The SIRA Fiasco
March 8th, 2015
In July of 1998, the former Enron Corporation sent some management heavies to the UK to negotiate the purchase of a company called Wessex Water. From Wessex’ perspective, negotiating with Enron was a surreal experience. The most basic due diligence was missing, the Enron reps didn’t even visit Wessex’ facilities. Instead, after their greetings, the reps from both companies went straight to the pub. Enron was making a massive offer for Wessex seemingly on the fly, and the Wessex folks didn’t know quite what to make of it. A deal this big, drafted on a cocktail napkin? Really? But by the end of that trip Enron had bought Wessex Water for $2.4 billion. Within three years, they’d lost over 90% of the value of their investment. Since then, the Enron / Wessex story has been the gold standard on how to screw up an acquisition. That is, until now.
We received a letter. “Dear Sir,” it began, “I worked for CSA for […] years, […] until the ultimate mistake, Ash Sahi. First time I met him I knew he was full of crap and he proved me right at every turn. Never been so glad to get out of a company […] They are in a death spiral and what’s more, they deserve to be exactly where they are.”
We thought that sounded interesting, so we asked this new source for a meeting. And we got one. And the source told a tale of acquisition to make Enron’s Wessex Water story look like sound management.
The story goes like this. First, as we already know, the CSA is always looking for foreign companies to purchase with taxpayers’ money. One such acquisition target was a British company called SIRA. This target was a testing company, smallish and highly specialized. It was run by two senior principals.
So how are corporate acquisitions handled in a normal company? Well, step one is setting up an acquisition team. For those unfamiliar, there are usually about a dozen people on these teams, each of these persons being a specialist in an area relevant to the acquisition. There’d be a tax specialist on the team, a finance specialist, and so-on. The idea is to ensure that the acquisition team has coverage of all of the parameters of the acquisition in order to ensure a smooth, crisis-free purchase and transition. Seamless acquisitions require a lot of planning, so these teams are established months ahead of the expected acquisition close date.
Contrasting all of this, the CSA formed their SIRA acquisition team several weeks after the deal had already closed.
We spoke to mergers and acquisitions consultants about CSA’s curious timing and they weren’t especially charitable in their assessments. Featured from the feedback; “I’ve never heard of something so stupid.”
Having no acquisition team in place means that very little -if any- due diligence was done on the SIRA deal. As a result, CSA left a lot of taxpayer’s money on the table. The purchase price was approximately $13MM, and just like Enron’s buy-it-in-a-pub program, the CSA bought SIRA without really negotiating. The SIRA principals submitted their first offer and, like all first drafts, it was a fantasy offering. The expectation is that weeks, if not months, of negotiations would naturally follow and the first draft demands would eventually be whittled down to something reasonable. Instead, CSA received the fantasy offer and signed it, just like that.
SIRA could hardly believe that CSA was doing business like this. It even took six months, long after the deal had closed, for CSA to fly management to the UK to assume control of their newfound asset. Upon arrival they had a cool reception from the SIRA principals. So much of business is based on respect, and with CSA’s conduct so slipshod, they really hadn’t earned any.
“From an employee point of view,” said one CSA staffer, “the biggest issue is there is absolutely no management accountability, stupid decisions and bad performance are rewarded with promotions.”
For example, consider the acquisition contract itself. Long after the close date, CSA was alarmed to learn that the executed contract contained no noncompete provisions at all. That is, there was nothing to prevent the SIRA principals from opening a competing business immediately after their transition terms expired. Noncompete clauses are awfully basic, and a missing noncompete clause is the sort of thing that gets noticed by an acquisition team, had CSA thought it important enough to properly form one.
In the absence of non-compete clauses, the former SIRA principals did indeed set up shop in competition with CSA, proverbially across the street from CSA’s SIRA offices. As longtime leaders of a small, specialized operation, the former SIRA principals attracted quite a few of their former clients to their new company. Thus, CSA found itself pleading with their former SIRA colleagues to agree an ex post facto amendment to the purchase agreement. Obviously CSA wasn’t in a strong negotiating position. They paid heavily for the mistake, which means that Canadian taxpayers paid heavily for the mistake. Alas however, it gets even worse.
Having at great expense amended the purchase agreement to at least partially restrict direct competition between CSA / SIRA and the new outfit run by former SIRA principals, the CSA then discovered that their purchase agreement also failed to include the rights to the name “SIRA.” How did they find that out? Well, surely not be reviewing the contract. Instead, the former SIRA principals had picked a name for their new company. They called it EXIRA. That’s right, its as bad as it seems, it’s pronounced “Ex-Sira.” They even launched a website with that name. Subtle, no?
The former SIRA execs had very little respect for their CSA counterparts. They picked the EXIRA name because they “wanted to piss off CSA a little bit.” In this, they succeeded. The CSA was once again fuming, then shortly pleading with them to reopen the purchase agreement in order to acquire the name SIRA, the same name, incidentally, that CSA had been using for months already. For the name SIRA they paid another $7MM.
Nobody on the outside knows how much CSA really paid in the whole SIRA fiasco. Their 2010 financial filings claim that the total was $17MM, but its not clear if this figure includes the secondary payments for the name, the noncompetes, etc. And subsequent CSA filings state that certain subsidiary-related charges were subsumed for filing purposes into the broader category of operations. So everything’s been jumbled together, in other words.
Why is CSA managed so poorly? The lack of basic due diligence cost CSA dear in the SIRA deal, just as its costing them in other ways with their fight against PS Knight Co. There wasn’t any due diligence prior to that fight either. So why is CSA leadership so far below par?
“I just think they actually don’t know [what] the rules are that they’re operating under,” said one insider, its “mismanagement as a result of ignorance.” That’s got some substance to it. RestoreCSA has researched quite a few CSA leaders and has been impressed by their insignificance. Senior CSA leaders have faked credentials, some have no credentials at all, and others get creative with even their CSA generated credentials. We have a CSA business card for instance, that lists a “manager of commercial alliances” in a department precluded at law from having any.
Most CSA leadership are unqualified for their jobs. “The people that should know, don’t know the rules, and that leads to everyone else doing what they want.” Said one CSA veteran, “CSA isn’t very bright as a whole, that’s the whole problem.”
The solution for most CSA employees has been to escape the problem entirely. As one source put it; “I’m now employed by a REAL company, not some ‘not-for-profit’ government subsidized model of gross mismanagement.”
Ultimately the solution is simple; sever the commercial assets from the regulatory authority, let the former rise or fall on its own merits and let the latter return to public service. Ah, but that wouldn’t be as convenient or as profitable or as posh as a sordid slushbox that is the current cartel structure. Still, with their trajectory unsustainable and their conduct indefensible, and with a very public trial shortly to be scheduled, the CSA may be compelled to change more quickly, and more substantively, than they presently think possible.