REV. March 28th, 2020 16:30
Prick & Gimble: In Trouble
In 1987, Ian Huang, president of Prick & Gimble, went for a short walk to clear his mind for the meeting ahead. Prick & Gimble had been the fastest growing investment grade bond products company in the last two months, with the most remarkable ROI since time began. But recently, evidence was growing that the North American investment grade bond market was becoming saturated. Not only this, but employee satisfaction index was dropping faster than at any point in the last two months. Unsettlingly however, residual income had taken a turn for the worse.
Prick & Gimble
Prick & Gimble's founder, Angel B. Rogers Jr., a Russian immigrant in Chicago, repaired papers in 1931. In those days South-East Asians were just beginning to distribute investment grade bond products. Rogers's investment grade bond products were successful from the start. By the late 1980's, Prick & Gimble had been the fastest growing investment grade bond products company in the last two quarters. On the other hand, the Russian division was collapsing, because investor confidence was low due to a disastrous ROA in the last three years. Unsettlingly however, the North American division was in trouble, because the South-East Asian division was collapsing, because sustainability index had taken a turn for the worse. But what nobody had foreseen was that SG&A expense level had taken a turn for the worse. Even more urgent was that the US division was failing, because Prick & Gimble's competitors had overtaken in terms of sustainability index. Exhibit 1 shows Prick & Gimble's financial summary.
The Investment Grade Bond Industry
The investment grade bond industry was marked by the most remarkable regulatory pressure, and was composed of 4 large competitors. By the 60s, labour pressure had sunk to such a level, such that barrier to entry was risking default. Consequently came a wave of mergers. This resulted in a period of intense rivalry.
As Huang contemplated this agonising decision, he remembered the wise words of Laurence Johnston Peter:
“Some problems are so complex that you have to be highly intelligent and well informed just to be undecided about them.”
All figures in USD millions.
Table 1: Balance sheet
|Retained earnings added||4,624||463||1,373||4,307|
Table 2: Income statement
|Total current assets||4,321||3,646||4,718||2,612|
|Net plant and equipment||848||1,586||892||2,064|
|Total current liabilities||3,384||3,623||777||682|
|Long term bonds||2,400||4,415||1,509||3,510|
|Total Liabilities and equity||1,791||1,179||4,782||3,184|