Throughout this handbook, we have often referred to the effects of time and context on the value of both intellectual property and intangible assets. It is useful to talk about other potential impacts on value; and, nothing illustrates the principal that management can impact value better than this brief case study involving a small but successful candy company in California.
The Morgan Confections Company case defines how management (or as in this case, mismanagement,) can grossly affect the value of a company’s intangible assets – and, by extension, the value of its tangible assets. Morgan’s management was able to take a successful and growing privately-held candy company from one of its most successful years in 2004 to disaster and sale of its assets in 2005. One often observes the impact of mismanagement but in this case, the speed with which the deterioration of intangible asset values occurred was truly impressive.
Morgan Confections Company (MCC) was a candy and confectionary manufacturer and a wholesale distributor to retail accounts large and small. The company had been an operating subsidiary of Ellis Foods, LLC, another California corporation, until the latter part of 2001, at which time MCC acquired Knudsen’s Candy, another manufacturer of confections, and was spun off as an independent company. The company had two primary family brands/bundles: The old line brand Allen Wertz and Simply Sugar Free, which was a successful dietary candy line. Allen Wertz was a European master confectioner who established the brand name in the late 1930s, and the label became a synonym for high quality confectionary products.
From 2002 to 2004, MCC was able to double its sales, due in part to strong demand for its brands, and its growing role as a private label co-packer of confectionary products for major retailers. Total sales had increased by the end of 2004 to more than $15 million annually, with the company’s products in nearly 10,000 stores across America. The company had spent considerable resources on building its brands, creating new products and sub-brands and refining and making its trade dress more visible. MCC was growing and building on its successful family of trademarks and brand assets.
However, with growth came problems, and the company became overleveraged and overextended so that by the end of 2004 it found itself unable to service its debt – and the company doors were shuttered with very little notice, leaving many suppliers and, more importantly, many retailers stranded. After trying to effectuate a refinancing, the company closed and was liquidated. Its primary intellectual property at that time consisted of the following:
- Allen Wertz and related trademarks;
- Simply Sugar Free trademarks;
- Recipes and formulae; and
- Research and bench data.
The turnaround management company originally brought in was inefficient in its management of these intangible assets and short sighted in its approach to the value of those same assets. Virtually no thought was given to the intellectual property or other intangible assets (e.g., research, bench data, recipe refinements, marketing materials, advertising materials, public relations, customer lists, trademark registrations, trade dress; as well as contracts with major retailers such as Kmart and Wal-Mart).
At one time, the trademarks, domain names, recipes and retail relationships (among other intangible assets) were very valuable and very saleable assets. However, before the original turnaround management team could be replaced, value had been dramatically reduced because of a traditional tangible asset focus, and relative inexperience with intangibles.
The original turnaround team had delayed any activity on marketing of the assets. When the company was forced to close its operations, there had been little thought to servicing the retail relationships, preserving the research and bench data with regard to replication of the products in the future, maintaining marketing materials, as well organizing source materials and designs for packaging and trade dress. In just six or seven months, the value of the intangible assets had been destroyed by the team put in to manage and shepherd MCC through its attempted reorganization. Specifically:
- Product remained undelivered to key accounts;
- Retail relationships were not managed;
- The database of contacts and customers was left unattended;
- Packaging was destroyed; and
- Recipes and research were scattered.
The company’s portfolio consisted of more than 200 individual recipes, including the following sampling:
- Sugar Free Raisin Clusters Mix
- Dark Almond Bark
- Milk Vanilla Butter Cream Egg
- Margarita Nougat Fluff
- Watermelon Witch
In sum, the MCC assets appeared unsaleable; not only because they had been mismanaged, but also because the customer list/retailer relationships/database was left unattended for an extended period of time. Today, two years later, the assets remain unsold. There is, however, a renewed active interest from a potential acquirer.
The lesson to be taken away is clear and simple: Intangible assets are wasting assets. Time is critical in the husbanding of their value. If one is to realize value in a merger or reorganization from a company’s portfolio of intangible assets, thought must be given to those assets earlier than any other group of assets, including real estate and PP&E.