Case Study #2: Transactional Crisis Management:The Cataclysm of ”NegReturnCo.”
NegReturnCo is a quality manufacturer of artificial, zero-sneeze-causing black pepper marketed in North America as ”Soft’n’Pepper.”
”Soft’n’Pepper” was originally commercialized from discoveries made at the Sonnenblick-Frazier Institute for Edible Research, a scientific pillar of modern food development research aptly named for its founder, the famous professor and Chairman of NegReturnCo, Dr. Robert Q. Institute. The Institute is responsible for a long line of highly successful food breakthroughs including ”Garlifresh,” (the ”Minty Fresh Garlic Salt”), ”Hotsicles,” (the ”Microwaveable Fruit Treat”), and ”Broc Pop,” (the ”Broccoli Flavored Soda,”). The Institute has carved out a small empire for itself within the food and beverage industry.
NegReturnCo, named for Dr. Institute’s dearly departed grandmother, Roberta E. Turn, is the commercial arm of this empire and holds a license from the Institute permitting it to exploit all commercial interests in Soft’n’Pepper (and the other Institute products) in return for a 3% license on all worldwide sales of Soft’n’Pepper (a tidy sum) that are, in turn, devoted to furthering the Institute’s continuing food research.
Dr. Institute arrived at this structure (a non-profit Institute with a separate commercial marketing and distribution organization) because he intended to devote a portion of all proceeds to food research for all humankind. This, along with the Institute’s charity work in Africa and Asia have earned both Dr. Institute and the Institute itself no small measure of notoriety and respect in the world community. The Institute refuses to comment on the persistent rumors that Dr. Institute might be up for a Nobel Prize.
Four months ago, a graduate student at the University of Western Carolina made a startling discovery. One of the important additives in Soft’n’Pepper seems to have an unusually high correlation with severe dandruff in laboratory mice.
Published in the International Journal of Disappointing Scientific Results, the finding shocked the food industry and immediately caused a serious crisis in NegReturnCo. Within days NegReturnCo is hounded by the media, it’s headquarters is besieged by protestors and calls for congressional hearings grow louder and louder. Within 24 hours of the article’s publication, a website called ”I Hate NegReturnCo dot com” springs up.
In a stroke of bad luck for NegReturnCo, the little known, but soon to be famous, Katherine Clu-Fischer, a reporter for the local newspaper, the ”Biased Observer Post,” catches a Junior Vice President for NegReturnCo off guard with a 3 a.m. phone call. Convinced he is talking to his ex-girlfriend, known for her frequent late night calls, the Vice President admits, ”We’ve all been scratching our heads over this.” The next morning’s headline reads: ”Did NegReturnCo know?: NegReturnCo executive admits widespread scalp itching among senior executives at NegReturnCo.”
Desperate to come to a resolution, the Board of Directors of NegReturnCo calls an emergency meeting. There is some delay as two of the more prominent members have to be recalled from a critical corporate goodwill trip to the Old Course in Scotland. When they finally meet, several options are considered by the Board including immediately closing down all activities related to Soft’n’Pepper, commissioning a study of the study to disprove its results or otherwise call into question the findings of the journal article, hiring a public relations firm, issuing a general denial and stonewalling, a complete recall of Soft’n’Pepper, preemptive bankruptcy to avoid what will doubtless be a series of class actions suits against NegReturnCo, and an all expenses paid vacation in Vegas for all of the members of the Board. (This last suggestion earns only blank stares from the other members).
While the Board is busily considering how to respond to the situation, Ms. Clu-Fischer has been equally busy digging into NegReturnCo’s financials. She discovers that one of NegReturnCo’s directors never earned his high school diploma and is also on the Board of Directors for the public corporation that manufactures ”Flake No More,” a popular anti-dandruff shampoo. She also discovers that the same director sold his NegReturnCo shares the day before the journal article was published and used the proceeds to buy shares in Flake No More’s parent company. The resulting headline, ”Fake Flocks to Flake No More,” breaks all the newspaper’s sales records the next morning.
Meanwhile, while waiting in the Galapagos Air departure lounge. Catalyst’s Chairman, Hans Amell, happened to read Ms. Clu-Fischer’s article in the Biased Observer Post. Intrigued by the company, Mr. Amell quickly called John Oldfield, Catalyst’s Vice President of Business Development and directed him to contact the firm and see if Catalyst could be of help.
Mr. Oldfield contacts members of NegReturnCo’s corporate development office and within 24 hours Mr. Amell, canceling his Darwin tour of the Galapagos islands, is meeting with the Board of Directors for NegReturnCo. Several critical initiatives emerge from the meeting:
1. That Catalyst would be interested either in:
o Acquiring NegReturnCo outright
o Taking a stake in NegReturnCo and dressing the fallen company for a for later sale, or
o Orchestrating an ”orderly wind down” of NegReturnCo’s affairs
2. That immediate, direct and decisive action needs to be taken quickly to at least stabilize the situation at NegReturnCo immediately.
3. That regardless of the structure of Catalyst’s involvement, serious crisis management work needs to be done. In this connection, Catalyst recommends a world-class crisis management firm, with which Catalyst maintains an active partnership, to take over the daunting task of public relations for NegReturnCo.
The Board convenes and after emerging from their conferences, asks Catalyst to present an offer for the acquisition of NegReturnCo as quickly as possible.
Together with the crisis management firm Catalyst immediately begins the dual process of stabilizing the firm and an intense investigative due diligence program. Under the agreement with the Board of NegReturnCo, Catalyst agrees to share all the results of due diligence with NegReturnCo in the event Catalyst decides not to make an acquisition.
The immediate triage of crisis management takes several forms. The initial steps include:
1. A public relations committee with experienced spokespeople is immediately appointed to avoid any more unauthorized or unmanaged communications with the outside world. Disclosures are strictly limited to particular spokespeople within the firm.
2. The many stakeholders in NegReturnCo are identified and independent channels of communication directly from the company are estlablished with them to minimize the dangers of relying on third parties and the media as information intermediaries.
3. A single point of contact is established within NegReturnCo to permit information to flow directly to the senior managment of the company from the lowest level employee to the top.
4. In order to control the spread of erronious information, several representateives are announced within the company to answer any and all questions by employees.
As the situation is stabilized, the due diligence process Catalyst undertakes serves two purposes. First, it allows Catalyst to value the firm. Second, it has the effect of creating a close investigation of the facts surrounding the firm’s woes by a critical (and somewhat skeptical) third party.
In addition to the rigorous scientific due diligence that Catalyst conducts, a three-fold strategy is developed. The first level, focused on the first 30 days, involves a detailed review of NegReturnCo’s financials with a particular focus on preserving as much cash flow internally as is possible for the company. Catalyst leverages its substantial change-agent experience to navigate the company through this period and identify the not-so-obvious sources of value within the firm’s balance sheet and non-financial assets.
Central to Catalyst’s approach to the first, critical 30 days is the philisophy that a fine balance between ”buying time” and ”investing for recovery” must be drawn. Catalyst prefers to avoid the quick and easy path of liquidation and cost cutting wherever possible, instead focusing on the longer-term looking strategy of keeping the firm stabilized in this early period with the needed infrastructure emerge from the crisis intact and strong. Of course, in some situatiions a recovery is simply impossible. In this unfortuante event, Catalyst’s ”liquidation as a last resort” strategy permits the firm to preserve a larger interest for the various stakeholders.
After the first 30 days, Catalyst expects to be able understand if a platform to build on actually exists, and if not, which assets can actually be preserved or divested.
Following this period, Catalyst has identified several key assets that can be built on. Catalyst structures a transaction to acquire NegReturnCo.