Mutually Assured Destruction - The Nuclear Option

Company A is running a successful franchise operation, with dozens of franchisees. Company B acquires Company A. That’s the end of the franchise operation. This is different from Reorganization, in that R&D management in Company A has much reduced negotiating power vis-á-vis the management of R&D in Company B. R&D in the acquired company is essentially ‘that pile of stuff’. In these cases we execute the Nuclear Option – the End Game+. Corporate funding continues for a pre-negotiated period (18-24 months), but each franchisee must seek its own sources for longer-term funding.

The franchisees have several contractual escape clauses in the event of the Nuclear Option that allow this to happen:

  • Ownership of the Intellectual Property reverts to the Franchisee
  • Majority ownership in the franchisee transfers away from the corporation, if needed
  • Corporate Right of First Refusal expires (i.e., via an escape clause)
  • Corporate controls over franchisee management expire.

These clauses are built into the original Company A funding contract, exercisable only in the event of a Nuclear Option. Leadership of the acquiring company (B) must be made to see that it’s in their own self-interest (via a minority share) to allow the Investible Units+ to become as attractive as possible for outside investors.

The acquiring Company B may think there’s a diamond in the rough in amongst the disenfranchised research units, and may seek to acquire it on the cheap. We use the legal defense funds in the War Chest+ to ensure the targeted Investible Unit is able to negotiate on a level playing field. Our End Game reigns; Company B will have to pay dearly for a new contract with their desired franchisees (i.e., to retain the rights of first refusal).

Consider the case where a few of our franchisees had products in commercialization+ at the moment of the acquisition. The franchisees were expecting milestone or progress payments, and now the Company A commercial organization has been gutted, along with all its built up history and experience with the franchisee products. There are two choices: renegotiate the terms of sale of the blockbuster+-potential product with Company B allowing them to continue with the commercialization (perhaps including retainers for key Company A commercialization staff, where possible). Or, cut a deal with Company C to acquire the product and to continue the commercialization. Essentially, the original sale with Company A is voided, and new negotiations are started between the franchisees and Company B, C, D, etc.

Even though the franchisees most likely continue with their R&D pursuits, the power and vitality of the franchise operation will soon be lost. The disenfranchised research units will be hard put to achieve the level of productivity and enthusiasm they had as members of the franchise. That special organizational structure, one that was very long in the building, is gone. This is why we describe the Nuclear Option as a form of Mutually Assured Destruction.

Home Page August 2010