Saving Troubled Stutts Corporation: Information Known Only to Decker

Abstract

This case, part of a series (see also UVA-QA-0712, UVA-QA-0714, and UVA-QA-0715), contains information known only to Decker. 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-0713

SAVING TROUBLED STUTTS CORPORATION:

INFORMATION KNOWN ONLY TO DECKER

As was widely known, without the loan, Decker would receive only 20 cents on the dollar for the existing debt. For Decker, making the workout loan was potentially attractive as doing so would build the value of the company so that he could recover more of his debt value. The debt would be junior to the workout loans, however, so the company's value would begin to cover the debt only after Stutts paid off the workout loans.

On the one hand, Decker considered it unlikely that recovery would occur. He believed that the developer of the competitive product was too strong and that Stutts had not succeeded in satisfying its customers over the past several years. He put a 0.1 probability on a recovery.

On the other hand, it seemed that liquidation was the most likely outcome, slightly ahead of restructuring, for many of the same reasons. Decker's assessment, based on conversations with industry experts, led him to put a 0.4 probability on restructuring and a 0.5 probability on liquidation.

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