Ethical issues in M & A & Industrial

Espionage

Professor Lynn Paine from Harvard thinks M & A involves ethical questions:
•Degree of "fit" between the value systems of the merging firms
•Transaction
A mismatch can sometimes lead to serious problems, such as when one firm invests
heavily in employees and the other focuses mainly on shareholders or customers.
Management must decide, for example, when to disclose plans for the merger, what
restrictions to place on insider use of information, what counts as fair and proper
accounting and taxation, and how to treat employees who may lose their jobs.
In M&As; that cross borders, these issues can be particularly difficult because of
cultural and legal differences. For example, the legal definition of 'redundant
employees' varies widely as do requirements for severance arrangements. The managers
of the merging companies have to wrestle with what is fair to the different sets of
employees and what will help build a cohesive organization with a single set of ethical
standards going forward. Saurav Banerjee 1
Ethical issues in M & A contd…

 As per Professor Joseph Badaracco, an authority on business ethics,

worries whether the merger will create economic value for shareholders;
the second involves a company's implicit contracts with its stakeholders.
 Managers' principal ethical obligation is to serve the interests of their
shareholders, he says the first question senior executives should ask is this:
Is there a detailed, realistic, implementable plan for making a merger or
acquisition succeed?
 Every company has implicit contracts with its shareholders that are the
result of its past actions, statements, and commitments. When an M&A;
modifies or breaks these contracts, as they sometimes must, compensation
may be due to people and groups that reasonably depended on the
company to make good on its commitments. Thus, the second question
senior executives must ask themselves is: What does a company owe the
people and groups, particularly the weakest and most vulnerable, that may
be left behind as the company moves forward?

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Industrial Espionage
 The first U.S. law against economic espionage became effective in late 1996,
Economic Espionage Act of 1996. In developing countries these laws and norms are
evolving. The theft of trade secrets is costing companies many billions of dollars a
year in lost sales and costing workers their jobs.  Foreign intelligence services and
corporations are increasingly using classical espionage techniques to steal corporate
marketing information, technological advances, and proprietary data in support of
their national economic goals.
 Plant Cell Culture Technology
 Hsu Kai-lo and Chester H. Ho, naturalized U.S. citizens, were arrested by the FBI in
June 1997 and charged with attempting to steal the process for culturing Taxol from
plant cells. It is now used in the treatment of ovarian cancer, is a trace element
originally found in an endangered species of yew tree, it took 1 1/2 endangered yew
trees to produce 1/4 ounce of Taxol. Bristol-Myers Squibb invested approximately
$15 million to develop the process for culturing commercial quantities of the material
from plant cells. Taxol is a billion dollar a year industry for Bristol-Myers Squibb.
The foreign market share is estimated to be $200 million. Potential losses could have
been in the billions of dollars over the ten-year period Bristol-Myers Squibb holds the
patent for the plant cell culture technology.
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New Gillette Razor Design

 Steven Louis Davis was indicted in Tennessee on October 3, 1997 on five

counts of fraud by wire and theft of trade secrets for stealing and
disclosing trade secrets concerning the development of a new shaving
system by The Gillette Company. Davis was employed by Wright
Industries, a Tennessee designer of fabrication equipment which had been
contracted by Gillette to assist in development of the new shaving system.
Davis was originally assigned as the lead process control engineer for the
project but was removed from this position at Gillette's request.
Subsequently, he is alleged to have sent confidential engineering drawings
for the new Gillette razor to Gillette's competitors, including Warner-
Lambert, Bic and American Safety Razor Co. One of the companies (Bic)
to which Davis allegedly sent information is foreign owned. It is not
known whether Davis disseminated trade secrets overseas, but the FBI has
learned that a competitor in Sweden saw the drawings of the new Gillette
razor.

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Technology for Self-Adhesive Products
 Pin Yen Yang, the President of Four Pillars Enterprise Company (FPEC) of
Taiwan and his daughter Hwei Chen Yang (aka Sally Yang) were arrested in
Cleveland on September 5, 1997 and charged with mail fraud, wire fraud,
money laundering, receipt of stolen property and theft of trade secrets from
Avery Dennison Corp.  Avery Dennison is one of the largest U.S.
manufacturers of adhesive products, including adhesives for such things as
postage stamps, labels and diaper tape.
 FPEC manufactures and sells pressure-sensitive products mainly in Taiwan,
Malaysia, Singapore, People's Republic of China, and the United States. The
company has more than 900 employees and annual revenues of more than
$150 million. His daughter has a Ph.D. in analytical chemistry from New
Mexico State University, was employed most recently by Four Pillars as an
Applied Research Group Leader, and may hold dual citizenship in the U.S.
and Taiwan.

Saurav Banerjee 5
Technology for Self-Adhesive Products contd…

 The Yangs were convicted for having paid an Avery Dennison employee
in Ohio, Dr. Ten Hong Lee, between $150,000 and $160,000 for highly
sensitive and valuable proprietary manufacturing information and research
data over a period of approximately eight years from 1989 to 1997.
Payments were reportedly made through Lee family members in Taiwan.
Avery Dennison estimates that its direct costs for developing the stolen
technology were in the tens of millions of dollars.
 Six months prior to the Yangs arrest, Lee had been confronted by FBI
officers and admitted providing confidential information to Four Pillars.
Dr. Lee plead guilty to one count of wire fraud in return for cooperating
with the investigation.

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Russia expels Israeli military attache for 'industrial
espionage'

 The Kremlin has expelled a top Israeli diplomat, accusing him of illegally
obtaining Russian military secrets in order to help Israeli companies win
lucrative defence contracts. Israel claims the Kremlin had attempted to
recruit Leiderman as a double agent. Russian security sources claimed that
Air Force Colonel Vadim Leiderman, Israel's military attaché in Russia,
had been caught "red-handed" receiving classified documents in Moscow.
 Col Leiderman was reportedly detained at a café where he was meeting a
source from the Russian defence ministry and questioned for several hours
before being told to leave the country within 48 hours.

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Eastman Kodak Trade Secrets
 Harold C. Worden was a 30-year employee of the Eastman Kodak
Corporation who established his own consulting firm upon retiring from
Kodak. Worden's firm was allegedly able to broker the consulting services of
more than 60 other Kodak retirees, some of whom consulted for competitors.
Worden's consulting contacts are believed to have included foreign firms.
 During his last five years at Kodak, Worden was project manager for what
was known as the 401 machine. This is a new machine designed to
inexpensively produce the clear plastic base used in consumer film.  The base
is lined with emulsions using a secret formula that determines the quality of
the photographs. When Worden retired, he took with him thousands of
documents marked "confidential" about the development of the 401 machine,
and he recruited his successor to continue providing confidential information.
 A Kodak spokesman said the numerous drawings, plans, manuals and other
documents removed by Worden were worth millions of dollars to the
company, even though Worden by the time of his arrest had received only
$26,700 for selling the information.
Saurav Banerjee 8
Eastman Kodak Trade Secrets contd….

 The market share at risk as a result of Worden's activities could have been
in the billions of dollars.
 As part of a plea arrangement, Worden pled guilty in August 1997 to one
felony count of interstate transportation of stolen property. Worden was
sentenced in November 1997 to one year imprisonment, three months of
home confinement with monitoring bracelet, three years of supervised
probation, and a fine of $30,000. Kodak has a civil suit pending against
Worden for financial restitution.
 A week after Worden was sentenced, Kodak accused another retired
employee of providing trade secrets to what was then 3M's photographic
film division in Ferrania, Italy.

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Industrial Espionage – the evolution
 The US National Counterintelligence Center (NACIC) which later became
the Office of the National Counterintelligence Executive (ONCIX) have
been reporting annually to Congress since 1995 about foreign economic
collection and industrial espionage.
 Post cold era, with the demise of then USSR, a lot of infrastructure busy in
governmental and political espionage got diverted to industrial one.
Government as well as individual companies are involved.

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Sabotage
 Sabotage is very much part of industrial espionage, albeit, done in an covert
manner
 Recent worm attack on Iranian nuclear facility is widely believed to be
handiwork of US- Israel to thwart Iran’s progress.
 Israel’s military attack on Syria, Iraq on their nascent nuclear facilities are
sabotages
 Inside a company a management or workers might employ sabotage
techniques to get one upmanship in industrial relation cases – labor disputes.
In the recent unrest in Maruti, Manesar facility management and government
feared widespread sabotage by workers and hence insisted on ‘good behavior
pledge’ by workers. The noted filmmaker Satyajit Ray depicted use of
sabotage by management to get out of commercial commitment by use of
‘Force Majeure’ clause in the Bengali film ‘Seemabadhha’
 The proposed gas pipeline between Iran – Pakistan- India is not fructifying
due to threat of sabotage by unfriendly entities including terrorist attacks on
the pipelines.
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Reverse Engineering (RE)

 RE is permissible as long as it is done post launch and not breaking the IP

(Intellectual Property)laws
 On lighter side, one can not make a parody Pine Apple on Apple and
you are not allowed to create a spin offs like Marlboro Bidi and
Mercedes brief ( the last two are Indian innovations!!!) Mercedes Benz
managed put off the brief campaign, before Phillip Morris could take
notice the Marlboro Bidi in Kerala lost steam on its own.
Japanese made a successful industry of micro electronics from RE and
now Chinese are going great guns.
Collecting all info in public domain is fair game but stealing, buying is
not only unethical nut illegal as well.
Steve Jobs accused Google’s, Samsung’s Smart phones on Android
platforms as rip offs on iPod, iPhones.

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Wire tapping, Hacking, Eavesdropping, garbage scrounging

 Wire tapping, Hacking, Eavesdropping may be allowed on wider

interest – national security etc, but when done by a pricate
enterprise or an individual is outright illegal and unethical.
 GOI tapping phone of Niira Radia, terrorists or tax defaulters are
allowed but not that by News of the World journos of Murdoch
and there is nothing ethical about hacking, never mind the best
seller from Ankit Fadia!!!
 Shredder is recommended if one wants confidentiality
maintained, however, shredding only for destroying wrongdoing
is illegal, ask Enron & Arthur Anderson!

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Acknowledgements

1. http://www.alumni.hbs.edu/bulletin/1997/june/text/dealstext.html,
accessed on 23/x/2011.
2. http://www.springerlink.com/content/xw46qq73185461wj/, accessed on
23/x/2011.
3.http://www.wright.edu/rsp/Security/Spystory/Industry.htm
4. http://www.mekabay.com/overviews/industrial_espionage.htm
5. Competing with Integrity, Richard T De George, OUP, 1993, pg 180-183

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