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Global Risks 2008 » more

Share price is always vulnerable

It is not necessarily a weak performance or a general stock market slump that can negatively affect a company's share price. Sometimes companies are hit by adverse outside factors beyond their influence. There are also self-inflicted crises of confidence which can be triggered by as trivial an action as sending an e-mail.

One Tuesday morning the CEO and co-founder of Cerner Corporation, a US health care software development company, noticed that the company's car park was almost empty when he arrived early at work.

Infuriated about that, he went to his office and wrote a strongly-worded e-mail to his management team. Under the subject "Fix it or changes will be made", he told his 400 managers: "We are getting less than 40 hours of work from a large number of our KC [Kansas City]-based employees. The parking lot is sparsely used at 8 am, likewise at 5 pm. As managers, you either do not know what your employees are doing or you do not care… In either case you have a problem and you will fix it or I will replace you."

Furthermore, he listed a set of six potential punishments such as closing the company gym from 7:30 am to 6:30 pm, hiring freezes and even a staff reduction of five percent. Completely frustrated that he had passed a stock purchase program for his employees only a few days earlier, he further wrote that "Hell would freeze over before I would implement another employee benefit in this culture". His directive ended with the words: "You have two weeks. Tick, tock." As a success measurement he defined that the parking lot should be substantially full at 7:30 am and 6:30 pm.

The rest of his memo was more moderate, but his target audience was not very amused. The memo was leaked outside and eight days later published on the Yahoo Web site. Another two days later, on March 23, 2001, Cerner Corporation's stock price slumped by 22 percent. What had happened? One leading analyst said the e-mail had prompted two major questions: had anything changed in the company to cause such a seemingly violent reaction, and was this a CEO with whom investors felt comfortable?

Although the CEO apologized for his e-mail, it took almost one month for the share price to recover to its "pre-e-mail" level. The CEO later explained that he wrote the e-mail with a lot of satire, never thinking it would be communicated to his associates or to the outside.

What was wrong with the water?

Major brand names are even more at risk of attracting publicity. Encouraged by the success of its Dasani bottled water brand in the US, Coca Cola decided to enter the European water market. When it introduced Dasani to the UK at the end of January 2004, the product was destined to become a new "lifestyle" brand. Although the company had never claimed that Dasani was made of natural spring water, the local media outbid each other with cynical articles about its origins as bottled tap water from the London suburbs. The company responded by pointing out that this was not mere tap water, but tap water which had passed through a process perfected by Nasa before having "a perfect balance of minerals" added.

Two months after Dasani's introduction, however, the company announced that it was voluntarily withdrawing the product from the UK marketplace. Within 24 hours, 500,000 bottles vanished from the shelves. The reason: the discovery of too high a level of bromate, a mineral said to increase the risk of cancer.

UK law requires all bottled water products to contain calcium. Coca Cola added calcium, which was extracted from calcium chloride. As this also contained a high quantity of bromide, not only calcium was formed in the process, but also bromate, a derivative of bromide. Although the bromate level was within the limits permitted by the World Health Organization, it did not comply with the stricter UK law and therefore Coca Cola had to withdraw its products.

The UK's Food Standards Agency commented: "Any increased cancer risk is likely to be small. However, the levels (of bromate) are higher than legally permitted in the UK and present an unnecessary risk."

The Dasani incident did not substantially affect Coca Cola's share price, but it brought the company a raft of unwelcome publicity and also revived unpleasant memories of another more or less voluntary recall.

The soft drinks mystery

In June 1999 Coca Cola had to withdraw up to 30 million cans and bottles of Coke, Diet Coke, Sprite and Fanta when more than 100 schoolchildren reported symptoms such as headache, nausea and shivering after drinking these beverages. Some children even went to hospital.

Although chemical analysis found nothing wrong with the drinks, the incident brought a massive reaction from the Belgians, who were just recovering from a dioxin scare. The cancer-causing substance dioxin had entered the food-chain through animal feed and therefore the sale of chicken, pork, beef, eggs and meat products had been banned for some time.

Even now it is not clear what caused the schoolchildren's illness. Coca Cola presented three possible scenarios. One was that a pesticide used on crates in its Dunkirk plant leaked onto the cans and was absorbed by the lacquer. A company spokesman confirmed that people who drank from these cans probably fell ill after inhaling the substance, but denied that the pesticide had leaked into the drink.

Another explanation was that in its Antwerp plant, the gas used to carbonate drinks had been "of bad quality". The manufacturers of the gas, however, denied that their gas was the cause and presented a sample of the batch delivered to Belgium. A third explanation was that chlorine products used to clean automatic drink dispensers had caused the illness.

Some health specialists said people became ill only because they were convinced they would be. Whatever caused the illness, Coca Cola's reputation was severely damaged. Some observers blamed the company for taking more than a week to react to the incident. Belgian authorities said Coca Cola did not offer enough information on the potential cause of the illness and therefore banned the sale of all products. Coca Cola later said the crisis cost about USD 60 million in lost sales, while other sources speculated that the loss could have been three times this figure.

Disclaimer:
Views expressed in this magazine are not necessarily those of the Zurich Financial Services Group, which accepts no responsibility for them.