Gordon Cain and the Sterling Group (a) and (B), and Associated Videotape and Teaching Note

Abstract

SUBJECT AREAS: Leveraged buyouts; spin-offs; value creation; corporate governance; LBO associations. CASE SETTING: 1987; USA (Texas); commodity chemicals industry.

Case No: 9-492-021, Gordon Cain and the Sterling Group (A) Case No: 9-492-022, Gordon Cain and the Sterling Group (B) Case No: 9-899-503, Companion Video to A case: includes Gordon Cain in Discussion with HBS Class Case No: 5-899-051, Teaching Note

The Sterling Group, a Houston-based LBO firm led by entrepreneur Gordon Cain, forms Sterling Chemicals Inc. to purchase an ailing commodity chemicals plant from corporate giant Monsanto. Because of dramatically increased organizational performance and rising styrene prices, the firm generates huge increases in value. Sterling?s success bred conflict, however, in the form of pressure from managers and employees to liquefy their large, undiversified equity holdings. This pressure threatens to undo the very structure that led to success.

As background, the (A) case recounts the story of Cain Chemical Inc., also created by Sterling through a series of leveraged acquisitions of petrochemical plants and pipelines along the Texas Gulf Coast. The case explores the relative contributions of rising chemicals prices and organizational changes to value creation, the wealth effects of the value change to employees, and Cain?s eventual decision to sell the company to a conglomerate to gain the desired liquidity at a profit equal to 45 times the initial equity investment.

The follow-up (B) case reveals Sterling Chemicals? decision to go public, and provides a brief synopsis of its IPO, and post-IPO performance which includes complete repayment of the LBO debt, large profit sharing payments to employees (who share in excess EBDIT), and huge cash dividends to equity holders. The companion videotape shows Gordon Cain discussing his experiences at Sterling and Cain Chemical with Harvard MBA students.

This case series allows students to examine the causes of organizational change, the difficulties of managing success in closely held LBO companies, and the relative merits of various exit strategies. These cases are currently taught in "Coodination and Control in Markets and Organizations," an elective course in the second year of the Harvard MBA program.

The series may be taught in conjunction with "Eclipse of the Public Corporation," by Michael C. Jensen (Harvard Business Review, September-October, 1989, Reprint No. 89504). These cases are currently taught in "Coodination and Control in Markets and Organizations," an elective course of about 600 students in the second year of the Harvard MBA program.

JEL Classification: G32, G34, D21, D23