The Jack Wright Series - Case 8

 Jack Wright Analysis - Case 8

Key Issues

        The first key issue in the case is the CFO’s suggestion that Mega buyback shares. Companies repurchase shares when they want to transfer the excess funds to the shareholders, send a positive message to the financial market, re-leverage the company, and to defend against takeover attempts.  The CFO is suggesting a buyback plan to re-leverage the company and increase earnings per share. The CFO has previous experience working for a much larger corporation than Mega. A corporation that is described as “sophisticated in financial and governance matters.” However, Bond is no longer with the larger corporation and I’m curious as to why. Is it possible Bond was discharged for taking too many risky or left voluntarily because he wasn’t allowed to take bigger risk? Bond, though knowledgeable in the area of finance, is an ambitious risk-taker and his suggestions may be overly influenced by pressure to improve earnings. His ideas may look good on paper, and may have a positive effect on earnings, but is this a short-term fix and will the risk outweigh the reward in the long run?

The second key issue is Bonds suggestion for Mega to change its state of incorporation to Virginia. If Mega seek to reincorporate wouldn’t Delaware be a more advantageous state? Virginia law is different from Delaware because it holds the directors less accountable for the outcome of their decisions. Bond has firsthand knowledge of the board’s willingness to not adhere to company bylaws when they made the decision to look past his violation of the company’s hedging policy. Bond knows the suggestion to buy back shares is a risky move for Mega, but is banking the fact that the directors may be more open to taking risk if their exposure to legal liabilities is reduced. Reincorporating to a state that is more pro-director coupled with a share buyback plan may send a message to the shareholders that Mega isn’t sure of its strategy and is taking steps to protect themselves if it doesn’t work. It appears, once again, Bond would like to gamble with Mega’s resources. The difference, this time around, is that Bond is also gambling with the shareholders trust in the board of directors if they move forward with this decision.  

Another key issue in the case is Bonds suggestion to streamline Mega’s organizational structure. Bond suggest eliminating subsidiaries unless there were a strong financial or operational advantage. Eliminating subsidiaries after creating debt may result in Mega being over leveraged. In addition, Bond suggested terminating the boards at the subsidiaries and appointing Mega’s CEO as the one and only director. Rock is already struggling to perform above a threshold that is below Mega’s cost of capital. With Mega’s current CEOs performance being average at most, adding to his responsibilities would not be beneficial to Mega in the long run. The existing boards have greater knowledge of the inner workings of the subsidiaries than Mega’s CEO would have. Replacing the current boards with one person who is less knowledgeable is not in the best interest of the shareholders.