Other People’s Money: Ethical Implications of Liquating a Company

It is no surprise that company’s are in business to make money. Although the heads of some of the largest and most profitable companies in the world will say that there are many other reasons; such as creating and keeping jobs, personal job satisfaction, environmental concerns, etc., the bottom line is that a corporations main responsibility and business goal is to maximize shareholders wealth. The concept of maximizing shareholders wealth is what causes investors to buy stock in a corporation with the hopes that they will yield high returns on their investments. Yet, it also leads to the question, “How far will a company go to maximize shareholders wealth.” In the movie “Other People’s Money”, starting Danny DeVito, maximizing shareholders wealth was the highlighted issue; which was the ultimate factor that caused Danny DeVito to persuade the shareholders of New England Wire and Cable Company to give him the votes he needed in order to have a controlling interest of the company and liquidate the assets if he so chose.

Danny DeVito, also known as “Larry the Liquidator”, plays a corporate raider who takes over companies through a hostile take over and sells off the assets of that company for large profits. The latest money making opportunity that Larry set his sights on was New England Wire and Cable Company, a family owned company that prides itself on treating their customers fairly and employees with integrity. Yet, as Danny DeVito describes at a shareholders meeting, that will not put money into the shareholders pockets. It is because of that fact alone that Larry will be able to successfully take control of the company. New England Wire and Cable Company is a division of the company that is losing money and therefore, losing the investments of the shareholders by having a declining stock price and minimal new business opportunities in sight. Larry’s plan is simply, take over the company and sell off the assets of New England Wire and Cable Company division to make millions. That is the name of the game with Corporations, right?

Financially, Larry makes an appealing case to shareholders that many would argue could not be passed up on. The selling point that Larry makes very clear is the Book Value Per Share of stock for the shareholders, which is a liquation formula that accounts for the amount each share of stock would receive if the company were to be liquidated. If Larry gets the votes of the shareholders, takes control of the company, and sells off the assets the Liquidation value per share of New England Wire and Cable assets sold in the hostile take over that Larry is planning is $25 per share. When comparing this amount to the initial market price per share of $10, it leads to a $15 net profit per share for shareholders from liquating the company. However, if the shareholders voted against Larry and the liquidation of the company would not go through, shareholders would have the potential to continue losing their investment from a company that was no longer profitable. The decision does not seem complicated for shareholders: maximize their wealth by liquidating the company or continue losing money on the investment in an unprofitable company? However, it is a more complicated decision than Larry wants to convey to shareholders. It is also where the debate of ethics so heavily enters into the role of accounting and Corporate America.

The role of ethics has been at the height of discussions since some major accounting scandals (Enron, WorldCom, etc.) have surfaced in the recent years. In the movie, Larry is only concerned with the bottom line of maximizing shareholders wealth. As Andrew “Jorgy” Jorgenson, President of New England Wiring and Cable, stated at the shareholders meetings, it is important to also consider all of the jobs that will be lost because of the liquation. A shareholder must decide if the ethical implications of taking a company that employs many in their area and selling the assets to make profits for themselves is worth the financial reward. It is far too often exposed that money hungry executives, like Larry, will do anything to establish wealth, including unethical practices. This was also the case at Enron in 2002 when the top executives partook in accounting fraud in order to create wealth for themselves and to maximize their shareholders wealth, which ultimately led to the demise of the company and jail time for the CFO and CEO. The movie “Other People’s Money” does a good job of bringing attention to the issue of ethics and greed in society, which will always be something at the forefront of Corporate America.

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