The New Year's Eve Crisis

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The New Year’s Eve Crisis

William Naumes
Margaret J. Naumes
University of New Hampshire
It was Monday morning, New Year’s Eve day, 2001. On a day that many people
were enjoying at home, Mike Valenti was in his office at Michael’s Homestyle Pasta.
Since he had acquired the Southern Pasta Company on December 10, he had been
learning the business, trying to get his arms around it, as he described it. Distance
was a factor: Michael’s headquarters and plant were in Connecticut; Southern was
located in Florida. Mike would have liked to be in Tampa, working directly with his
new employees and trying to integrate the two companies’ cultures, but his wife was
expecting their third child in early January and he needed to stay near home. In the
due diligence period leading up to the purchase, it had seemed as though a new
problem had developed every week. Finally, 3 weeks after closing, things seemed to
be under control.
The telephone rang. When Mike answered, he was not surprised to hear Ted
Brewer on the other end of the line. Ted, Michael’s vice president for administration
and operations, spent part of every week at the Florida plant. Ted began, “I hope
you’re sitting down.” He went on to tell Mike that Southern’s quality assurance
manager, Fred Jones, was in his office, and “You need to hear what he has to say!”
He put Fred on the phone.
Mike listened as Fred told him that the seafood-stuffed pasta shells that South-
ern had just shipped to its biggest customer were tainted with salmonella.
“That can’t be true,” Mike responded. “We have the lab results that show
it’s fine!”
“I know,” replied Fred, “but those results were falsified.” In tears, the quality
assurance manager explained that he had taken the samples of stuffed pasta that
were to be sent to an independent lab for testing and baked them to make sure that
any bacteria were killed; then he had frozen them and repackaged them to look like
packages just off the production line. Southern’s president, Hans Schmidt, had
threatened his job if the stuffed shells didn’t test clean.
Mike was stunned. New Year’s Eve was one of the biggest nights in the year for
restaurants. The shells stuffed with chunks of lobster, crab, and shrimp were custom-
made for a chain of over 200 restaurants and were one of its featured menu items.
The names in this case have been disguised. This case study was prepared as the basis for class discussion rather
than to illustrate either effective or ineffective handling of an administrative situation. An earlier version of the
case was presented at the 2003 annual meeting of the North American Case Research Association in Tampa,
Florida, and received the Emerson Award for Best Case in Business Ethics as presented at that meeting.
Copyright © 2005 by the Case Research Journal and William Naumes and Margaret J. Naumes.
This document is authorized for use only in Karin Svedberg Helgesson 's BE917 at Stockholm School of Economics from Sep 2022 to Jan 2023.
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The chain accounted for almost half of the revenues of Southern Pasta, and was one
of the most important reasons why Michael’s had acquired Southern. Salmonella
contamination was a serious problem. Salmonella was a bacterium that thrived in
undercooked food containing eggs, poultry, or meat, and was responsible for about
600 deaths a year. Small children, the elderly, and people with weakened immune
systems were particularly at risk.1
“Ted, we need to talk about this,” Mike said. “I’m going to set up a conference
call and call you back.”
MICHAEL’S HOMESTYLE PASTA

Mike Valenti had written a business plan for a homemade-style pasta company in
1991, while he was a college undergraduate. His goal, in the plan, was to reach
$3 million in sales. After graduation, he started the company, making stuffed pasta
by hand upstairs from his father’s bakery. By 2001, the company had moved twice
as it expanded, first to the corner of an old textile mill building, then to its own new
plant. It had over 100 employees, and sales had reached $17 million.
Michael’s Homestyle Pasta produced a range of specialty products including
fettuccini and linguini, but its signature product was gourmet stuffed pasta shells.
Mike had studied competitors’ mass produced products and compared them with
homemade. He had identified an important difference—machine-made stuffed
pasta, no matter how tasty, had fillings made with chopped up ingredients, while
handmade shells had large, identifiable chunks of vegetables or meat or cheese. So
Mike designed machines that could handle the irregular chunks. His focus on
research and development and on customer service led him to develop new pasta
products for specific clients. By 2001, nearly half of his sales were to national or
regional restaurant chains, with independent distributors selling most of the rest.
SOUTHERN PASTA COMPANY

While there were small “mom and pop” companies making specialty pasta in many
local markets, there was only one other company that was able to produce stuffed
shells similar to Michael’s on a large scale. Southern Pasta Company, located in
Florida, was smaller, but had a wider range of products, including a number of
nonpasta items. Like Michael’s, its customers included restaurant chains, several of
which ordered custom products. Southern was the only company, other than
Michael’s, that made pasta shells stuffed with identifiable chunks of seafood. At
Southern, however, employees made and stuffed some of the pasta products by hand.
Mike had first approached Friedrich Walz, the founder and owner of Southern,
in 1999 when the companies were roughly equal in size. The two companies were
competing for the same pool of customers, and Mike wanted to know whether
Walz would be willing to sell. Walz would only consider a merger, and talks didn’t
progress far. Shortly afterward, Michael’s succeeded in signing Southern’s largest
customer.
Two years later, Walz was willing to sell. Despite signing some new customers,
sales at Southern had been steadily decreasing and his company had lost $1 million
in each of the last 2 years. In May 2001, Southern had to recall its seafood-stuffed
shells due to salmonella contamination. The plant had to be thoroughly cleaned
and then inspected by the FDA. For the first time, the company put in a system to
track individual production lots and made other changes in the production process.
The customer for whom Southern made the shells stuffed with seafood sent people
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to inspect, help retool, and develop approved cooking procedures. The recall cost
Southern more than half a million dollars.
Although Walz had been willing to shoulder the losses out of personal funds
from selling a previous business in Europe, the emotional drain of the recall process
had taken its toll. He wanted to return home to Europe. The deal was important to
Mike because of his concern that a major food company might become interested
in buying Southern, enabling it to become an effective competitor. By the end of
June 2001, Mike and Walz had signed a letter of intent for Michael’s purchase of
Southern. However, Walz provided as little information as possible during the next
few months while Mike and his management team were attempting to do due dili-
gence analysis. Mike recalled, “There was a point in time during the due diligence
where we really didn’t feel we had the information to close the deal.” Dan Rivers,
Michael’s vice president of sales and marketing, was more optimistic. “We knew a
lot about the company from competing against them,” Dan said. “We felt comfort-
able that we could make it work.”
They did learn the name of some, but not all, of Southern’s customers. The
May salmonella recall was an issue, but not a major one. As Mike said, “We had
done as much due diligence as we could possibly do without going into the plant.
To make sure, they provided documentation, consulting documentation saying
they’d cured the problem and they’d cured it well into the summer.” Joe and his
management team were concerned about the limited information they were able to
secure from the company. They realized that Walz was not going to provide any fur-
ther information. They felt that they could build in insurance clauses to cover any
expected contingencies. One concern was Southern’s large volume of accounts
receivable, half of which were more than 90 days old. Mike negotiated an escrow
account to cover any receivables that turned out to be uncollectible. Other prob-
lems surfaced in the weeks prior to closing, but on December 10, 2001, control of
the company passed from Friedrich Walz to Mike Valenti.
MANAGING SOUTHERN PASTA

Mike decided to leave the management team and operations at Southern intact, at
least for the time being. He ran Michael’s with a lean staff, and he did not have
people that he could spare to send to Southern on a full-time basis. Mike also real-
ized, “When you acquire a company, the biggest challenge you have is to overcome
their culture and weld it into yours.” Though he understood Southern’s production
and markets, his difficulties in getting company information before the takeover left
him concerned about what else might not have been disclosed.
Two days after the acquisition, Walz and the president went home to Europe
for the holidays. They stated that they would be back after New Year’s. For the first
few weeks, Mike commuted to Florida as often as possible. Although he would have
liked to move to Florida temporarily, he knew this was impossible because of the
late-term pregnancy of his wife. His two top people, Dan, vice president of sales
and marketing, and Ted, vice president of administration and operations, split their
time between Connecticut and Florida, each spending half the week in their new
plant to learn the business and begin the process of integrating the company into
Michael’s. Mike joked that everybody at Bradley International (Hartford CT’s air-
port) knew his name, because “I racked up so many frequent flyer miles.” Shortly
after December 10, Michael’s director of quality assurance moved to Florida tem-
porarily. “He was whipping them into shape,” particularly in the area of cleanliness,
according to Ted.
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It became obvious quickly that the cultures of the two companies were very
different. As Mike and his team began digging into the company’s operations, they
discovered that many of the employees intensely disliked the former owner. The
Southern employees indicated that Walz and Schmidt ran the company with a
top–down management style. The employees stated that when the two top man-
agers gave an order, they expected it to be followed by their subordinates. Other-
wise, they had little interaction with lower level employees.
Mike, on the other hand, explained his own approach as “very interactive, very
hands-on. I wanted to go out there and see what people were doing. They took it as
a breath of fresh air.” One of Mike’s staff compared Walz’s management style with
Mike’s: “Mike, your people would throw themselves in front of a bus for you. His
people would throw him in front of the bus.”
Once his wife’s due date approached, Mike felt that he couldn’t travel until after
the baby was born, since “I would never want to miss that!” It wasn’t easy for him,
however. He described himself: “I’m the kind of guy that says, ‘Look, we’re going to
solve the problem, so you’d better believe I’m going to be there. I want to know
what you’re doing, I want to know how you’re doing it, I want to know what my
impact is going to be, I want to know what my exposure is, I want to see it all.’”
THE CALL FROM FLORIDA

Mike sat back and considered what he had just heard from Fred Jones: “The long
and short of what he’s telling me is, ‘You have a major regulatory problem that
could shut you down completely, number one, and number two, you can pretty
much kiss goodbye 50 percent of the revenue stream you just bought 3 weeks ago!’”
One of the changes made after Southern’s salmonella problem in May had been
the installation of a lot tracking system, so that every batch of each product could
be traced and its location identified. The stuffed shells produced during November
and early December had been stockpiled, and shipments had only recently been
made to the customer from these potentially contaminated batches. Fred reported
that he had managed to stop two shipments on Southern’s loading docks. Ted was
checking with the distributors, trying to locate the rest of the contaminated lots.
Mike realized the magnitude of the problem:
Once we traced the product, we realized that the product had left distribution
already. It was in the restaurants.
There are recalls that go on that you never hear about. And the reason you
never hear about them is that the lots never hit flow, they never hit consumer
marketplaces. So what happens is the companies will simply pull them back out of
distribution and destroy them. And the FDA is fine with that, as long as it can be
proved that the product is contained.
If the product had reached consumers, however, the FDA would take action.
And what the FDA does, is they put out a press release, and depending on how
many states you’re in, depends on what sort of media they use to issue the press
release. So, 50 states would generally mean US News & World Report and CNN.
We were extremely close to that very harmful situation.
The problem was the cooking system in the plant. The filling mixture of the
shells was cooked, but then allowed to cool. The final processing step didn’t get the
temperature high enough to kill the salmonella.
Mike had learned from Fred that “everybody knows that, down there. It said
right in the specs that the product needed to go up to 158 [degrees Fahrenheit], and
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all of the documentation behind it states that it never hit more than 140.” The
seafood filling was more vulnerable to contamination than other fillings. In the
month before Southern Pasta was acquired, virtually every lot of the seafood-stuffed
shells had been contaminated. Hans Schmidt, Southern’s president, who was the
only person in the company other than Walz who knew about the impending sale,
had coerced Fred to make sure that the pasta got clean test results. What Schmidt
didn’t know was that Fred had also kept his own records of all of the failing test
results. Now, after 3 weeks under new management, he had finally worked up the
nerve to come forward.
THE DECISION
Mike’s conference call with his management team had lasted more than 4 hours,
and no definite decision had been reached. Soon, the restaurants would be starting
to serve their patrons, who were happily celebrating New Year’s Eve.
Dan, Ted, and Mark had been as shocked as Mike was. Dan’s word for it was
“dumfounded.” “Nobody could finish a sentence: ‘How could they . . . ? What did
they . . . ?’” Mike remembered.
Southern’s sales manager who handled the restaurant account and Michael’s
lawyer were also brought in on the call. The lawyer noted that the restaurant chain
had some responsibility here due to its stated policy of certifying production by its
suppliers. There were also the FDA and health department requirements to cook
the product at a sufficient level to kill contaminants such as salmonella. The lawyer
argued that even if there were a problem at the restaurants, Southern had produced
the product prior to the acquisition, and any liability could be placed on Southern’s
previous owner. He felt that Michael’s liability could be limited if anyone were to
get sick from the tinted food. They went back and forth on what to do, whether to
tell the customer. “Effectively, all my inventory was bad, and all of their inventory
was bad except for a very small residual of the older stuff that they had,” Mike told
his team. Would it matter that the inventory had been produced before Michael’s
had bought the company? Who would be sued if any customers got sick?
The restaurant chain had cooking standards that required the stuffed shells to
be cooked to at least 160 degrees Fahrenheit. After the May recall, the chain had
sent representatives to Southern’s plant and assisted in the retooling process. Mike’s
team discussed the probability that the product would be cooked correctly:
We went through a scenario where, from a legal standpoint, they have documenta-
tion saying they need to come up above 160, which means that they should have
been cooking the product, so from FDA and health departments standpoints,
would they have been at fault? Probably, (the restaurant company) would have
been co-fault because it meant they didn’t have checks and balances in place on
their end, to make sure that they were cooking the product properly.
One option would be to trust the chain’s cooking standards. Another option
would be to contact the chain and have them notify all restaurants, to make sure
that the cooking temperature was high enough. Either option could have ramifica-
tions, however.
Dan felt,
I think we were scared of a couple of things. One, we were scared that [the customer]
would go to another vender. And they were a big reason why we bought the com-
pany, $3.5 million out of $8 million or so that they were doing. And two, we were
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scared that they would take it off the menu altogether . . . just say, “This was the
second time, we can’t do this any more. It’s too big of a risk to our customers.”
Mike thought back about the call:
It went up, it went down, it got heated, it calmed down: Well, what do we do?
What if we called? We could lose the business! Well, we could lose the business any-
way. I played out every scenario that I could possibly play out. Don’t call. Well,
what if they call you and say, “Did you know about this?” What if a pregnant lady
comes in there, eats the product, and has a stillborn?
I said, “My God, I can’t believe this. I just spent three and a half million
dollars—I just spent three and a half million dollars on nothing!” I thought for sure
we were done. Damned if you do, damned if you don’t. If somebody gets sick, not
only are we done here, but the resulting impact through the industry would have
been devastating for us.
By now, it was late afternoon. After the conference call ended, Mike had called
back and talked to each person separately, probing to find out what they thought
and how comfortable they were with the different options. Ultimately, however, it
was his company. Soon, the restaurants would be starting to serve their patrons,
happily celebrating New Year’s Eve. Mike had to decide what to do.
End Note
1. For information on Salmonellosis, see www.about-salmonella.com.

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