Call Me Crazy
February 1 2002 by Jeffrey Rothfeder
All CEOs face challenges. But some companies, especially those on bankruptcy’s brink, offer more daunting hurdles than others.
Some executives tackle tough assignments because they need the money. Others, like William Clay Ford Jr., are from families that own the companies; for Ford, taking the top slot at Ford Motor Co. after Jacques Nasser stumbled was as much obligation as choice. Harder to comprehend are the CEOs-Lucent’s new chief Patricia Russo, for example-who move into precarious situations willingly. But they do, and in difficult economic times, there is certainly more demand for the services of execs willing to accept Mt. Everest-like challenges.
Here are snapshots of three who took on companies in trouble, faced angry creditors, got their egos bruised, but might do it all over again.
Falling from grace
Paul Norris, W.R. Grace & Co.
In late 1998, when Paul Norris, then head of Allied Signal’s specialty chemicals business, told CEO Lawrence Bossidy that he was leaving to run W.R. Grace & Co., Bossidy was dumbfounded. Citing Allied’s steadily rising stock price, as well as the company’s consistent track record as one of the better-performing manufacturers of aircraft equipment, auto parts and electronic materials, Bossidy reminded the then-52-year-old Norris of the career advancement his job would afford him and of the more than $1 million in stock options he’d be giving up if he left. Bossidy added that if Norris continued to build a management rÃ©sumÃ© at Allied, he would have plenty of opportunities to land a CEO job-much better than the offer from Grace.
“He said I was impatient, but I thought it was my time,” Norris recalls. “I was well-positioned at Allied but I felt like I had learned enough during my nine years there to see if I was ready to be a chief executive. I preferred to run an independent company, even if it wasn’t that big, rather than a small unit in a major company.”
But Grace? The former high-flying conglomerate had spent most of the 1990s self-destructing. One CEO, J.P. Bolduc, who was accused by the company of sexually harassing employees, resigned after alleging financial improprieties by Peter Grace, his predecessor. Meanwhile, the Securities and Exchange Commission claimed the company had used improper accounting procedures to pad profits. Grace settled the dispute by setting aside $1 million to train staffers in financial disclosure rules. To stave off a complete meltdown, Grace divested many of its larger businesses, including its health care and biotechnology units. Revenues fell from about $6 billion at the beginning of the 1990s to just over $1.5 billion when Norris took over in November 1998.
Still, Norris believed in Columbia, Md.-based Grace. Before taking the job, he analyzed its business lines, which were mostly specialty chemicals and which competed with many of the products he oversaw at Allied. His conclusion: Grace’s portfolio was excellent as was its cash flow; the company simply wasn’t reaching its potential.
“The fundamentals were strong and I was sure I could improve performance by changing processes in manufacturing, marketing, sales and even acquisitions-all of which I knew something about,” says Norris. “Sure there was a significant risk that I would fail very publicly and perhaps not get another CEO position. But I was confident that I could do transformational things to double the size of the business.”
At first, it seemed like he had read the situation perfectly. Norris urged every business unit to rethink the way they operated, to look for savings, efficiencies, and to develop ideas for new product lines.
Initial results were heartening. In 1999, Norris’ first full year as CEO, operating earnings were up 40 percent. More important, as a measure of improved productivity, operating margins topped 10 percent in both 1999 and 2000, up from about 8 percent when he started at the company.
But the smooth ride ended abruptly. In late 2000, potential liabilities from an unexpected 81-percent increase in asbestos-related litigation jeopardized Grace’s ability to satisfy these claims from cash flow and reserves, as it had done in the past. When word got out, Grace’s stock tumbled and lenders shut off new lines of credit and threatened to call in old debt. In April 2001, Grace filed for Chapter 11 bankruptcy protection. “I completely mis-evaluated the company’s asbestos liability when I took the job,” Norris says ruefully. “But at the time, there was a feeling that asbestos litigation was on the decline.”
Now Norris is operating a far different company than he anticipated. Instead of doubling the size of the company, Norris spends his time in workouts with creditors, attorneys and suppliers while also making sure that core business lines don’t degrade and employee morale remains high even after $75 million in 401(k) money was lost when Grace’s stock became worthless. So far, through a new compensation plan to replace the lost equity, an effort to maintain critical research and development, and a stated goal to get out of Chapter 11 in three to five years, Norris has convinced most of his staffers and especially senior management that although the company’s survival is in the balance, it’s worth defending. The numbers back him up: During the first three quarters of 2001, when larger competitors in the chemical industry such as DuPont posted double-digit profit declines, Grace’s operating income rose 10 percent.
Norris says the adversity he faced at Grace has made him a better leader. “I’ll never get the same kind of personal recognition for turning around the company that I would have if we didn’t go into Chapter 11, but taking the job was never about ego,” Norris explains. “I took it to prove to myself that I could lead an independent company and now we’re certainly finding out if I can.”
Still, he adds, if he could go back to that day in Bossidy’s office, knowing what he knows now, “I would probably have made a different decision.”
Mortgaged to the hilt and loving it
Deborah Cafaro, Ventas Inc.
Imagine buying a building with penniless tenants in a run-down neighborhood where it would be impossible to get anybody else to move in. That, in essence, is what Deborah Cafaro did in March 1999 when she became CEO of Ventas Inc., a real estate investment trust, or REIT, that depended on nursing home operator Kindred Healthcare for 99 percent of its revenue.
Just a year earlier, the government had changed its Medicare rules in a series of steps that would severely curtail the amount of money provided to elderly care centers. The fallout would eventually send five of the nation’s biggest nursing homes, including Kindred, into Chapter 11 bankruptcy protection. Cafaro knew even before she accepted the job that she would likely have a virtually insolvent tenant. But Cafaro, a real estate lawyer who was previously president of Ambassador Apartments, a REIT now owned by real estate holder AIMCO, had a hunch that she could untangle this mess and make money.
“I weighed the upside and downside carefully,” recalls the 43-year-old CEO. “I knew if I succeeded, I would gain good visibility, learn a lot more about running a REIT, stretch my talents as a manager and receive financial rewards. If I failed, I still would have learned a great deal and I felt I could withstand a bit of tarnish to my reputation.”
In her first week as chief executive, Cafaro took somewhat of a beating. Shares in Chicago-based Ventas plunged 37 percent, from $8 to $5. Trading was halted a few times as investors were nervous about Kindred’s imminent earnings announcement and a government investigation into Kindred’s billing practices. But she tried to ignore these and other market distractions, including Kindred’s Chapter 11, to focus instead on setting her recovery plan in motion.
“My instinct told me that Medicare policy would right itself because the government needs to take care of the sick and elderly,” she says. “With that prospect I was able to risk the tough financial steps I needed to take with less fear.”
To help keep Kindred afloat, Cafaro cut its rent by 20 percent and in exchange took a 10 percent equity stake. She also helped convince Kindred’s creditors to follow her lead and take equity positions in the company in exchange for their loans, on which Kindred was defaulting.
Ventas’ creditors-essentially, the mortgage holders on its property-was the next group Cafaro had to tackle. After discounting Kindred’s rent, Ventas would be hard-pressed to meet its own debt obligations. So, Cafaro asked Ventas’ debt holders, primarily JP Morgan, to restructure their loans. If they didn’t, she warned, Ventas might have to file for Chapter 11 as well, and everybody would suffer. The bankers, seeing no other option, gave in.
“That was a dicey time, but I loved it,” says Cafaro. “The negotiations, the workout, the financial reevaluations-it’s all so exciting. It’s strategic, it’s tactical and you have to bring all of your experience to bear.”
Since then, Cafaro’s scenario for how things would fall into place has played out perfectly. Congress passed two Medicare giveback bills that buoyed the fortunes of the nursing home industry. With that and a multi-million dollar settlement of its billing dispute with the government earlier this year, Kindred came out of Chapter 11. In November, it completed a stock offering that brought its market capitalization to $800 million and Ventas’ stake in the company to about $80 million. By the end of 2001, Ventas’ stock had risen to about $12.
The exhilaration of living with danger and defeating it has given Cafaro a greater thirst for the job than if the past three years had been routine. She now wants to diversify the company’s tenant base, pay down debt, decrease interest expense and build a stronger internal organization so Ventas can grow.
Looking back, Cafaro admits that she was “smart and lucky.” But she also learned that the most important rule for a CEO is to “go with what you know and trust what you go with,” she says. “Instincts aren’t magic. They’re the sum of your experience applied to new situations.”
The turnaround specialist who hates bureaucracy
Jay Valentine, Alve Technology Corp.
Jay Valentine likes to call himself a launch CEO-although relaunch would be a better description. The 52-year-old Valentine has spent the recent part of his career running distressed companies that desperately need to shift innovative but unprofitable products into new and growing markets that can produce earnings.
“I’m not the person you bring in to GE to run it after Jack Welch leaves,” Valentine says. “I’m there for 18 to 36 months to be a catalyst and get a company on the right track.”
He did that at InfoGlide Corp. from 1997 through March 2001, taking over when the company was flat broke and getting nowhere trying to sell computer forensic software that tracks serial murderers. Talk about a limited customer base. Under Valentine, InfoGlide turned this program into a search engine for fraud detection that eventually was licensed to eBay and dozens of insurance companies. Before he left, after a dispute with the board over future direction, InfoGlide had gone from near-bankruptcy operation to a $100 million company on solid footing.
Out of work, Valentine planned to spend time on his horse farm near Austin, Tex.-and to restore a 1963 Triumph-until the next CEO position that suited him came along. That happened a month later, much sooner than he expected. The offer to run eight-year-old Alve Technology in Austin was too good to turn down. Alve was out of cash, couldn’t attract investors and sold inexpensive, low-margin software for monitoring customer service centers-the kind of business that would make some CEOs run in the other direction. But it had the perfect set of conditions that Valentine was looking for.
“Alve was a nice situation because there was no board of directors [nor were there] venture capitalists [to] drive the company toward the wrong goals,” Valentine says. Those partners also tend to own a large piece of the company’s equity, diluting the CEO’s share-and possibly his or her stake in making the company a success. “I have buddies who are getting killed on those kinds of deals, because they had to raise so much capital that they cut into their holdings,” he says. Valentine took a large percentage of Alve when he joined and raised a minimal amount. “To mitigate the risk I’m taking in becoming the CEO, I have to be able to control the factors that affect the company and my position in it,” he explains.
Valentine thought he could generate enough cash from Alve’s core software, which he felt had untapped potential, that a major investor wouldn’t be needed. The key was to take a $20,000 turnkey commodity program and transform it into a robust product that could essentially run the management side of an entire corporate call center and charge $1 million-plus for the system. Because the software was so sound, Valentine says, this was more a brand repositioning and sales effort than a complicated technological fix-and it was achieved in a scant few months.
Valentine’s plan appears to be working. Alve’s updated program has already been sold to HCA Inc., which runs more than 300 hospitals and outpatient centers, and Valentine says that he’s about to close a lucrative partnership arrangement with one of the Baby Bells.
“We’re now involved in seven-figure deals,” Valentine says, adding that the company saw revenues of $500,000 in 2000 and $2.5 million in 2001. He expects that number to grow to $5 million this year.
Alve is already profitable and, as Valentine hoped, will need only about $3 million to back operations. For that, the CEO is drawing on an angel investor, who will get a tiny part of the business but have no active role.
Within about three years, Valentine expects the company to grow to a few hundred employees. “That’s when we’ll bring in a real CEO. I don’t deal with bureaucracy well. I shouldn’t run an organization with 200 or 300 people.”