KOTEL, INC. SITUATION I (LATE 1985)
Sebastian Cabot wasn't sure what to do. Three years ago, fresh out of his MBA program with a
strong background in finance and accounting, Sebastian had been hired to work in KOTEL's
finance department at an unusually high salary. He quickly displayed his financial and
communication talents and by the end of his second year had been made Special Assistant to the Vice-President of Finance, Tom Konroy.
Sebastian had married, acquired a home with a sizable mortgage, and he and his wife were expecting their first child. Given his promising future at KOTEL, being deeply in debt hardly mattered.
Now Konroy and KOTEL's President and CEO, Gary Weisel, had asked him to prepare a report
justifying the acquisition of I-Tech, a small company that manufactured IBM-compatible
microcomputers. Normally Sebastian would have welcomed the assignment, but this one made him uneasy.
KOTEL's Status
KOTEL was incorporated in 1978 in Santa Clara, California, part of the Silicon Valley. Its President, Gary Weisel, is a former engineer. KOTEL has revenues of about $50 million.
KOTEL began by producing and marketing hard disk drives for microcomputers. In 1980, the
company introduced "local area networking" (LAN) which allows several dozen personal
computers to exchange information using the Nathane storage device, printer, modem, and other
peripherals. By 1981 the company's LAN system was a successful product. KOTEL operated in a very competitive environment, however, larger, better known companies were marketing their own LAN systems, storage devices and microcomputers. To succeed KOTEL offered lower prices and quicker delivery than many of its rivals.
In 1982 the company introduced a microcomputer with its own operating system to serve as a
workstation in its LAN system. This was seen as a key strategic step, since revenues from a
system including microcomputers were much higher than revenues from a system without.
Unfortunately, KOTEL's new microcomputer failed. There just wasn't enough compatible
software. Businesses tended to buy IBM microcomputers (for which an array of software existed) and connected them using KOTEL's LAN. Other computer companies found they could succeed only by making IBM clones-inexpensive PC's that could use software developed for IBM. By building a non-IBM-compatible computer, KOTEL had locked itself out of this market. Although sales of its LAN remained high, customers ignored KOTEL's personal computers.
During 1984, KOTEL's sales slumped due to stiffer competition and even slower sales of its
microcomputers. Sales of its LAN systems, however, increased by about 70 percent, accounting
for 23 percent of net sales (as compared to 14 percent for 1983). Cost of sales increased over
1983, because larger inventory reserves were set aside due to a buildup of the company's
non-IBM-compatible microcomputer inventory. Although losses at the end of fiscal `84 totaled
$10,770,000, considerable belt tightening followed and matters improved the following year. By the end of fiscal `85, the company posted losses of $2,707,000. Still it was clear that something more had to happen. One idea was to make an IBM-compatible micro that could be sold as a workstation along with the company's LAN system.
In spite of KOTEL's problems, Sebastian Cabot liked working there. He was paid extremely well
for his ability to explain financial concepts. This was a crucial service, since the company was
composed largely of engineers. Sebastian knew he could never find a comparable position with
another corporation and still live in the style to which he and his wife had become accustomed.
He enjoyed being able to come to work in blue jeans and address co-workers by their first names.
It was an egalitarian,"hang-loose" organization. Every Friday afternoon they had a TGIF beer and pizza bash. The only thing that bothered Sebastian was the chaos that often reigned within the company. Sometimes it was hard to know who was in charge of a project. Although things always got done, they were often several months late-sometimes a year. Weisel and the vice-presidents seemed to view the chaos as the "creative ferment" that kept people bubbling with new ideas.
KOTEL's Financial History
Originally financed with venture capital from several investment firms, the company's first years appeared wildly successful. In just a year the founders produced storage devices; at the end of two years the company went public and began selling its stock over the counter. Initially offered for $3 a share in 1982, the stock within days sold for $12 a share. This offering gave the company $10,000,000. A second public offering, in September 1982, netted almost $24,000,000. Since then, the firm's stock has fluctuated, depending on the boom-and-bust cycles of the computer industry. At times the stock has traded for as much as $21 a share and as little as $2. By late 1985 it was holding steady at $3.50. The company had never paid cash dividends and planned to continue reinvesting all earnings in the business.
The investment firms that provided KOTEL's start-up capital sold off most of their shares when the stock was at $20. The original founders, who held substantial blocks of shares in the company, also sold much of their stock. Eventually all of them left the firm, either to retire and enjoy their wealth or to start up other ventures with their stock proceeds. A headhunter found Gary Weisel. He was hired as President and CEO when KOTEL's founder left. Weisel had been working at another Silicon Valley computer company, and when he came to KOTEL he brought several people, including Tom Konroy and two other vice presidents.
The Board of Directors now consisted of Weisel, Konroy, and a representative of an investment firm that owned 5 percent of KOTEL's stock. Between them, Weisel and Konroy held 1 percent of
KOTEL's stock. The rest of the stock was distributed among several thousand shareholders,
none of whom held large blocks.
The Assignment
About this time (late 1985), Weisel and Konroy approached Sebastian with a special task. Sebastian went to Weisel's office to discuss the assignment. As he entered, Konroy greeted him and said, "Have a seat, Sebastian. We'd like to update you on some important news. We just met with the other vice-presidents, and we've agreed to purchase I-Tech." Sebastian knew that I-Tech manufactured small IBM-compatible microcomputers and that it started selling products about two years ago. Much of I-Tech's stock was owned by Nathan Simkins, the President of I-Tech, and his family. Some of KOTEL's vice-presidents had helped Simkins set up his company and probably owned shares of I-Tech. Sebastian suspected Weisel and Konroy owned sizable blocks of I-Tech stock, which was not publicly traded. "Isn't I-Tech a little young?" asked Sebastian.
"We've been trying to find a quick way to make our computer systems compatible," explained
Konroy. "Now we've got the perfect opportunity-I-Tech. We spoke with the President, Nathan
Simkins, and the Board of Directors. They agreed to sell and we're going to offer them 3.7
million shares of our stock. We'd like you to look over the company and give us an analysis of
the purchase. We've talked this over with our Board.
Weisel and I think it's a good buy, but the guy from the investment firm doesn't. We could just outvote him, but we want you to write up a purchase analysis that shows him this makes good business sense. "I don't know," said Sebastian. "I've heard rumors I-Tech isn't doing so great. I know it sustained losses last year. Some people I've talked with think it's because the way the company's managed."
"Look, Sebastian," Weisel said softly, "Konroy and I KNOW Simkins and his company. We think it's an excellent company. Like most start-ups, I-Tech has been kind of slow reaching a favorable
profit picture. That just makes it easier for us to buy them out. Especially since future prospects
for their IBM clone are so good. I-Tech gave us projections. We're convinced this will work
for us. It's an easy way to get the IBM compatibles we need for our LANs."
Konroy continued. "We've looked over I-Tech's books. We're getting the company for a good
price, considering the added value of the synergism that will result. Their microcomputers will
help us sell more LANs, our LANs will help them sell more microcomputers. We could offer then
chicken feed. But that wouldn't be ethical, would it?" Konroy's tone changed and acquired a barely noticeable edge. "Sebastian, this purchase is very important to all of us who have helped Simkins set up his company. That report had better be good. Nobody wants a negative report on something so important to everyone here, you know?"
Later, when Sebastian made some inquiries, he found that Nathan Simkins was a close friend of Weisel, Konroy and some of the other vice presidents at KOTEL. In fact, Simkins, Weisel and two KOTEL vice-presidents had all worked together at another Silicon Valley firm some years ago.
When Sebastian looked over I-Tech's financial statements and calculated its value, he became nervous. He wasn't sure what to do.
Answer these questions:
1. What is your assessment of the PRIMARY ethical problem? Give 3 factually supported reasons why
2. Who are the primary stakeholders and how are they affected?
3. Who is responsible for solving the problem and 3 reasons why?
4. Give 2 options that you would you suggest to Sebastian and support them with 2 reasons and 1 connection to a stakeholder
5. Select one option explain why and present the arguments for that option through the following 4 moral standards; Relativism, Core Values, Kant and Moral Rights.
• You can present as many arguments for each value as you as long as the TOTAL number of arguments for the all the values together do NOT exceed 10.
• Each argument must have a heading to identify the moral standard
• Remember to connect the arguments to facts in the case whenever you can.
6. Would Milton Friedman support the option currently before Sebastian? Give 4 reasons to support your choice