Saving Troubled Stutts Corporation: Widely Known Information

3 Pages Posted: 23 Jun 2009

See all articles by Samuel E. Bodily

Samuel E. Bodily

University of Virginia - Darden School of Business

Abstract

This case, part of a series (see also UVA-QA-0713–UVA-QA-0715), contains information known to both negotiating parties. Two individuals own all the capital in Stutts Corporation. Decker owns all the debt and Evenson owns all the equity. Unless Decker and Evenson supply workout loans, Stutts will become bankrupt immediately. If they do provide the loans, Stutts will go into three possible states: recover, restructure, liquidate. The payouts to Decker and Evenson differ in each state. The two parties have differing probabilities for these three states and differing budget limits for adding capital; probabilities and budgets are private, confidential information. Students playing each role will negotiate, in pairs, a deal for the additional financing of Stutts. Without state-contingent side payments and/or altered ownership arrangements, players cannot strike a deal that is good for both sides, based on their differing probabilities and budget constraints. Students will carry out a preliminary negotiation, discuss it in class, and then have a chance to conduct a final analysis, based on new ideas from class discussion.

Excerpt

UVA-QA-0712

SAVING TROUBLED STUTTS CORPORATION:

WIDELY KNOWN INFORMATION

Stutts Corporation was in serious trouble, and only the two individuals who would lose if the company failed could save it. On the one hand, Daniel Evenson owned all the equity of the privately held company. On the other hand, William Decker, a financier, owned all the debt of the firm, which was due to be paid, in full, in one year for a total value (principal plus interest) of $ 25 million. These two parties had begun discussions about providing identical workout loans to save the company.

Stutts owned the rights to technology for “smart” electrical meters that afforded two-way communication with the electricity provider. These devices would monitor real-time usage at remote sites to enable billing with time-of-day rates. They could actually turn off power or impose usage limits at the remote site during peak periods. For some time, it had seemed that electric utilities would see the economic value of these devices and invest heavily in them. For several years, the company's management had believed that huge demand for its units was right around the corner, but that corner had not yet been turned. Because Stutts had depleted its resources and because surpassing technology was expected in a year's time, the firm had only one more year to win a place in the market—or die. And it would not even get that additional year without immediate funds from the new loans.

If Evenson and Decker did not commit to the loans, Stutts would quickly go bankrupt. The value of Evenson's equity would fall to zero, and the company would go through bankruptcy proceedings. After assets were sold off and liabilities covered in bankruptcy court, Decker's debt would be worth, in one year's time, 20 cents on the dollar of total value (principal plus interest).

. . .

Keywords: decision analysis, negotiation, side payments, contingent contracts, BATNA, Pareto optimality, workout loans

Suggested Citation

Bodily, Samuel E., Saving Troubled Stutts Corporation: Widely Known Information. Darden Case No. UVA-QA-0712. Available at SSRN: https://ssrn.com/abstract=1423298

Samuel E. Bodily (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4813 (Phone)
434-293-7677 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/bodily.htm

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