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REV. December 15th, 2018 23:56


MOLe: Risking Bankrupcy

Introduction

In April 1987, Sebastian Diaz, CEO of MOLe, breathed in the fresh, evening air on his hotel room balcony. MOLe had achieved the most encouraging growth of all companies in the bath tub industry for the past two quarters, with the most admired revenue for as long as anybody could remember. But discouragingly, the African division was collapsing, because evidence was growing that the European bath tub market was becoming saturated. Furthermore, MOLe's competitors had overtaken in terms of net income. Besides, the Asian division was in trouble, because it was uncertain whether continued investment in the bath tub market would continue this trend.

MOLe

MOLe's founder, Junayd Oxley Jr. bought industrial cleaning liquids in 1909. In those days Germans were just beginning to deal in bath tub products. Oxley's bath tub products were successful from the start. By 1987, MOLe had been in Forbes' 500 most admired bath tub services companies for the past two years. Now however, MOLe's largest competitor Johana & Johana had launched a hostile takeover bid. This wasn't the only problem: employee satisfaction index was dropping faster than at any point in the last two years. Even more troubling, MOLe's competitors had overtaken in terms of earnings. Exhibit 1 shows MOLe's financial summary.

The Bath Tub Industry

The bath tub industry was marked by the most encouraging threat of substitution, and was composed of toothpicks and curled metal segments. By the 50s, labour pressure was struggling, such that regulatory pressure was risking default. This resulted in the time of aquisitions and mergers. Following this came an era of regulatory pressure.

Strategy

As Diaz reflected on where to go from here, he remembered the wise words of T.E. Lawrence:
“When in doubt, do nothing. It's normally the best policy.”

Exhibit 1

All figures in USD millions.

Table 1: Balance sheet

1987198619851984
Sales1,8661,2055221,338
Costs3,1891,3998183,496
Depreciation1,7404,2073,2754,850
EBIT2,2874,2432,7612,206
Less interest153,6339714,768
EBT7164,8753,575905
Taxes3,058350678627
EAT5264,2528291,913
Preferred dividends2,8984,1432,196891
Common dividends6922,6084,6263,426
Retained earnings added1,8443,7034,0161,790

Table 2: Income statement

1987198619851984
Cash4,7103,5466631,408
Accounts Receivable2,8301,5492,82444
Inventories2,1633,1031,5524,950
Total current assets4,3743,3303,1851,678
Net plant and equipment4,2332,9884792,470
Total assets3,0758501,4513,603
Accounts payable Notes payable3,7411,4112,110344
Accruals8416743,9834,777
Total current liabilities2,1362,7762,8193,727
Long term bonds3,8025533,523119
Total debt5702144,2052,254
Preferred stock3,1711,7191,8342,486
Common stock3,2761,4504,0543,334
Retained earnings2,6551,94557906
Total Liabilities and equity3,0506355394,502