Harvard Business School 9-396-300 Rev. June 4, 1996 Professor George Wu prepared this case as the basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. It is based on an earlier case by Professor David E. Bell. Copyright © 1996 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 1 Dave Armstrong (A) Dave Armstrong is the disguised name of the 29-year old second year MBA student who wrote this case. I grew up in Dumas, Texas, population 9000, graduating from a small liberal arts college in central Texas. Immediately upon graduation I went to work for Thorne Enterprises in Austin, Texas, as a computer programmer. After 6 months Mr. Thorne made me president of a subsidiary company that sold conveyor belt scales. The subsidiary had 6 employees including myself. As a practical matter, I was the chief salesman. Belt scale sales had been flat through the 1973-1974 recession and did not improve much under my management. After eighteen months I quit to go into the life insurance business in Amarillo. In five years with nothing more than a secretary and a telephone, my income was around $60,000 a year. It was a comfortable living, but the problem was I was a one-man band. When I took a vacation or even the afternoon off, the entire sales process came to a screeching halt. There was no momentum built up in the way I operated. I applied to the Harvard Business School to see if I could get in. I hadn’t considered what I would do if I got accepted. But when I was accepted, I decided that I had to go. I would still be receiving renewal income from my old policyholders, so my wife and I would not have to make too much of a sacrifice in our lifestyle. But now, it’s early March. I’m three months from graduation and I have to figure out what to do next. For the last several months I’ve been trying to sell a producing oil lease for an exploration company in Kentucky. It’s a pretty good deal from my standpoint. They pay my expenses if I don’t sell it, and an 8% commission (about $30,000) if I do sell it. If this deal sells, the 30K would make quite a difference in my plans. At this point, I’ve got three job prospects. I’ll call them Job A, Job B, and Job C. Job A is the one I really want, since it has the most upside potential. But I’d say it has a pretty good 396-300 Dave Armstrong (A) 2 chance of not working out at all. Job B had better odds of working out but doesn’t have quite the same excitement as Job A. Job C is what I would call a traditional job. Job A Mr. Thorne called me last fall about an idea he has for a piggyback rail terminal to be located halfway between Dallas and Houston. I got a group of second year students at the Bschool to do a feasibility study of the idea. Thorne’s idea is to develop a rail terminal on 9,000 acres he owns there and ship truck trailers into and out of Texas via rail. The idea of a truck trailer riding “piggyback” on a rail car is not new. But what is new is the idea of a hub serving two major cities. This terminal would draw business from both Dallas and Houston and would be built on land that is 1/100 the cost of Dallas or Houston industrial property. That’s where the economies come in. Thorne also owns a railroad that already serves the proposed terminal site. Hopefully this terminal will transform the surrounding real estate into an attractive industrial site. Mr. Thorne suggested that the terminal could be segregated from the rest of his business in order to provide a cleaner way for me to participate in the equity. At this stage, we think it will require around $1 million to get started: $300K for equipment and $700K for one year’s operating expenses. I’d put in as much money as I could and Mr. Thorne would supply the rest. In addition to profit sharing, I’d be paid $50-70K, salary and bonus, to startup and run the facility. I have to give Mr. Thorne an answer by the end of March. Job B Robert Irwin owns an oil exploration company in Houston. I met him during the course of trying to sell the Kentucky oil property. Irwin and I have talked about setting up a corporation that would actively seek out producing oil leases that might be for sale. The oil and gas business has been in a severe recession for eighteen months now and a large number of producing properties have been forced on the market at fire sale prices. I would have two petroleum engineers working for me to evaluate these properties. Irwin’s exploration company would receive a standard investment banking fee. I would put up a third of the equity ($100K). In addition, I would receive annual compensation equal to the greater of $60,000 or one-third of the profits. This is really only a short-term deal. Within two years, the oil and gas glut will be gone and the attractiveness of this business will disappear also. If the oil and gas glut dries up before we got our business launched, I would probably stay on with Irwin as an agent or broker to sell oil and gas properties. There would be no equity role for me in this but commission at 8% would add up fast if I’m good. This would also give me an opportunity to develop many contacts with prospective buyers and sellers. Dave Armstrong (A) 396-300 3 Hopefully I would develop a strong relationship with a single buyer and then enter into an equity deal with him at some point in the future. Job C The third possibility is what I’d call a conventional job. Earlier this spring Mr. Irwin put me in touch with a large pension fund management company in Houston. They have plans to begin an oil and gas investment fund for key executives in the firm. I have interviewed for a position where I’d be working with two or three others to evaluate oil and gas properties for the fund. This position doesn’t open up for another 6-12 months, but they’ll put me on in the interim as a securities analyst for around $45K until the fund is started. I’m going to Houston in three weeks for another series of interviews and will have to let them know if I’m serious or not. The Decision I’ve never been faced with a hard choice before. When I graduated from college, working for Thorne as a computer programmer seemed like a great opportunity. And going to Harvard Business School looked like the obvious thing to do once I was accepted. Now, for the first time in my life, things aren’t so clear. Thorne needs a decision in a couple of weeks. Some days, when I think of all the financial upside, I’m tempted to reach for the phone and tell Thorne yes. But I decide to sleep on it and wake up frightened about the $200K to $300K that I might have to put into Thorne’s project. All of a sudden I think about all the contacts I might develop working with Irwin and Job B looks pretty good. Of course, I’ve asked my wife for her opinion. She’s been after me to take Job C and thinks that I’m crazy for “gambling” our money on these other deals. But really all she want is that I be happy in my work; that’s what it comes down to.