AJAX CORPORATION
In June 1995 Ajax Corporation could look back on 12 years of pioneering in the newly developed offshore segment of the Northern lobster fishing industry. Having accounted for 16 percent of the offshore poundage landed in 1993, this Massachusetts company ranked as the largest single lobster producer in North America. Joseph S, Gaziano, president since 1988, looked forward to a still more dominant position and, in the long run, to further vertical integration beyond what he had already introduced:
Basically, we’re tying to revolutionize the lobster industry by applying management and technology to what has been an 18th -century cottage industry heretofore. Other companies have become giants by restructuring such commodity businesses as crab, tuna, avocados, celery, and chicken; we want to become the Proctor & Gamble of the lobster business. Until we opened up the offshore resource there was no way to bring about this revolution, but now the chance is there. Furthermore, the technology and money required to fish offshore are so great that the little guy can’t make out; the risks are too great. The fishing industry now is just like the automobile industry was 75 years ago; 100 companies are going to come and go, but we’ll be the General Motors.
We have toyed with the idea of establishing a restaurant chain featuring the Ajax lobster, similar to Black Angus or Red Coach (local chains which offer only a small selection of beef as their fare), but have never really gotten serious about it. We find we have enough to manage now. The Deep Deep and Wickford distribution systems, which we purchased in the past fiscal year, have given us some vertical integration.
As Mr. Gaziano voiced these expectations, Ajax hopefully saw itself as starting to recover from a recent precipitous and unexplained decline in its per-trip catch. This decline had plunged the company back into the red for the fiscal year ending in April and had raised the specter of depletion of the offshore lobster population by pollution and overfishing (Exhibits 1 and 2). Mr. Gaziano viewed these possibilities as bleak, but discounted them:
The vessels we have are especially designed and constructed for our lobster gear and couldn’t be used for any other purpose without costly refitting. I suppose we could go south into the Caribbean for crawfish or go after finfish that are amenable to longline techniques. We could even use the vessels for research, laying cables, or as oil-survey ships. Practically speaking, if someone said tomorrow that we couldn’t sell lobsters due to mercury content or some other reason, I guess we would be forced to close the doors. However, I foresee this risk as minimal. Certainly it is possible, but there are no studies or indications that this is at all a likely occurrence.[1]
HISTORY
Ajax’s predecessor company had been organized in 1988 to develop techniques for deep-sea lobster fishing. Its founder was an ordained minister, the Rev. William D. Whipple, and its name reflected Mrs. Whipple’s profession — music. In the course of raising money for a company that was never in the black until 1994, Rev. Whipple had incorporated in 1989 and had arranged a private placement of 140,000 shares (58 percent of the total). This brought in $1,050,000, which was supplemented by debt. Late in 1989, when Rev. Whipple felt ready to start commercial operations, prospects for growth plus creditor pressure led to additional financing, some of it completed before the end of the go-go market in 1992:
Date / Financing / AmountFebruary 1989
September 1989
September 1989
June 1990 / 250,000 common share at $25.50
10 percent senior (John Hancock Insurance Co.)
40,000 rights at $20.25 (John Hancock)
50,000 common shares at $9 (private placement) / $6,375,000
1,500,000
810,000
450,000
Also during 1992, Rev. Whipple agreed to bring in Mr. Caziano as president, and to have him put together a professional management team. The purchase of two 101-foot trawlers for $4,755,000 completed Ajax’s make-ready, and the year ending April 30, 1994 brought operating earnings of $819,000 from a lobster catch of 1.1. million pounds.
Spurred by this success, Ajax purchased two more ships of 96 feet and 125 feet for $3,354,000 and acquired two nearby subsidiaries in the lobster distribution business. The latter were the Wickford Shellfish Company and the distribution segment of Deep Deep Ocean Products. These would, it was hoped, reduce price fluctuations and raise margins by reducing Ajax’s dependence on independent wholesalers. In the three fiscal years prior to their purchase, Wickford had had two nominal profits and one nominal loss. Deep Deep had suffered significant losses, but these were laid by management chiefly to Deep Deep’s operation of three ships which Ajax did not buy — although it agreed to market their catch. Ajax saw both firms as competently managed but beset by inability to raise enough capital to finance their rapidly expanding sales which were as follows:
(thousands of dollars)1992 / 1993 / 1994 / 1995
Wickford (years ending February 28)
Deep Deep (years ending December 31) / --
$2,850 / $2,610
$2,433 / $3,750
$2,550 / $4,800
--
AJAX IN 1995
In mid-1995, Ajax was organized primarily along functional lines, with departments for operations, engineering, research, and finance and administration. Distribution functions were divided among the Deep Deep and Wickford subsidiaries.
Operations
Fishing. Fishing operations and the logistics involved in landing and distributing the lobster catch were under the direction of Robert E. White, vice president, operations. Ajax’s four ships operated year-round on a two-week cycle, ten days fishing and four days in port for unloading and resupply. Each ship carried a crew of ten: captain, mate, engineer, cook, and six deckhands. After a 12-hour steam to the offshore lobster grounds, the crew would begin hauling pots 12 hours a day. When the lobsters were brought up and removed from the pots, their claws would be pegged with a red plastic peg which displayed the Ajax brand, ad then they would be stored in the hold. The empty trap would be rebaited and stacked until the line was ready to be played out again for three days of fishing.
Whether the trawl was relaid where it had been, or in another location, was a decision made by the captain, depending very much on how the catch was running. In any event, the captain was charged with bringing in as many pounds of lobster as possible on each trip, an amount which could vary tremendously. Although Ajax’s ships averaged about 20,000 pounds per trip, the results of a single trip could range from 4,000 to 40,000 pounds. In Mr. Gaziano’s words:
The biggest problem in the production process is the variability in the size of the catch. It is not like a manufacturing business. The size of the catch is uncertain. There is no proven way of forecasting where the lobsters will be on a given day. Mating habits, weather, and so on, are some of the many variables which determine the size of the catch. Black magic is used by the captains to find lobsters. Presently, it is an art, not a science. Actually, it is on a trial-and-error basis. If one canyon is not producing, the skipper moves to another location.
Work Force. Along with dispatching and supplying the vessels, Mr. White was responsible for staffing both the ships and Ajax’s truck fleet and storage facility. These operations used 50 people who were engaged in manning the ships or moving lobster. Because Ajax was located in Westport Point, these workers were nonunion. In nearby New Bedford, where the larger portion of the fishing industry was located, unions were a predominant force. Unlike most others in the fishing industry, who were required by the union to pay their crews a straight percentage of the catch, Ajax paid a base salary plus a sum of 60 cents a pound on everything over 25,000 pounds, to be divided among the crew on a pro rata basis. Mr. White commented on some of the problems with people:
The fisherman is an independent worker. He is always in demand and has a job waiting at his beck and call. His reputation stays with him, although references are not easy to evaluate. Since there is “always a ship leaving,” he does not hesitate to tell his boss to “get screwed” if he is unhappy about something. How do you get a reference on somebody who has told his last three bosses to “get screwed”? So we end up hiring them and taking a chance based on their informal reputation, which I get from my sources in the industry. We spin our wheels on quite a few. We attempt to hire experienced fishermen, but 20 percent of our crews are bank tellers and “potato farmers” who want to try something more exciting and more financially rewarding. We start the experienced fishermen at $700 per week and the layman at $350. If the latter pans out after two or three trips, he goes to $700, also.
The cook is one of the most important men on the ship. If I get a bad cook, morale goes to hell. Most ship cooks are drunks — it is just a question of whether they are good drunks or bad drunks. I try to have a least one crewmen on each ship with welding expertise. This avoids having to return to shore to make minor repairs. Engineers are hard to get — their education allows them to earn good money on shore and avoid the hard sea duty. Lobstering is a hard and demanding job. Guys over 40 break up after several trips.
Logistics. Since the inlet leading to Ajax’s headquarters in Westport Point was not deep enough for the draft of the four ships, the company rented 225 feet of pier space at the State Pier in Fall River, about 15 miles away. The company owned and maintained a fleet of refrigerated trucks with which to transport the catch. After a returning ship had docked, the mesh baskets of pegged lobsters were lifted out of the hold and into these trucks. If the catch has already been sold, the truck, driven by a member of the shore crew, began its delivery rounds immediately.
If there was an excess, however, or if it was desired to hold the catch for better prices, then the truck would make the 20-minute run to Westport Point, where the lobsters would be transferred to the Ajax holding tank. This tank, built during 1991 and 1992 at a cost of $750,000, was capable of holding 125,000 pounds of lobster in seawater cooled to 42ºF. The tank was designed around an experimental system aimed at reducing handling costs by keeping the lobster in mesh baskets aboard ship and stacking these baskets in the storage tank. The system had not worked out well in practice, however, since one dead lobster could cause the loss of 10 percent to 15 percent of its tank mates within a 24-hour period. As a result, the baskets had to be hauled out and culled regularly. Ajax management felt that if they did expand their holding capacity it would be with a conventional three-tier tank which, even though they required more space and lobster handling, could be culled more efficiently and could be built for only $3 per pound of storage capacity. Security measures, both at the holding tank and on the trucks, were important since lobster was a readily marketable commodity at any roadside stand.
Engineering
Engineering activities at Ajax were under the direction of Howard W. Gifford, vice president, engineering. These activities included the maintenance and procurement of vessels and equipment, as well as the development of gear, and so on.
Maintenance. With each ship representing an investment of over $1.5 million and subject to continual stress at sea, maintenance was an important and continual activity. This work was carried out by a seven-person maintenance department located at the pier in Fall River. Available there were complete facilities for the welding and machinery necessary to overhaul and repair a ship’s engines, life-support equipment, and trap-handling gear. Additionally, this crew performed periodic preventative maintenance on the holding tank at Westport Point. This life-support system was particularly important since its failure, if the tank was full, would result in the loss of 125,000 pounds of lobster. Mr. Gifford was responsible for the hiring and firing of the maintenance personnel. Also, even though the ships’ engineers were under the operational command of Mr. White, Mr Gifford was responsible for their technical direction.
Purchase of Ships and Gear. Mr. Gifford was responsible for evaluating potential vessels for use as fishing platforms; writing the specifications for their conversion; and initiating, supervising, and approving their fitting out. In all these activities Mr. Gifford worked closely with Rev. Whipple in improving designs. Mr. Gifford also spent considerable time working with manufacturers’ representatives on developing improved refrigeration technology for the life-support systems. The corrosive nature of the seawater, coupled with lobster’s sensitivity to trace amounts of certain metals which were traditionally used for refrigeration systems, made this a difficult task.
Research
Rev. Whipple, held the title of director of research. Since 1978 he had devoted a major portion of his time to commercial fishing and to developing a number of improvements and innovations in its equipment. Among these were hydraulic power block and various rigging and hauling devices related to high-speed handling of deep-water lobster trapping systems. Rev. Whipple was constantly evaluating the operational design of the ships’ fishing gear and experimenting with ways to improve it. A qualified captain himself, Rev. Whipple would often take a ship out when a captain was sick or missing for some reason. In any case, he was generally aboard the vessel whenever there was a new idea to be tried out, a frequent occurrence.
In an effort to enhance their knowledge about the habits of the lobster, Ajax’s management had recently hired a marine biologist. Mr. Gaziano remarked as follows regarding research on the “product”:
We knew a lot about management and lobster fishing when we started, but we didn’t know a damn thing about the lobster. We hired Jerry (a marine biologist) to give us some expertise in this area. He started with the task of accumulating all the data he could find on the lobster. It turned out nobody really knows a heck of a lot about them. He has three current projects. One is to set up a lobster-rearing facility downstairs (corporate headquarters) and see what we can learn from that. The second project is to help us figure out what to do with the crabs we catch in our traps along with the lobsters. They are highly perishable and only bring about 75 cents per pound. There is not much market for them, but since we haul them in from the sea in quantities equal to or greater than the lobsters, we would like to exploit the resource. And last, we’ve chartered a little research sub. Jerry’s going to spend five days on the bottom seeing what really goes on down there. It is going to cost us $75,000, but we will have information that no one else has.
Marketing
Prior to the acquisition of Wickford and Deep Deep late in fiscal 1994, Ajax sold most of its catch directly to wholesale lobster dealers in large lots, usually an entire shipload. As a result, the number of transactions was limited, and Mr. Gaziano was able to handle the telephone negotiations himself. He commented on the bargaining process as follows:
The distributors knows when your have a large catch. He may say, “You have 30,000 pounds — well, we don’t really want any today,” and thereby drive down the price. Even with our large holding capacity we have been caught in this situation. There are no long-term, fixed-price contracts. It is cutthroat haggling to a great degree. We are really in the commodity trading business — buy and then sell at a profit; there is very little value added.
With the acquisition of Wickford and Deep Deep, each of which owned a variety of trucks and sorting tanks of 50,000 pound capacity, marketing arrangements had changed. The original plan was for the two acquisitions combined to handle some three fourths of Ajax’s catch, although, in line with the intent to treat all three entities as profit centers, each could sell or buy where it got the best price. In any event, the Wickford and Deep Deep acquisitions happened to coincide with the precipitous drop in lobster catches, so all if Ajax’s lobsters were sold “inside” during the first half of 1995.
Wickford, located in North Kingston, Rhode Island, had brought Ajax a business in live lobsters (about 70 percent of sales) and in other types of seafood, including other shellfish and frozen-fish products. It distributed these products in various ways. It had a combined retail seafood store and restaurant located in its hometown, which accounted for 30 percent of its sales; it had a mail-order business in prepackaged clam and lobster dinners; and it operated a wholesale business in a market area that extended along the Eastern seaboard south to Pennsylvania. Customers were restaurants and small dealers, whom it reached by making four delivery runs a week, locally, and to Pennsylvania, Connecticut, New York, and New Jersey.