Montana Power Company Scandal

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Short Case Study

Company Name Montana Power Co/Touch America

Background

For many decades, the Montana Power Company demonstrated the very best of American capitalism. It granted cheap, reliable electricity to the people of Montana, excellent benefits for the thousands of employees, and dependable dividends to it's stockholders. The citizens of Montana had no complaints and were happy. Those who were unhappy were the executives officers and their Wall Street investment banking firm, Goldman Sachs, decided that there was more money to be to made in the world of telecommunications. Montana Power executives pushed a bill via the state legislatures that would deregulate the price of electricity and open the market to competition. This was supposed to be good for the consumers. Sure enough within six months of the bills passage, the company now began to sell off its generating assets. Montana Power announced that is getting out of the business entirely. Why did the executives decide to sell off the assets of a reliable, safe utility stock to a very, very highly speculative, risky telecom stock?

Analysis/Recommendations

The people of Montana were stunned. Montana Power joined the high-tech telecommunications company called Touch America. Most importantly that this decision was based on the advice of Goldman Sachs, who obviously did not consult the stockholders. This decision was completely unethical and had no form of communication between the top management and its shareholders. The company's plan was to take its .7 billion dollars in the sale of Montana Power's assets and bury the profits in the ground.

Why did Bob Gannon rush out of the energy business and into the telecom? It was simply for the money, and by the pressure from his financial advisers at Goldman Sachs. It was a 'stupid' decision, to sell off the business that you know is generating income for thousands of employees and provided a steady return for shareholders. Goldman Sachs executives made many trips to Montana urging the company to get out of the energy business. They were the ones that pressured Gannon to selling off Montana Powers assets. Goldman Sachs did not care about the shareholders; they were the drivers and wanted money. An important factor was the contract with Montana Power and Goldman Sachs that any advice provided is exclusively for the senior management. This is translated into 'do not tell the shareholders.' Did Goldman Sachs know that this was not a good deal for the stockholders? Goldman Sachs was to be paid a flat fee as the financial adviser, and was to be paid commission on every asset that was sold. I don't think they cared very much, because ultimately they were the ones making money.

Conclusion

Someday, the Montana citizens just might wake up and wonder why Montana Power Company stockholders never insisted that the Montana Power management should take all the proceeds from selling off the power assets, and instead of dumping it into the fiber-optics hole (Touch America), use the money to buy cheap long term power contracts and continue to serve Montana homes, business and industries, instead of letting Montana's economy decline. It was unfortunate to see thousands of Montana citizens loose money in a stable energy stock. The reason for failure can be pointed directly at Goldman Sachs and Bon Gannon who betrayed their ethics, if they ever had any.

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