a general insouciance regarding the whole idea of school." A daughter, Gay, took a keen interest in the Simplots' civic activities but didn't aspire to the top job. Through a spokesman, Donald and Gay Simplot declined to be interviewed.

That left the youngest son, Scott, who was good at school and liked to tinker with machines. After Scott graduated from the University of Idaho with a degree in business, his father nudged him to get an MBA, and Scott headed to the University of Pennsylvania's Wharton School.

Immediately after graduating in 1973, Scott was made director of planning and information technology. It didn't take long for father and son to collide. They argued about diversification moves, budgets and computer upgrades. Scott was cool toward a plan championed by his father to buy a meat-packing plant in Nampa, Idaho. The company went ahead but closed the plant a decade later.

At the company, Scott became known as "the antithesis" because he opposed many of his father's ideas. At one point, Scott quit for three years. He stayed in Idaho making investments in real estate and other areas. "Every son has to claim his space," Scott says. "It's never given to you."

In the mid-1980s, Simplot was showing signs of age. Simplot's once-unique french-fry technology was being copied by rivals willing to sell fries more cheaply. Simplot's other big divisions — fertilizer and cattle ranching — were profitable but not growing fast.

Other agribusinesses, such as ConAgra Inc., were publicly traded and used their stock to make acquisitions, something Simplot couldn't do. Gordon Smith, Simplot's CEO in the late 1980s, says he argued for taking the company public so it could take advantage of more opportunities. "If we'd gone public, we could have been bigger than ConAgra," he says.

In a rare moment of unity, father and son opposed the plan, which was put on ice. The notion of being accountable to thousands of non-family shareholders made J.R. Simplot shudder. Aides say the patriarch told them he didn't think the company needed to go public until 2050. He wasn't joking, and the odd timetable effectively put an end to the matter.

With its core business boxed in, Simplot got lucky with an offbeat diversification, a vestige of J.R.'s scattershot approach. In the mid-1980s, the company and J.R. Simplot personally invested several million dollars in a tiny Idaho start-up, Micron Technology Inc., which made memory chips. Commentators joked about the potato company that wanted to make chips of any kind, but as Micron thrived, the value of that stock soared.

Simplot made hundreds of millions of dollars from its stake and still owns 3 percent of Micron. Scott Simplot was the first to hear about Micron and urged his father to make the investment. Mostly on the back of that success, the family's estimated net worth topped $4.7 billion in 2000. It has since slipped to $2.3 billion.

In 1994, at the age of 85, J.R. Simplot resigned from the board, although people still consulted him on major decisions. He remains chairman emeritus and periodically attends meetings. In recent years, he's pared back his contributions. Of the company's 11 directors, five are Simplot family members, who along with their offspring control all the company's Class A voting stock.

Family leadership was handed to a four-person executive committee consisting of siblings Scott, Gay and Don, along with J.E. "Ted" Simplot, J.R.'s grandson, and son of the deceased Richard.

"It took six or seven years for the next generation to figure out its role," says Stephen Beebe, who was Simplot CEO from 1994 to 2002. The Simplot siblings testified — in a 1998 federal tax case relating to Richard's estate — that they quarreled at times in early business meetings, mostly about whether to make certain investments.

In a bid to revive the company, Scott Simplot and two of his siblings interviewed Lawrence Hlobik, 59, for the job of running the fertilizer division. A computer-systems specialist, Hlobik had spent 25 years at various energy and fertilizer companies in the Midwest. They chose him without consulting their father.

As fertilizer chief, Hlobik expanded Simplot's nitrogen operations, long a sidelight to the company's bigger phosphate business. He also yanked the fertilizer unit from Pocatello, Idaho, moving it to Simplot's headquarters town of Boise. That helped lower costs and sped decision making but was also a sign to employees that the old Simplot was disappearing.

Hlobik became CEO in 2002, the first person to hold that position who wasn't a longtime employee. "He knows how to make tough decisions," says Scott. "Sometimes you need someone who isn't embedded in a place to do that."

The new CEO centralized more operations, laid off about 400 workers at one aging potato-processing plant in Idaho and pushed to close a second facility in Hermiston, Ore., that wasn't paying its way. Some of the plants that came under Hlobik's gimlet eye were the same ones started by J.R. in the company's earlier days. The patriarch frequently made his disapproval clear to Scott, but as the younger man laid out the numbers, J.R. gradually came around.

"Administration after administration had struggled with" the problem of how to fix the potato facilities, Scott says. "Eventually we got enough courage to do something." Hlobik acknowledges he has taken heat for closing plants. "There were some nights when I wondered whether it was safe for me to start my car," he says jokingly.

Hlobik redoubled the company's expansion efforts in Asia and Australia. He asked the board in 2003 to approve a $30 million purchase of a controlling interest in John West Foods, an Australian canned-fished company and consumer brand. John West doesn't own trawlers and doesn't run packing plants. It simply puts its labels on suppliers' products and promotes them with upbeat advertising.

"It was very difficult for the family to buy something that didn't have big physical assets," Hlobik says. "But they came to realize that you can make money without owning plants."

The hardest tussle came this summer when Scott Simplot and Hlobik proposed stabilizing Simplot's feedlots at about 120,000 head of cattle — down more than 30 percent from peak levels a few years ago. The company had for decades operated on J.R. Simplot's belief that huge herds bought economies of scale. But when cattle prices plunged two years ago, Simplot's livestock operations posted losses. The company's new leaders decided they couldn't stomach the weak periods that would inevitably come in this cyclical business. They worried about the company's ability to borrow money.

When J.R. Simplot found out about the cutbacks, he was furious. News of his anger — and his attempted firing of his son — traveled quickly throughout Simplot's executive wing. A decade earlier, that might have been seen as an effort by the patriarch to regain control. Now, Simplot insiders retell the story with a wry shrug, knowing J.R. no longer calls the shots.

Soon afterward, as usual, peace returned. J.R. Simplot's health is fading; his truck sits idle because he is too frail to drive. On a recent morning in his downtown Boise apartment, he parried an invitation to critique his children's stewardship of the company. "I just hope they do a better job with it than I did," he said. "If my kids lose it," he continued, before shutting off that train of thought. "They're not in any danger of doing that," he declared.

That morning, Scott Simplot stopped by and helped adjust the older man's cane. They briefly reminisced about the patriarch's earliest ventures in the 1920s, the son prompting the father to recall his memories. A few minutes later, it was lunchtime. Unable to walk more than a few hundred feet, J.R. Simplot got on his three-wheel scooter and headed toward the elevator. Picking up speed in the street below, he raced to Boise's Arid Club to eat and play gin rummy — his way — with friends.

"I sure hope he's all right," Scott Simplot said. "I'd try to stop him, but it's impossible."