Union Carbide

1. How would you characterize the key turning points in the case for Union Carbide, Morgan Stanley and First Boston?

Union Carbide was a fortune 500 company (37th) in 1983. It seemed to have limitless potential for growth until a gas leak in India killed nearly 2000 people. This unfortunate situation caused the Wall Street Journal to speculate that Carbide might declare bankruptcy which, in turn, led to the stock price going down as well as a downgrade in credit by Moody’s (from A2 to A3). In August 1985, GAF, a much smaller company, purchased Carbide company stock with the intention of a takeover. At that point, Union Carbide knew that, in order for it to go back to its previous success, it needed to act fast. They eliminated jobs, sold businesses and tapped into their pension plan to buy back stocks (with the purpose of increasing earnings per share and supporting the price of the stock). They ended up buying much of the stock, increasing debt at a high percentage and further downgrading their credit score (from A3 to Ba3). There were three key turning points for Union Carbide. The first was the attempted GAF takeover. Then, after Carbide thwarted GAF’s attempt to takeover, dealing with the excessive debt with which they were left. The last turning point was when they asked for proposals to fulfill their final objectives (to further reduce interest, relax covenants, and protect Carbide from another corporate takeover attempt).

Morgan Stanley knew that it was the preferred bank for Union Carbide due to relationships between the senior management of both companies. They were also aware that smaller transactions took place between Carbide and other investment banks (when those banks had specific areas of expertise). Morgan Stanley’s status and their relationship with Union Carbide allowed them to become complacent in their dealings with Carbide, so much so that they failed to notice First Boston slowly infiltrating their exclusive relationship. The...