Coke and Monster: What was That?

The Coca-Cola Company was compelled to release a short statement yesterday denying that it was “at this time, not in dicussionss” to acquire energy-drink maker Monster Beverage Corp.

Monster shares spiked on a report in the Wall Street Journal that Coke was exploring a deal for the company, only to fall back once Coke issued its statement.

It appears the WSJ wants to claim credit both for breaking the story about a possible deal and for killing it.  Its story is littered with unnamed sources (“persons familiar with the matter”), which are usually either disgruntled investment bankers unhappy about missing a fat payday, or anxious executives who were farther out on the limb than their bosses (or the board) realized.

This episode illustrates that there’s a very thin, almost nonexistent, line between rumor and news, and how quickly a deal can be scuppered if a leak occurs.

The careful wording of Coke’s statement and the updated article in the WSJ, in which it reiterates its earlier reporting, suggests there were serious talks between the companies.  That leaves Coke in the awkward position of needing to respond to shareholder concerns about its acquisition criteria, its strategy for growth and its designs for the energy-drink market, where it has been a laggard.

The next earnings call for Coke could be an interesting one.

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MF Global’s Fatal Mistake

At this hour, executives and MF Global are huddling with bankers and lawyers, trying to come up with a deal to sell the firm.  It must seem like a surreal exercise, since just days earlier the firm held a solid investment-grade credit rating and a market cap of $620 million.  Now, as its clients turn away and its cash evaporates, CEO Jon Corzine is running out of time and options.

Selling a financial firm isn’t an easy process, particularly in an edgy market. Doing it in a couple of days is only for the foolhardy or the desperate.  For MF Global, a few extra days could have made the difference between a somewhat orderly auction and the weekend fire sale they’re now holding. 

In hindsight, it looks like the firm’s early announcement of its earnings on Tuesday was a mistake that cost it precious time.  Rather than reassuring the market, the announcement confirmed the firm’s weakness, threatened a further credit downgrade and amplified anxiety among clients and regulators.

An early release of a company’s financial results can be a good strategy, provided the news is positive.  MF Global’s earnings revealed the extent of its exposure to European debt and the firm’s weak earnings – hardly a recipe for quelling speculation.  

Corzine and MF Global still would have a busy weekend even if they had kept to their initial plan of issuing earnings on Thursday.  But those two extra days could have been spent focusing on the sale process, without the pressure that accompanies a public earnings announcement.  It’s two days that could make the difference between a deal that preserves some value for shareholders and one that doesn’t. 

 

 

Olympus: Where were the auditors?

The hole is getting deeper for Olympus and its chairman, Tsuyoshi Kikukawa. And his outside auditor, Ernst & Young, might find itself alongside him.

A day after denying allegations by its former CEO, Michael Woodford, that it paid advisory fees of $687 million on a $2 billion acquisition, the company reversed itself and acknowledged that Woodward’s figures were correct.

Analysts have downgraded the shares, and Goldman Sachs suspended its rating over doubts about the company’s accounting, calling into question the accuracy of Olympus’s books over the past several years.

It hasn’t helped that three different company officials are speaking on the matter – Chairman Kikukawa, Executive Vice President Hisashi Mori and press spokesman Yoshiaki Yamada.  All have made contradictory statements, further undercutting Olympus’s credibility.

There has not yet been much focus on the Japan affiliate of Ernst & Young, the independent auditor for Olympus.  Presumably, it would have reviewed the accounts for the acquisitions in question at the time it prepared the company’s financial reports.  E&Y could face scrutiny for its role, especially if Olympus must restate its accounts.

The story shows also no sign of falling from the headlines, with the Financial Times and other business publications giving it intensive coverage.   Attention seems certain to shift to learning the identity of the firms that received the advisory fees and whether other acquisitions were done properly.  A Bloomberg report said:

“One of the advisers receiving the fees, Cayman Islands- incorporated AXAM Investments Ltd., was removed from the local registry in 2010, according to an official filing. PwC said they were unable to identify the owners of AXAM Investments.”

It also will be interesting to watch the actions of Olympus shareholders in Japan.  With the stock off some 40%, there will be growing pressure on Kikukawa to resign.  Even in Japan’s insular corporate world, this crisis is too big for shareholders to ignore.

3 of “Richard’s Rules” for employee communications on M&A deals

I recently spoke to graduate students at Baruch College in New York City.  The topic was employee communications in M&A deals, and I introduced what I call “Richard’s Rules” for these situations.  Here’s a sample.

1.  News will leak, and usually at the worst time.  Anyone who has handled communications for an M&A deal knows that a leak is always a possibility.  People talk, rumors spread, and pretty soon there’s a call from a reporter or a blog post gone viral.  For a recent example, look no further than Sunday afternoon’s announcement by HSBC that it would sell its retail bank branches in upstate New York.  A carefully scripted plan was probably in the works for weeks, but news reports and Twitter chat likely forced an early announcement.  As a result, employees first heard the news from press reports instead of bank executives.

2.  Distribution, not content, is the root of failure.  Companies labor for weeks over the language that will put their deal in the best possible light.  But if employees cannot get the news, all that effort will be in vain.  Email is great, so is Twitter; but employees on factory floors or distribution centers might not have access to them.  Employees in overseas locations can miss an announcement if it’s made in the middle of the night in their time zone.  So unless these distribution issues are addressed, employees will hear the news from friends, colleagues and competitors – and each will put their own take on it.   Your chance to tell them first, in your words, is lost.

3. Fast and incomplete beats late and complete.  In the mid-1990s, Dennis Weatherstone, the CEO of JPMorgan (and my boss at the time), introduced an innovation to manage the firm’s risk profile.  Called the “Four-fifteen Report” it summarized – on a single page – the firm’s risk positions with 95% confidence as of 4:15pm, shortly before the close of the New York trading day.

This snapshot gave Weatherstone a good approximation of the firm’s risk and did it quickly, so he could act on it if needed.  But, at 95% confidence, it wasn’t “perfect,” and that was its strength.   Weatherstone was fond of pointing out that he easily could have a report with 100% confidence in a day or two – but it would be too late to be useful.

It’s much the same with communications.  Information that’s sent quickly to employees and responds to immediate events is valuable, even if it doesn’t answer every question.  Employees appreciate candor and timeliness, and a little bit can go a long way toward keeping trust and credibility high at a critical time.