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Case Study:
Farmland Industries
Inc.
Farmland Industries Inc., a federation
of 1,700 rural farm cooperatives that is the largest farm cooperative in the
United States, filed for bankruptcy protection on May 31, 2002, after
reportedly rejecting an offer by Smithfield Foods Inc. for acquisition of
Farmland's meat business. The meat business is operated as a joint venture
with U.S. Premium Beef Ltd., which has the right of first refusal.
In the 1990's, Farmland Industries re-directed its capital and
took on considerable debt to become a larger processor of farm commodities. The
subsequent declines in crop prices resulted in a loss of $90 million for the fiscal
year reportedly ended August 31, 2001, with additional losses of $46 million for the
half year ended February 28, 2002. Investors in Farmland's subordinated bonds
reportedly aggravated the liquidity crisis by redeeming the cooperative's bonds in droves. This
story offers an example to vendors of the impact of massive changes in a
customer's business environment, as well as the inflexibility a customer faces
when it has committed to joint ventures.
This bankruptcy
could be bad news for Ernst & Young LLP (or its successor Cap Gemini Ernst
& Young). In April 1997, E&Y and Farmland formed OneSystem Group
LLC (OSG) as an IT joint venture to provide IT outsourcing and business process
outsourcing services to Farmland Industries and the Farmland Cooperative System,
the largest farmer-owned cooperative in North America. The
joint-venture relationship reportedly introduced results-based metrics and
gain-sharing through the establishment of unique payment methods for services
funded by realized business savings.
In a bankruptcy, executory
contracts may be terminated. In a joint venture where one of the
parties is bankrupt, the bankrupt joint venturer may terminate future obligations to
provide funding and services, but it still owns the joint venture interest.
Joint venture planning
requires special attention to this kind of outcome. For further
information, please contact one of our outsourcing attorneys.
Related Topics
Bankruptcy
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