Wednesday, March 30, 2011

Hostile Takeover



The saga of Wargames Factory continues this week with an open letter posted on TGN by the new owner Wai Kee Hui in response to the open letter from Wargames Factory founder Tony Reidy. While the truth may lie somewhere in between there are various claims made by Mr Hui that don't pass the smell test or at the very least need further examination and or clarification for this to be fully understood. Tony Reidy has taken a good amount of flack for his “less than professional” reaction to the events that transpired (other’s words, not mine) But those people obviously aren’t grasping the personal emotion of what’s going here.

Most of the comments I’ve read about this are two fold. Either people flippantly dismissing this as internet drama, as they could care less about the inner workings of gaming /hobby Companies or Wargames Factory product. Or it is people overly concerned with Tony’s mannerism (aka Angry) posts about whats transpired. Very few people seem genuinely interested is what’s at root here. This important my fellow bloggers because there isn’t one of you out there that wouldn’t like to make money from his blog or see some kind business opportunity transpire from one’s interest in this hobby. Discrepancies in the story aside, what’s gone here is a textbook “Hostile Takeover.” There is no stock involved. but mechanisms are the same none the less.

I’ve run my own small business going on a dozen years now and my own operations are undoubtedly similar to Wargames Factory in the nuts and bolts. (while I don’t sell physical product I sell technical services ) the inner workings are basically the same. Personally I know two business’s that were taken over this exact same way in the last decade here in Chicago. Not by Chinese manufactures but by overly aggressive vendors. Text of Mr Hui’s Letter can be found here. I like to point out the most important parts that in the end, and in his own words, point out exactly what’s transpired here.

I became majority shareholder of Wargames Factory along with all its’ intellectual properties on October 13th, 2010. This acquisition occurred because over the course of the previous 2 years Tony Reidy had run up a bill of more than $250,000 with my manufacturing company in China and had failed to make a single payment on his bill during this time. Despite rumors to the contrary, I am not an immensely wealthy man and this is a huge sum of money to me. When it became evident that Tony was unable and unwilling to pay his debt to me, I had to consider my options. Option 1 was that I cease making product for Tony and call in the debt I was owed, which would effectively put Wargames Factory out of business. Option 2 was that I assume 51% ownership of Wargames Factory in return for the $250,000 I was owed . The intention behind option 2 was that I would gain controlling interest and help manage the company into some sort of financial health, where I might be able to recoup the monies owed me as well as make money for the rest of the shareholders. When both options were presented to Tony Reidy he chose option 2 and signed the paperwork transferring majority ownership to me on October 13th, 2010.”

Whats important here is that most small businesses and especially if they are doing any kind of product manufacturing, spend their formative years in red. (i.e losing money) They exist purely on credit, either that of vendors in the industry operating in good faith and contractual agreements or by will of their Bank. Fortunes have been made and companies sold for billions that never made a profit of one dime, soley based on the company “just being a good idea.” (see the late 1990’s tech bubble for further evidence of that, I remember it quite well)
I don’t know the size of Mr Hui’s manufacturing company but he also states he is “Not a wealthy man” but regardless, No one and I mean, No one lets a client rack up a tab of $250,000 unpaid without an ulterior motive or some kind of plan to seek compensation. Tony spent years building up this company from scratch.I and I am sure some of you watched the whole thing develop from here in cyberspace. To imply Tony just one day told Mr Hui. “Hey Hui thanks for the toy soldiers, I am going to stiff you on 250K” is utter nonsense. And for Mr Hui to claim that, really implies he thinks that we are all idiots.

The root of what's happened here is of course Money! It all boils down to the timing and release of the “Shock Troops” product that generated a ton of response and was going to be the product that pushed Wargames Factory out of the red and into black. Hui’s company was in control of success of this product and Wargames Factory had the preorders in place all they needed was the physical product. It didn’t take Mr Hui long to realize he had Tony by the proverbial “balls”. Especially with employees of Tony’s looking for their own "piece of the action" staging a proverbial “coup d’etat” here at home (either in collusion or not is unverified at this point) All Mr. Hui needed to do was create the product shipping delays to get what he wanted and that he did. This had to have put Tony under impossible pressure to sign any new deal or be forced to agree to any unfriendly terms of any previous deal he already signed . All In order to get the product to market and keep the company from collapsing all around him.. This story in the business world is as old as the world’s oldest profession. (Merchant of Venice rings a bell here too)

Hui continues-

"What occurred next is that Tony Reidy felt he should still be able to continue to manage Wargames Factory as he saw fit, with my only input being to proceed to produce product as before. This was not a scenario I was comfortable with, for obvious reasons. As a point of fact, before I signed the paperwork transferring the 51%, we had a forensic accountant look at the company’s financial health and it was discovered that the company had been running in the red for its’ entire existence under the management of Tony. While Tony is passionate about wargaming and the wargaming community, it was clear that he was completely unsuited to running this business. It was evident that for Wargames Factory to have any chance of financial success it would need to have a new business model."

Clearly, Tony is a great company “front man”, he built the company up from nothing, engaged and got the fans support, kept them motivated interested and made them involved with the brilliant "liberty and Union league. I bought stuff from him because of him even when the product was inferior To others on the market, because you knew with what was going on, it was only going to get better- and it did. I think its completely plausible he’s not particularly suited to run the nuts and bolts, However you get what you pay for Mr Hui. You let his company build up a large debt to you, and just when he’s about to “get over the hump” and starting making a profit, and paying all his creditors off. you put him a position to “Give you a piece” or “Go out of Business”

(This kind of thing goes in Real Estate and Construction too., I am/have been involved in both it goes on all the time.)

Next up is paragraph about Wargames Factory undisclosed debts.

"The agreement that Tony and I signed has a clause that states that he had fully apprised me of all debts the company owed before I became majority stockholder, and that any debts not disclosed were the responsibility of Tony, not Wargames Factory. I will not go into the long list of debts to both vendors and individuals undisclosed by Tony that have come to light over the past five months, but I am going to tell you about one specific debt"

What’s important here Is when you do any kind of legitimate business purchases You have your attorney conduct what is known as “Due Diligence” meaning you find out What all the company debts are- legally, there are no surprises, just like those undisclosed debts “you didn’t know about." When you conduct a “Hostile Takeover” there usually isn’t any “Due Diligence”Because there isn’t any time for it, and/or, not doing so suits your own purposes. Like using the assumed and blatantly obvious- unknown debts, as an excuse to Fire the guy you just took the company from.

"When we told Triangle that we would regrettably be moving our shipping operations elsewhere, they informed us that before we could remove the Wargames Factory merchandise from their facility I would need to pay them the $5,000 that was owed to them for back salaries for their disabled shipping employees. This came as a big surprise to me, especially when I asked for a copy of their bill and discovered that Tony Reidy had not made a payment to the employees of Triangle for almost 2 years. In light of Tony and Howard’s recent posts claiming I cheated Triangle out of their money, I find myself most dishonored by this blatant lie."

Ok this whopper above is what really puts this all into perspective. Maybe its Hui’s translation or unfamiliarity with US business practices. Not sure how Wargames factory Could possibly owe Triangle, its packaging and shipping company for "disablement" pay. If someone at Triangle got hurt on the job coincidentally working with Wargames Factory product, Triangle is require by law to provide Worker’s comp against injuries. Wargames Factory isn’t liable. Now I’m sure Wargames Factory had a balance with Triangle it packaging and shipping company..$5000 doesn’t sound like much as running balance over two years, If WF hadn’t made a payment in two years…Triangle would obviously put a hold on there product. How WF (Tony) directly owed them their back salaries, makes no sense. (edit: apparently Triangle employees are actually disabled persons and amount owed is purely services rendered., doesnt change the facts of no due diligence)

Lets back track a moment here- Remember- Mr Hui lets WF rack up $250K in manufacturing debt, takes over the company and uses the fact he’s owes his packager $5000.00 in undisclosed debt as a result of a Hostile Takeover as his big anecdote on Tonys shoddy business practices?. and that’s somehow a smoking gun? Tony and Howard Whitehouses story surely scream true here.

I don’t need to really go on much further into what’s transpired here, if you have any insight at all to workings of a business, this is plain as the nose on your face. I guess what side of the argument you fall on stems from whether you have an ethical business sense and take actual human beings into consideration or are of the stone cold attitude “business is business” China’s business S.O.P is well documented in the latter. For further reading Go ahead and Google “Chinese Takeover” and read some the articles from"the Economist"

The main point of this commentary are the lessons learned here, even the smallest Hobby company successes can be its own worst enemy, predators will always try to take what someone ( or you) have built up with your own work if you are not careful and protect yourself. I don’t think Mr Hui, was prepared for the customer backlash against his new company And with the company in disarray and with product sales grinding to a halt with the bad press. He’s responded with this open letter which unwittingly speaks to it potential customers, like they are idiots. In an effort to get back the PR back on track. I’m curious to see if it has any impact or if this company continues to just put itself out of business due to whats transpired. The hobby world is really just too small. Once again I’ll say it. In this world we have a choice whom we do business with. This hobby is such small microcosm of life. Whether you buy your Toy soldiers from Wargames Factory or not- is up to you. Its also true that many people just don't care what transpires to get you the product you want in your hands whether its your new Nikes or box of Shock Troops..all you care about is- you want it.

Hopefully Tony rebounds with hard lessons learned here, he’s already started a new company with designs on establishing his own IP that grew legs on the success of the shock troops. You can check it out here.

6 comments:

Greg said...

While this looks like a solid analysis, don't forget that neither you nor I have any real factual knowledge of the exact situation in WGF. All we can make are educated assumptions; given that both parties are probably not being 100% honest about any of this, our educated guesses are similarly not 100% accurate either.

John@Plastic Legions said...

Absolutely, all I can comment on/analyze is what I actually know which is limited to public statements. There comes a point of putting 2 + 2 together..but I still have some questions..if facts change so certainly will my opinions.

David Taylor said...

Thanks for this. It can be difficult to get a sober and well though out analysis of situations like this.

dogui said...

Thanks a lot for this.

Somehow I still consider toy soldiers, whether plastic mass produced or metal, a bit of artsmanship. Im proud of creating a stunning looking model from bare metal or plastic, and i like to think the guy who sculpted, cast, packaged is also proud as me.

Just a matter of opinion of course, but when something makes me feel awkward then the eventual purchase and building-painting of the models will also feel weird. Dont know much about PR or product image but i will probably not get a good vibe from products from this company anymore, like i did before (sadly I had orders during the whole storm and had to cancel them).

John Morse said...

Hi, I'm John Morse. I was Business Manager at WF under Tony.

Wai Kee Hui's open letter is full of inaccuracies, both spoken and unspoken.

It is simply untrue that WF had not made a payment to Triangle in two years. It is also simply untrue that WF did not make any payments to Mr. Hui. Believe me, I can document that.

I agree with John's assessment of what Mr. Hui did as a hostile takeover. What Mr. Hui does not tell you is this:

In exchange for the hand over of 51% of the firm to Mr. Hui, he agreed to provide large amounts of plastic sets on account --- that is, without payment up front -- for WF to sell in order to get the firm back on its feet. These sets were a combination of old sets but largely the new sets which had generated much advance interest in the market place and which Mr. Hui is only starting to release now.

The agreement last summer was that Mr. Hui would begin delivery of those sets on October 1, 2010. In fact, we did not receive anything until the last few days of November. Furthermore, that delivery was far less than promised. His failure to deliver on his promised supply of plastic meant that we could not generate sales, and yet he seems to have blamed Tony for that. That is irrational.

A second delivery scheduled for December never did come while we were still on board. However, we received a shipping list which showed that the delivery would have been nearly useless --- not only was it short on very important sets, but many of the sets in the shipment were incomplete and could not be sold.

Whether that was Mr. Hui being dishonest or whether that was Mr. Hui being incompetent, it is his fault alone. However, when Tony call this serious problem to his attention, Mr. Hui did not react in what I think any reasonable person would consider good faith. He did not say, 'sorry, I'll fix that.' Instead he fired us all and took over the company. What a piece of work.

If Mr. Hui did not intend, or was not capable of upholding his end of the agreement worked out late last summer, he should not have assumed an ownership share. That is basic, I think.

Certainly if we had thought he would not deliver, Tony would not have signed the agreement.

Tony, Howard, Tim and I acted in good faith and did everything we promised. We designed and delivered new and exciting product prototypes and promoted them in the market place effectively, and took pre-orders in good faith, believing that Mr. Hui would deliver. He did not.

John@Plastic Legions said...

John,
Thanks for taking the time to share that. Best of luck

 

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