April 1 2003 by Jennifer Pellet
When Robert “Steve” Miller Jr. pulls open a company’s front door, that loud sucking sound you hear is typically a sick firm gasping for air. Companies that call him in are usually in need of emergency surgery. But that’s okay with Miller; in fact, he prefers it that way.
“I find these situations irresistibly interesting,” says the 60-year-old executive, who cut his turnaround teeth serving under Lee Iacocca during the famous Chrysler overhaul. “To me, the thrill and satisfaction of going through a turnaround is more interesting than doing day-to-day business operations.”
Miller, who is currently attempting to breathe new life into Bethlehem Steel-the eighth rescue operation he’s undertaken since announcing his retirement as vice chairman of Chrysler 10 years ago-is now among a small cadre of leaders sought for their proven ability to resuscitate ailing firms. And lately these turnaround titans have been very busy indeed. Between upstarts like Enron, WorldCom and Tyco being toppled by corporate scandals and struggling powerhouses such as Kmart and United Airlines brought to their knees by the ravaged economy, companies in crisis seem to be making headlines daily.
Does this turbulent climate complicate an already formidable task? Yes…and no. Sure, skepticism from investors and the media is at an all-time high, making it tough to woo the support necessary to bump stock prices back to acceptable levels. And the sluggish economy adds an unwelcome hurdle to the recovery process. But at the same time, the horde of firms sent into a tailspin over the past year has been something of a boon to troubled companies, which are finding that there is, in fact, safety in numbers.
As the ranks of ailing firms in recovery swell, rehab inevitably becomes less of a stigma. Put simply, in troubled times, the market will suffer plant closings and layoffs more easily than it will during fat years. A turnaround CEO can take drastic measures and yet not stand out significantly from the hundreds of other company leaders taking similar steps to cut costs.
Still, that doesn’t diminish the steep slope faced by today’s corporate crisis veterans. In some cases, by the time they arrive on the scene to save the day-hastily recruited by a desperate board-the company is teetering on the edge of bankruptcy, is hemorrhaging cash, has lost its credibility on Wall Street and has alienated both its customers and employees. In others, the board has moved more swiftly, hoping that aggressive treatment can keep a dismal year from spiraling into chronic underperformance.
Their specific maladies, too, vary widely. The firm may have botched an acquisition, miscalculated a market shift or seen its previous management team led away in handcuffs after wildly misrepresenting financials. But however unique the circumstances, and however severe the prognosis, the approach to treatment is eerily similar.
“The consistent tool is your ears,” says Robert Peiser, a turnaround veteran charged with leading $1.3 billion Imperial Sugar, which emerged from Chapter 11 in August 2001, back to profitability. “You’ve got to get around and listen and separate the smoke from the fire, because in the beginning you get a lot of smoke.”
All turnarounds are not created equal
A new leader must work closely with his financial and operations teams, meet with employees, suppliers and customers to assess the situation and then communicate with lenders and creditors to buy the company some time to get its financial house in order. “I logged a lot of airplane miles those first six weeks,” Peiser recounts. “I visited all of our plants around the country and met with 16 banks, building credibility and talking about what we needed to do.”
If the outlook is particularly grim, balance-sheet triage is typically the first order of business. “I refer to myself as the Mayo Clinic for troubled businesses,” says James McTevia, chairman of McTevia & Associates, whose firm helps companies in dire straits restructure. “Most of the companies I deal with are losing cash very quickly; I have to stop that bleeding so I can perform surgery on the patient.”
McTevia, who frequently works with companies in or facing bankruptcy, begins by addressing cash flow. “The first thing I do is put a freeze on payables,” he says. “I notify the vendors that for 30 days, we won’t be paying any vendor bills. We will pay COD for current goods and services.” Once apprised, large creditors will often capitulate to demands for leeway, albeit reluctantly. “Nobody wants a company going into Chapter 11,” says McTevia. “No company coming out of Chapter 11 pays creditors 100 cents on the dollar.”
But sometimes Chapter 11 is inevitable. Hampered by union demands and crippling pension obligations, Miller took Bethlehem Steel into bankruptcy protection three weeks after joining the $3.6 billion company. “The best case is to never file bankruptcy; the next best is to file promptly; and the worst is to mess around and file at the last possible moment, because by then you will be in very deep water,” says Miller, who was still too entangled in Bethlehem Steel’s recovery to accept when the likes of United Airlines, Enron and Kmart recently inquired about his services. “Chances are you will have compromised your ability to do a good restructuring by tying yourself up with financings that you do in tough times.”
Only after the immediate pressure is relieved can drastic-and more permanent-financial fixes, such as closing plants or selling underperforming divisions, be taken to alleviate the problem. And it’s here, say the most experienced turnaround veterans, that the new leader must achieve a tricky balance, treading both quickly and with care.
Do something-and do it fast
“You can’t be afraid to act,” says Cyrus Freidheim, who was named CEO of Cincinnati-based Chiquita Brands International when the $2.2 billion company emerged from bankruptcy in March 2002. “There are few situations in the turnaround world where timidity wins. People both inside and outside of the company will say, €˜Just give it time.’ But I’ve never seen a situation headed south where giving it time would have helped.”
Indeed, inertia can be so deadly that most turnaround pros say they prefer a bad decision over no decision at all. “It’s better to have something new to chew on than to keep drifting, because that’s what can really kill an organization-when they just lose spirit,” says Miller, who made a point of collecting ideas from senior managers and picking one or two to act on within his first weeks at faltering firms like Aetna, Waste Management and Morrison Knudsen. “The very fact that you’re making decisions tends to energize people.”
And the right decision, well executed, can make a world of difference. When Martin Franklin was named CEO of Alltrista in September 2001, the company’s Ebitda-to-total-indebtedness ratio was four-to-one, reflecting a balance sheet so debt-heavy its bank had placed it in a workout. Franklin lost no time launching a reorganization effort that replaced its 23-person headquarters in Indianapolis with a staff of seven in Rye, N.Y., put the company’s underperforming plastic thermoforming businesses on the block and changed its name to Jarden Corp.
“Instead of looking to get $60 million selling the entire plastics group, which is what the company had looked at before, we sold just the businesses that were underperforming for $23 million,” says the 37-year-old CEO, whose work with troubled companies includes a stint as a corporate raider, buying and breaking up companies like $1 billion British paper company DRG. “But in that transaction we created $100 million in tax losses, and since the company had a profitable history, we were able to file an expedited tax return and collect $40 million of tax refunds, which we then paid straight down to the banks. All of a sudden the whole feeling with the banks was different.”
And so were the company’s prospects. Jarden’s stock price, which had plummeted to just over $5 in 2001, is now a healthy $28.
Bring on the buy-in
But while measures such as divestitures and cost-cutting can help take a company out of crisis mode, they’re just one component of a restructuring plan. Peiser, also coping with a debt-ladden balance sheet at Imperial Sugar, whittled $280 million in debt down to a more manageable $50 million through strategic asset dispositions and refinancing arrangements. Now, he’s addressing perhaps the most crucial challenge: finding a way to deliver growth.
“You can save a company through cost-cutting and capacity rationalization, but you can’t create value that way,” says Peiser, who is betting that retail customers will pay higher prices for the convenience of better packaging, and rescue the company from the razor-slim margins of a commodity business. “Sugar is the second most hated product on grocery store shelves,” he says. “It’s subject to humidity and bug infestation, and it still comes in the same five-pound bag your grandmother used to buy.”
Peiser, who believes in a philosophy he calls “directed consensus building,” won’t elaborate on what he has in store, but he is quick to say that employee support is crucial to the task at hand. “If I just came out and said, €˜This is what we’re going to do,’ I would get a lot of €˜Yes, sirs,’ but their hearts wouldn’t be in it,” he says. “Someone performing because they’re afraid of you isn’t the same as someone performing because they believe in what you’re doing.”
In fact, the ability to rally support for the demanding journey ahead may well be the most critical-and possibly most elusive-talent that successful turnaround stars have in common. “It’s easy for CEOs to make people believe in a story that’s so evident it speaks for itself,” notes Franklin. “But a turnaround CEO has to get people to buy into a dream. That’s something you’re born with-you don’t learn it in business school.”
Anatomy of a Turnaround Guru
Jeff Christian, chairman and CEO of executive search firm Christian & Timbers, is on the short list of folks board members call when a company needs a CEO in a hurry. Here’s what he tells them to look for:
An irrefutable reputation. “A reputation for honesty, integrity and personal values is No. 1 today, because in many cases they’re going into a situation where that was not the case with the prior CEO. So they have to be people who can help the company gain credibility through their own reputations.”
Intellectual horsepower. “They have to be able to take in lots of information from multiple places, decipher that data and pick the right critical path, because they’ll need some early wins for the board to give them time, the financial community to give them support and the customers to believe in them.”
Superior listening skills. “They have to know the right questions to ask, to genuinely care about what people have to say and to be able to translate that into doable things quickly. What is it that customers would love to have if you were able to build, create or deliver it? They need to be able to listen to their customers and their people and to be decisive in figuring out where to place bets-what to kill off, what to keep and what to start that’s new.”
Contagious passion. “The company may not have a lot to stand on; it may be standing in a lot of muck without any clear path out of the swamp. So there has to be a lot of passion that you can get out of [the environment]. People have to think, €˜Boy, I want to be around this person. He or she is exciting, smart, creative, with great ideas and a lot of energy.’”
Leadership talent. “To me, that’s the ability to put that stake in the ground that everybody can see that says, €˜Here’s where we are going,’ and then engage the people in the strategy. Turnaround leaders need the ability to make people feel a part of it, and that it’s maybe a stretch place to go, but it’s doable.”
A sense of humility. “They can’t be blind to their weaknesses. They’ll have to learn very quickly about a lot of different things, so they need to be willing to recognize what they’re not strong in and ask for people’s insight and direction. People who are not humble don’t learn, and people who don’t learn don’t create strong organizations-because the only way for organizations to grow is if they are learning.” -J.P.
Is it Miller Time Again?
Steve Miller jokes that he’s listed in the Yellow Pages under Flaming Disasters. And he might as well be. The unassuming 60-year-old gets calls about virtually every turnaround task that surfaces-and he’s known for taking on even the most hopeless of them. The following are Miller’s reflections on what it takes to be a corporate firefighter:
My ability to make up my mind quickly is one of the reasons I get involved in these situations. The average length of time from my first hearing about an opportunity to my starting work is 24 hours. I don’t do due diligence. The only thing you find out is that things are worse than people think-and, if they’re worse, they need me more. All I need to know is it’s a basket case. The fireman doesn’t ask how hot the fire is; he just jumps on the truck.
I do have two simple tests. One, is it worth doing? To participate in Bethlehem Steel is to try to salvage 10,000 jobs and help regenerate a viable steel industry in America. That’s worth doing. Not every call I get is something I feel in my heart is important to the country or the economy. The second test is, can I add value? There are some areas, such as high tech or advertising, where you need more of a feel for how that world works.
Over time, you build your credibility. The most important thing you have is your willingness to be forthright and tell people what the problems are before they find out some other way. If you are willing to step up and tell people the bad news, then when you tell them something good, they will believe it.
The more of these you do, the more you learn about the process. Companies under stress have a lot of common attributes. You may not know the specific industry, but you know how the corporate culture behaves in those situations and what buttons to push. And the lawyers, bankers and accountants are all the same. It’s a big moveable feast where only the client changes.
A lot of other turnaround specialists tend to have an additive philosophy where they bring in new blood; I tend to be subtractive. My fortÃ© is to work with and rebuild the team that is there. I ask people who are not ready to change, or have been in their posts too long, to retire, and then I bring up younger, more aggressive people.
The toughest turnaround I worked on was Olympia & York, a $20 billion real estate company that had poured $4 billion into the Canary Wharf project in London. It was an incredible company. I spent 11 months working on that project and I can’t detect any good that I did. They were overextended and the commercial real estate market had gone sour, so they were unable to refinance. There were second and third mortgages on every piece of property. I was worn out at the end of it. I don’t regret it, though. I didn’t walk away with the satisfaction of having made a big difference in the outcome, but I learned things I’ve applied in other situations.
I’ll finish at Bethlehem Steel before I pursue any other opportunities. It usually takes between three and six months, but this one is getting close to 18 months. A steel mill with an old-fashioned labor agreement is worthless, but we’ve been unable to win compromises from the union. We’re now working on a resolution that involves consolidating Bethlehem Steel with International Steel Group, with the union agreeing to adopt the ISG labor agreement.
After I wrap up here, I’m going back to Sunriver, Oregon, and [my wife] Maggie and I will work on our model trains€¦ until the phone rings again.
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