How a Corporate Takeover Went into a Tailspin within Days

When companies change ownership, key employees often get busy looking for new jobs. Some also take intellectual property with them on the way out the door. Here is how a real-world case unfolded – and how investors can prevent such calamities from happening.

The moment the investment started sputtering and stalling was the day the head engineer quit his job. His resignation letter, hand-delivered to the CEO in the morning, hit the new private equity investors of the company like a bucket of ice water. They had only recently acquired the southern German plant manufacturer for a load of cash. The engineer, a key figure in the company, had assured the new owners just the day before, again, that he would stay on in the new era.

As the news of his sudden departure reached the asset managers, they instantly realized the momentousness of his decision. But before they could even discuss how to deal with the consequences, more resignations turned up within hours. Three senior sales people and service technicians quit by lunchtime, a serious upheaval in the midsized company. According to the grapevine emerging that day, they did not believe that their future was golden under the new ownership.

The acquisition had been rather expensive in the first place. It was after all a seller’s market in the German corporate world. Potential investors from all corners of the globe – Europe, the Middle East, China, the U.S. – were lining up around the block to buy up German “hidden gems”. Midsized, globally successful, family-owned businesses.

The backdrop to this phenomenon was fast-growing private wealth, which to this day has been giving private equity investments a massive shot in the arm. Whereas PE assets under management totaled approx. $ 30 billion worldwide in 1992, they had reached $ 4,000 billion (=4 trillion) by 2015, according to the private equity marketplace Palico based in Paris. By 2020, Palico predicts the PE market will have doubled to $ 8 trillion. But the demand for attractive investment opportunities already far exceeds the supply. And thus investors are jumping at the chance to snatch up, among other things, successful German engineering companies. They are seen as solid and reliable, like the plant builder in southern Germany.

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When the Music Stopped Playing

We were hired as investigators to look into the sudden personnel departures and found that the head engineer had started a new Ltd. company in a neighboring country not far from his previous job. The financier of the new venture was a local entrepreneur with deep pockets. Meanwhile, a first wave of customers began canceling their contracts with the plant manufacturer and signed up with the brand-new competition, who were offering competitive prices for their services.

We scrutinized the laptop computers left behind by the departing staff. A breadcrumb trail of bits and bytes showed that customer lists and tens of thousands of engineering documents had miraculously left the building in recent months. Most of them in the last two weeks before the resignation wave.

Also, part of a business plan was discovered, outlining the new Ltd.’s strategic direction. The document’s time stamps suggested that its creators had lied about their intentions for quite some time.

Armed with the assembled proof, the plant manufacturer filed a criminal complaint, a likely breach of competition law, with the local prosecutor’s office. The case is now a government investigation that will probably drag on for years, outcome unknown. It is unclear, too, whether the plant manufacturer’s business will continue to flourish as it did in the past forty years. All it took was a data breach and a few disgruntled key employees to turn a rock-solid investment into a liability within a few days.

Investors beware: prepare for such scenarios. Because cases like this happen every week.

Collect background information about key personnel before the takeover, so that there are no surprises. Look into the IT situation: how well protected are the company’s ‚crown jewels‘? Are there any open barn doors that may be used to squirrel away intellectual property? And finally, talk to the key personnel early in the game and keep your promises to them. They will judge you by your actions, not your words.

Sebastian Okada / 28.01.2018

How Ray Reardon Solved a Blackmail Case

When playing snooker, you sometimes have to rely on your opponent making a mistake to win the game. When conducting investigations, we also have to rely on the suspect to make mistakes, in order to solve the case.

A while back one of our customers, a large German cosmetic company, had received threatening emails from an unknown perpetrator. This person threatened to sabotage the company’s supply chain and thus cause a production fallout. The emails where sent from an anonymous email address and we were not able to find any information on the originator through OSINT. Over the course of the next weeks, the perpetrator continued to send threats and demands in various emails. One of the demands was to transfer a large sum of money to a Bitcoin account.

Again, we went looking for information online, trying to track down this Bitcoin account. Once more, we turned up empty handed. We tried every trick in the book, including trying to lure the perpetrator into a trap using phishing emails, which only resulted in him sending the threats from different email-addresses each time.

The only consistent information was the Bitcoin wallet address and the name he used to sign the emails. This name was ‘Ray Reardon’. Judging from the content of the emails, we had a hunch that this person might actually be an insider. He apparently had extensive knowledge of the company’s supply chain and internal procedures. Knowing this, we sat down with the company’s security officer and discussed the next steps. Our technical approach using OSINT and even phishing was exhausted and we agreed upon covert investigations within the company. In the first step, the security officer identified everyone that could have the knowledge displayed in the emails. We received a list of eight employees and also some written documents from each of these employees. We compared the documents to the emails, hoping we might find specific phrases, terms or spelling mistakes that match. As with the steps before, this proved inconclusive.

The suspects worked in different shifts and the company’s employees had no access to private IT or phones during their worktime. Each employee entered and left the building through doors that only opened with their personally issued RFID tag. We pulled the login data and compared it to the times that the emails had been sent and could rule out five of the suspects, as they were definitely still in the building at their workspaces. Furthermore, we had the IT department check if any company computers had accessed the websites of the email providers used to send the threat emails. So far, we started off with OSINT, then tried social engineering (phishing) and were now down to an internal forensic investigation.

These steps enabled us to narrow down the amount of suspects from eight to three. The remaining three suspects were off duty at the time the emails had been transmitted. We started conducting intensive background checks on all three, including looking at their social media and online footprints. While the checks on two of the suspects did not provide any further leads, one check revealed that the last remaining suspect was really into snooker and competed in regional snooker tournaments. This small and seemingly irrelevant information actually helped solve the case. Remember the name used to sign the threatening emails? It turns out ‘Ray Reardon’ is actually a famous snooker player. Combined with the fact that the suspect wasn’t at work in the relevant time period, the use of the name ‘Ray Reardon’ proved to be a circumstantial piece of evidence that our customer then handed over to the German law enforcement agencies. Subsequently, it was enough to get a search warrant for the suspect’s home.

Our customer later reported that the police had found more evidence on the suspect’s computer and that he was tried and convicted for attempted blackmail.

Our investigation was the frame ball* in this case.

Snooker_Touching_Ball_Redfoto by barfisch under license CC-BY-SA 3.0

Matthias Wilson / 14.12.2018

*Snooker term: the last difficult shot required to win