Reference no: EM132173281
Joseph Horne Company, a Pittsburgh department store chain, was the target of a management leveraged buyout in 1986 and was suffering with the resultant $160 million in debt.
Horne executives were relieved when, in 1988, Dillard Department Stores, Inc., and mall developer Edward J. DeBartolo agreed to buy Horne’s stock for $74 million and to assume the 1986 buyout debt.
As part of the deal, Dillard’s installed data lines and computers in Horne’s fourteen stores to prepare for the consolidation. With the stores hooked into its Little Rock, Arkansas, headquarters, Dillard’s assumed control of Horne’s merchandise purchasing.
Dillard’s executives wanted financial and purchasing control because the contract price was contingent upon a finding that Horne’s financial statements were accurate. Horne’s CEO, Robert A. O’Connell, voiced his concerns to E. Ray Kemp, Dillard’s vice chairman, about the extent and speed of Dillard’s assumption of control. Kemp told O’Connell, “Trust me, it would take an act of God for this deal not to go through.”
Dillard’s had been acquiring department stores like Horne’s all over the country, adding 196 stores in five years. From 1987-1991 Dillard’s earnings had gained 20 percent through its strategy of taking over financially troubled firms.
In 1990, however, Dillard’s deal with Horne’s fell through, and Horne sued Dillard’s and DeBartolo for breach of contract and fraud. Horne’s suit alleged that Dillard’s plan in taking over the buying and data was to decrease the value of Horne’s to get a bargain price.
Experts in the industry indicate that Horne demonstrated inexperience by allowing Dillard’s rapid infiltration. The contract provided that Horne could veto any proposal for Dillard activity in Horne’s business.
Between the time the contract was negotiated and Dillard’s cancellation of the agreement, Dillard’s executives found that some Horne accounting practices were questionable. But some industry experts and Horne executives said Dillard’s often “nickels and dimes” sellers to bring down the price.
Horne’s suit also alleged that Dillard’s told 500 employees that their jobs would be gone after the takeover. Thirty percent of those employees quit before Dillard’s and DeBartolo withdrew. Because Dillard’s took over merchandise buying, Horne maintained, merchandise deliveries were late and the wrong merchandise was ordered for critical periods, such as the holiday season.
A Pittsburgh National Bank officer testified in his deposition in the suit that a Dillard’s executive told him in 1988 that Dillard’s might wait until Horne’s bankruptcy to buy the company. Dillard’s denies the statement and the plan. Dillard’s and Horne’s settled the suit in 1992.
a. Were the damages Horne’s experienced just a consequence of a failed business deal?
b. Did Dillard’s take advantage of a debt-ridden company?
c. What financial-disclosure obligations do takeover targets have?
d. Did Dillard’s have any special obligations because of its access to Horne’s data and buying power?
e. Is it unethical to take advantage of a naive party in a commercial transaction?