Acme Inc. is a giant conglomerate providing products and services from locations all over the United States, and numerous overseas facilities. Like many organizations, Acme has seen a sharp decrease in revenues due to the recent economic recession. With growing operating losses and looming debt payments, the relatively new CEO has attempted something most companies would never consider. Rather than follow the conventional wisdom during an economic downturn such as reducing costs, laying-off employees, consolidating debt, etc., the CEO has done much the opposite.
The company, with the support of the Board of Directors, and preferred stock holders, has taken out another line of credit on top of the existing debt. The company has hired new employees, handed out pay-raises to existing staff, bought locations and facilities that were previously leased, increased charitable donations, and decided to corner the market in an area which it has had little success in the past and no competitive advantage.
The CEO, following the advice of his closest friends has decided that it would be best for the company and the market as a whole to use some of the credit line to buy new furniture for the corporate executive suites, repave the recently completed parking lot, install green technology that is expensive and unproven but has the slight potential to improve public perception and placate a few of its most vocal shareholders.
Now, several months after Acme Inc. has instituted its plan to return to profitability, all financial indicators continue to paint a bleak picture. Debt payments are becoming unmanageable; the bank is hesitant to lend any more money, shareholders are angry, many of the Board of Directors have resigned, and many of the preferred stock holders have been forced to sell. The CEO insists that many of the problems in the market are due to its competitors who have cut staff and refused to hire more employees until they are sure it is profitable to do so. Caving to the pressure from shareholders the CEO has recently announced that pay will be frozen, and that he is open to suggestions but is unwilling to stop the programs he has already signed off on.
Would you invest in this company? What if I told you are already a shareholder?
To the casual reader this story is probably another example of evil, uncaring, and always expanding Corporate America. Any financial analyst or reporter with even a few management or business skills can see that the CEO in the story is simply digging a bigger hole. An intelligent CEO would do what most companies do in this situation: sell unused facilities, restructure debt, cut pay and benefits, layoff employees, cut charitable donations, hold off on cosmetic and un-needed improvements, and concentrate on its core business.
Read more on: www.notadriveby.com.