Three Strikes Theory: Convergence & Triggers

Today’s case study reveals how Three Strikes of bad luck impacted a multi-billion dollar listed company, proving that the Theory applies to companies large and small.

The Three Strikes Theory states that companies, irrespective of size or type, are only ever three good strikes away from success or three bad strikes away from failure… and that it is not down to any one of these strikes, but rather the convergent timing of them, that causes significant consequences. 

I developed the Three Strikes Theory from real world experience across 24 years in business. Last week you read a real world case study of a startup that experienced three strikes of bad luck. Today’s case study reveals how Three Strikes of bad luck impacted a multi-billion dollar listed company, proving that the Theory applies to companies large and small. 

Interestingly in this case study, the convergent timing of first two strikes triggered the third and fatal strike. I hope you find it insightful. 

Case Study 2: Listed HeadCo

A large, listed, multi-billion dollar market cap company “HeadCo” is going strong and is on the up – their share price is increasing, they are very well capitalised, and they are buying companies to fast track growth. They purchase Acquired Company A for $60 million, quickly followed by the purchase of Acquired Company B for $160 million. 

But HeadCo faced a swift downturn despite these strategic acquisitions and a strong market presence. Acquired Company A faced anti-competitive behaviour from insurance companies, reducing its revenue. Acquired Company B’s profitability dipped due to banking reforms affecting its high-margin business asset liquidation business. The HeadCo’s minor profit revision spooked the market, leading to a sharp share price decline, a failed hostile takeover, and a share price collapse - erasing billions in shareholder value in only 4 months. 

Strike One - Competitor Action: Acquired Company A provides replacement vehicles to people who have been in accidents and then seeks recompense from their insurer. Insurance companies started to act against Acquired Company A, applying pressure to referring businesses to stop. Acquired Company A’s revenues declined. (Was this anti-competitive behaviour from the insurance companies? Probably, but it happened and the impacts were felt.) 

Strike Two - Banking Reforms: Acquired Company B is a marketplace, mostly made up of high-volume, low-profit-margin goods. The most profitable sales come from liquidating expensive assets of companies that have gone under. The Australian Banking Royal Commission was underway and because of this Australian banks stopped or dramatically reduced, foreclosing companies. Acquired Company B’s revenues declined slightly, but their profit declines sharply. 

Strike One and Strike Two occurred within 60 days of each other. (Were either possible to predict or guard against? Tough to focus on risk scenarios like this when you’re on the “up”) 

Strike Three - Failed Takeover: HeadCo reports a profit forecast of $87 million NPAT (net profit after tax), strike one and strike two both happen within a few months of each other and HeadCo releases a profit downgrade to $83 million NPAT. This revision of only $5 million less in net profit comes so soon after the profit forecast it spooks the market and makes it look like the leadership of HeadCo does not have a handle on their business. Their share price drops by 1/3, triggering a hostile takeover from their largest competitor. They enter due diligence and go into a trading halt. Diligence takes months and uncovers “inconsistencies”. The takeover falls through, and the share price tanks to only 10% of what it once was only a few months before.

Ultimately, the convergent timing of the first two strikes caused a minor profit downgrade which in turn triggered the third strike, which resulted in billion of dollars of shareholder value being destroyed and a company in ruins.  

It is important to note here that Strike Three was triggered by Strike’s One and Two, and the hostile takeover bid was only possible because of such an unexpected profit downgrade. There has been supposition that the takeover bid was a strategic play by the competitor to start DD, and feign interest to eventually erode investor sentiment by pulling out. In any case, this sequence of events turned a competitor upside down. 

You might wonder how you can possibly predict or prepare for such dramatic turns of events as these, but this is why understanding the Three Strikes Theory is so important. Identifying when first and second strikes has occurred, and importantly, reassessing the risk to the entire business at a time when you’re focused on other areas, is absolutely crucial.  

Three Strikes Theory this is one of the most important learnings I have to share. Importantly, it is implementable by everyone so you can take appropriate action before it is to late. 

Thoughts or feedback? Please feel free to email me!

If you have a story to share, privately or publicly, please email me! (I have loved the feedback so far) 

Stay tuned next week when we review a potential single and potentially fatal strike for any business, hear from industry experts, and review action items that are implementable by all of us to safeguard ourselves and our companies.

Thanks for reading. 

SK