Red Star China Case
Unicord PLC Group A Florida Atlantic University Professor: Dr. Hemant Merchant Emerging Markets MAN-6728 February 15, 2010 Problem/Decision Dr. Juanjai Ajanant, a special advisor to Unicord PLC’s board, has been tasked with deciding the best strategy to take Unicord out of receivership. Unicord, as a relatively young company, was a leading tuna processor and one of the “shining stars” of Thailand. As a top tuna exporter, the company had shown year over year growth since its inception in 1978. It appears that their challenges began soon after the purchase of Bumble Bee in 1991.
In four short years, Unicord quickly spiraled downward and seemingly out of control. By 1995, the founder and CEO, Dumri, was challenged by surging debt, plummeting share value, significant losses, creditors demanding repayment and falling per capita consumption; faced with these failures, Dumri committed suicide. Without a CEO and VP of Finance providing direction, Dr. Ajanant must determine the causes for the rapid demise of such a promising company and identify what information he needs to decide if a turn-around strategy is possible. Fundamental Causes
The two primary reasons for Unicord’s demise were the acquisition of Bumble Bee along with its deal structure and the dolphin controversy. A secondary cause was related to their senior leadership. Although, leadership can be an ambiguous cause, there were some senior level decisions and management style that accelerated the downfall. Without the acquisition of Bumble Bee, Unicord could have been a healthier and stronger company today. From a strategic perspective, the acquisition made sense given Unicord’s growth stage and the state of Thailand’s government and economy.
The problem began with the purchase price and the structuring of the debt. Unicord was permitted to purchase a company twice its size because Chase Manhattan and Sutro banks were responding to Thailand’s economic momentum. All parties were hedging their bets that the conditions were perfect for continued growth to cover the debt even though the American tuna industry was based upon high volume and low profitability. Thailand demonstrated its willingness to embrace free market ideals, the baht was gaining value and Thailand’s inflation was decreasing.
The Thai government wanted global investment and had recently relaxed financial restrictions and deregulated their financial sector. With Thailand’s Board of Investment’s approval, the deal was structured in US dollars. By the middle of 1994, the baht was loosing its strength, forcing creditors to demand a restructure because the debt was quickly becoming un-serviceable. In 1995, Bangkok Bank required repayment of its $113 million by year end. Prior to the Bumble Bee acquisition, Unicord, as a supplier, was sheltered from the tuna-dolphin controversy and boycotts that had existed for years.
At the height of the controversy, in 1990, Bumble Bee admitted to lying to and deceiving the public by labeling its cans as “dolphin safe” when their processes were still six months away from actually delivering truly dolphin free tuna. The damage to the brand and the industry resulted in reduced profit margins and a dramatic decline in US consumption, thereby increasing the US rivalry. Bad decisions by Unicord’s senior leadership magnified the problems. To recover from Bumble Bee’s dolphin controversy, Dumri, aggressively cut prices to increase market share.
When Unicord’s market share increased, he invested additional money to increase Thai production. Dumri was short sighted in realizing that he was potentially gaining ground in a shrinking market where actual per capita consumption continued to fall. In 1992, Bumble Bee lost $40 million most likely from pricing its products lower than its production cost. By 1993, the debt surged to $200 million. In July, when financial leadership was most needed, Unicord’s VP of Finance Vichet Bunthuwong resigned and the position remained un-filled, leaving the company without direction.
Bumble Bee had almost 100 years of deep tradition and relationships, yet Unicord did not address the cultural differences between the companies. For instance, the senior management team of Bumble Bee often ignored Dumri’s contradicting hierarchal style of management. When Dumri wanted to close the Puerto Rican operations, his directive was ignored. One of the strategic reasons for buying Bumble Bee was to leverage their US distribution network. There was no indication that the integration was successful at creating distribution synergies and reducing costs. These types of production “misses” would just continue to diminish the bottom line.
Analysis Unicord’s demise can be attributed to three primary causes; the acquisition of Bumble Bee Tuna, purse-seine fishing techniques, and actions and reactions by senior leadership. The rationale to purchase Bumble Bee was obvious at the time to Unicord; to become an “American” company and lessen the current trade regulations between the U. S and Thailand, to help the company diversify and stabilize its supply of raw materials, find ready buyers for its line of white meat products, push products into the American market, and have gained efficiencies from Bumble Bee’s Puerto Rican manufacturing plant.
All combined, the acquisition would allow Unicord to become the world’s largest tuna canner. Unicord founder and CEO Dumri Konuntakiet built his company on three primary convictions; Thailand was central to prime tuna fishing, the Thai Board of Investment offered many incentives to the fishing industry, and low wage demands from Thai workers. However, Unicord’s desire to become a global power took the company away from its convictions on which it was built. Acquiring Bumble Bee was the answer for Unicord to become that power. BBBumble Bee was the third largest American producer of tuna at the time of Unicord’s acquisition.
The largest American producer, H. J. Heinz’s Star Kist initially offered to purchase the company but the sale was disallowed as it was determined the purchase would hinder free competition of the American companies. This opened the door for Unicord to purchase Bumble Bee, which was twice the size of Unicord. The purchase also occurred at a time Thailand desired to become an emerging market leader in the global economy. The purchase was approved by the Bank of Thailand and landed President Dumri as one of the countries prominent businessmen. But, were there indications that the Bumble Bee acquisition would not be the best move for Unicord?
The American tuna industry was in transition mode; profits were decreasing and existing canneries were moving operations away from the continental U. S. Bumble Bee’s reaction to the dolphin controversy was to reduce prices to increase market share. In the short run, it worked. Market share in the U. S. increased from 17% in 1989 to 25. 7% in 1992. Production in Thailand increased to spur on the increased market share. However, what was overlooked was the consumption of tuna was falling at a faster rate than Bumble Bee’s market share was increasing.
The company was losing money, as was Bumble Bee’s primary competitors Chicken of the Sea and Star Kist. Despite its financial troubles and losing $40 million money in 1992, Unicord announced it would list Bumble Bee on the NYSE. Company losses surged to $200 million in 1993. By now, the public, creditors, and business analysts lost confidence in Unicord. There were no public relations, pricing methods failed, and the bottom line was sinking fast. Dumri Konumtakiet’s hierarchical management style was not accepted by Bumble Bee leadership. There was no sense of control of the company.
Bangkok Bank was also demanding Unicord repay its $113 million debt by the end of 1995 due to the ongoing fall of its share price. Unicord was not structured in a manner to survive turbulent times. Ownership changed three times over a two year period and there was no direction from top level management. After Konumtakiet’s death in 1995, Unicord went into receivership. Alternatives Unicord, facing a need to revive itself, has a few alternatives. The basic choice the company must make is if it should attempt to retain Bumble Bee or to try to sell it.
If the company chooses to retain Bumble Bee, issues such as management culture would need to be addressed. Under the leadership of Dumri, all decisions had to be approved by him. This level of control had met with resistance from Bumble Bee executives who believed that the company could behave independently due to its familiarity with the competitions and culture of the American market. This was further compounded with three ownership shifts at Bumble Bee over three years. Under this alternative, Unicord might attempt to stabilize this relationship, and allow Bumble Bee to function with autonomy.
This could lead to the company reviving itself by allowing Bumble Bee management to make decisions based on their knowledge and experience. However, due to Bumble Bee’s deception in regards to its “dolphin-safe” policy, the company had lost some of its own credibility. As such, the company, regardless of management decisions, has already lost market share. In direct opposition with this first option for Unicord decision makers is another alternative where Unicord could try to force Bumble Bee to follow Dumri’s directives, which is to shut down its Puerto Rican operations and send the profits over to the parent company.
This action might give Unicord the weight to pay their debts. However, this option might meet with the same previous non-compliance from Bumble Bee management, which would not aid Unicord’s situation. Or this action could lead to un-forecasted consequences, leaving Unicord without a profit and without the Puerto Rican operations. An additional alternative would be for Bumble Bee to turn away from the United States, which has had a decline in tuna consumption and views the company in a negative light.
Attention could be focused on the European market. The disadvantages of this alternative, though, is that Unicord’s original rationale for the acquisition of Bumble Bee is rendered useless, as the company would still be obliged to follow European trade regulations and tariffs. Another viable option for Unicord would be to sell Bumble Bee. Prior to its own acquisition of the company, Pillsbury had many bidders for Bumble Bee, including Star Krist, one of its largest competitors.
As such, Unicord could attempt to sell Bumble Bee to one of its competitors and attempt to leverage its own heavy debt situation. This would also be an advantageous situation for the purchasing company as it would enhance its own market share. Of course, this would result in a loss of that market share for Unicord. Unicord could also try to sell Bumble Bee to one of its competitors in Thailand, ThaiUnion Manufacturing Company or Ta Kong Food Industries, who may be interested in acquiring the company for the same reasons that Unicord has made the acquisition.
However, with decline in tuna consumption in the United States and Unicord’s history with Bumble Bee, the Thai companies might be not interested in pursuing the same model. A further option for Unicord would be for the company to reassess its financial position, and try to restructure its debt. This plan could be difficult, however, due to the high debt burden carried by Unicord. A final dire action would be for the company to seek and file for protection under Thai bankruptcy laws, and attempt to liquidate. This option would entail essentially giving up on the company. Recommendations
It is clear that for the large part Unicord’s demise can be attributed to the acquisition of Bumble Bee and the fall out flowing from that decision. If Dr. Juanjai wants to resuscitate Unicord the first step he needs to take is to sell Bumble Bee. Unicord’s management also needs to be re-structured and the company should develop a smart marketing campaign to re-introduce Unicord to the world. The first step in reviving Unicord is to sell Bumble Bee. Granted the environment for selling may not be the best, but Dr. Juanjai needs to get Bumble Bee off his hands if he has any hope of revitalizing Unicord.
Realistically, the chances of getting what they paid for Bumble Bee is slim, so Unicord will need to decide what they are willing to take for Bumble Bee and actively seek out potential buyers. Konuntakiet, as the CEO and founder of apparently made all the major decisions for Unicord. When Konuntakiet committed suicide he left his company in disarray. Prior to his death the VP of finance and friend resigned and that position remained unfilled. The fact that such a major position in the company was not filled shows serious managerial issues. Clearly Unicord’s management system needs to be restructured.
Perhaps without Konuntakiet this restructuring will be accomplished far easier and less painful. Unicord’s main line of business is still the canning and processing of tuna fish. The company markets tuna fish under its own name and under other brands worldwide. Marketing Unicord as an ethical and environmentally friendly company in Europe and Asia can only enhance its image. Even in Thailand there is probably a loss of confidence in the company. Consequently, though the company is financially strapped a smart marketing campaign is essential in turning the company around.