Parmalat - The Fall of a Dairy Giant

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Case Details:

Case Code : FINC028
Case Length : 14 Pages
Period : 2003 - 2004
Pub. Date : 2004
Teaching Note : Available
Organization : Parmalat Finanziaria SpA
Industry : Dairy Products
Countries : Italy

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"The key issue which continues to perplex us is why the group (Parmalat) continues to tap the market for relatively small, yet often quite complex debt issues, when its cash pile continues to rise."

- Joanna Speed, Analyst at Merrill Lynch in 2002.1

"In some ways it's no more than a symptom of the times; these are people who had great ambitions and when those ambitions weren't being realized they wanted to create what wasn't there. It's no different than what went on with other companies like Enron."

- Robert E Mittelstaedt, Vice-dean and Director of Executive Education at Wharton in 2003.2

"There is nothing wrong with keeping things in the family or close. If people are good, why not? The problem is when you become a public company, when you take billions of pounds from the market to help you grow, you have to let other stakeholders have a say in who runs the show. Italian firms refuse to do that. It's a cultural problem."

- Carlo Scarpa, a Professor of Economics at the University of Brescia, Italy, in 2004.3

In the Eye of a Storm

On December 15, 2003, Calisto Tanzi (Tanzi), the founder and chairman of Parmalat Finanziaria SpA (Parmalat), resigned under pressure from Italian banks over the alleged accounting fraud at the group's milk-processing division.

The management of the company was handed over to Enrico Bondi (Bondi), a turnaround specialist well-known in Italy for rescuing the Montedison food and chemicals group4 from bankruptcy in the early-1990s. Bondi had been appointed as a consultant by Parmalat's banks just a few days earlier, to help unravel Parmalat's complicated financial systems.

By the end of December, Parmalat went into controlled administration and Tanzi was arrested by the authorities. On questioning, he admitted that he was involved with the cooking of the books at Parmalat since the 1980s. Parmalat was one of the largest companies in Italy and a giant in the world market for dairy and food products.

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It was estimated that Parmalat purchased about eight percent of the total milk produced in Italy and provided employment to over 30,000 people in the country. Consequently, analysts expected the company's downfall to have adverse effects on Italy's economy.

Parmalat was also one of the biggest corporate scandals to occur in Europe and was compared to the collapse of the American energy giant, Enron.5

Some analysts even went to the extent of calling Parmalat 'Europe's Enron'. Parmalat's financial systems had eluded analysts' understanding for a long time. The company had a large number of subsidiaries and bank accounts, most of them located in tax havens around the world, and it used complicated bond and derivative deals to operate them. There was also little transparency in the company's results and analysts found it difficult to calculate the true extent of its liabilities.

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2] How Parmalat Differs From US Scandals, knowledge@

3] Sophie Arie, Time for a break in the Family Circle, Guardian, January 15, 2004.

4] Montedison was one of the premier industrial houses in Italy. It had interests in diverse areas like food products, chemicals, energy, etc.

5] Enron was of one of the largest companies in the US. In the early-2000s, it was revealed that much of Enron's apparent success was because it lied about its profits and concealed debts so that they did not show up on the company's balance sheet.


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