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RANDOM⋅BUSINESS⋅SCHOOL

5/125/47
REV. March 28th, 2020 16:30


Prick & Gimble: In Trouble

Introduction

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.

Strategy

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.”

Exhibit 1

All figures in USD millions.

Table 1: Balance sheet

1987198619851984
Sales4,3492,6793,0801,543
Costs1,6313,869394100
Depreciation1,5297264,9704,195
EBIT2,4804,3493,4003,048
Less interest4,4962,2083,9472,793
EBT1,9403,2422,735599
Taxes2,7814,5643,265458
EAT4,1241,4794,080956
Preferred dividends2,4031,3033,1204,571
Common dividends3,4381,6972,097345
Retained earnings added4,6244631,3734,307

Table 2: Income statement

1987198619851984
Cash1,7631,4322,9602,669
Accounts Receivable4,3782,4934,7413,242
Inventories2,2702,8313,1951,636
Total current assets4,3213,6464,7182,612
Net plant and equipment8481,5868922,064
Total assets5363,2918914
Accounts payable Notes payable1,1004,2092,4564,129
Accruals4,7104,9084,688426
Total current liabilities3,3843,623777682
Long term bonds2,4004,4151,5093,510
Total debt4,674177664,730
Preferred stock3,9481,1253,7354,579
Common stock3,7267264021,934
Retained earnings3,3142,566102,050
Total Liabilities and equity1,7911,1794,7823,184