Tools for Turnaround

When companies face their toughest times, boards call in the specialists with the skills to woo back Wall Street and the stomach for tough measures.

April 1 2002 by Russ Banham


Imperial Sugar Chairman and CEO Bob McLaughlin is a turnaround specialist, a rare breed of corporate leader in higher-than-ever demand now that the economy is reeling. McLaughlin and his peers have singular skills and career appetites that separate them from more conventional CEOs, who when faced with the same challenge might run in the other direction. Charged by the obstacles ahead of them, turnaround CEOs are compelled to take on the toughest job in business-righting a corporate ship foundering on the shoals.

At the moment, McLaughlin is trying to save Imperial Sugar from the abyss. The Sugar Land, Tex.-based sugar producer, with $1.4 billion in revenues and a 33 percent market share, is the largest sugar company in North America. Yet it was forced to file for bankruptcy protection from creditors in January 2000, besieged by some $300 million in debt. A few months later, McLaughlin was brought in to navigate the company’s future. “Liquidity was and is our first concern,” says the new CEO, a veteran executive who began his career with Xerox in 1962.

“The board has driven a stake in the ground to get the debt down to $100 million as soon as possible,” McLaughlin adds. “I told management the first day I got there that if we have to sell the boardroom table, we’ll sell it.” So far, McLaughlin has auctioned off Imperial’s nutritional business and four plants that belonged to a subsidiary, Michigan Sugar. (As of this writing, the company still owned the boardroom table.)

McLaughlin has been down this road before, turning around several companies, including plywood-maker Fiberboard; Spreckles Sugar, a sugar producer that, ironically, he sold to Imperial four years ago; and Ajax Magnethermic, a small Ohio company that makes electric induction heating furnaces. And he doesn’t find uncertain situations intimidating. “I’m not afraid to walk into a dark room and not know where the light switch is,” he says. “A lot of people don’t like dark rooms because they can fall over the furniture and get hurt.”

McLaughlin is not alone in relishing the thrill of the unknown, the opportunity to revive a moribund company written off by analysts, vendors, investors and customers. The list of CEOs who get high taking on impossible odds is a short one, but executive search firms say the leadership skills of those on the list are remarkably similar. And they’re also markedly different than the leadership skills of more traditional CEOs. “Bob McLaughlin and others of his ilk have an uncanny ability to quickly analyze the fundamentals of a business to determine if it has the right products, markets, distribution, capital structure and people,” says David Nosal, northwest regional manager at executive search firm Korn/Ferry International, the Los Angeles-based firm that brought Imperial and McLaughlin together.

“They can quickly appreciate and understand the value proposition for shareholders, and are able to make very tough decisions,” Nosal adds. “You would think a guy like McLaughlin would be cold-hearted, but he’s just the opposite. He’s able to break down issues and communicate them in such a way that people in the organization not only understand them; they accept them and follow them. That takes a very unique leader.”

Distress calls
These days, there are plenty of CEO job postings at companies that got in trouble in good times and are paying for it now in bad times. “The demand for new CEOs is up 50 percent in the last five years,” says Tom Neff, former chairman and CEO of Spencer Stuart, a New York-based executive search firm. “The job is a lot tougher, more stressful and demanding, causing CEOs to burn out and quit at a higher rate.”

Given the recession, the litany of failed mergers and acquisitions and the dot-com debacle, it’s little wonder that turnaround specialists like McLaughlin are in high demand. Several industries are slogging through muddy waters, particularly textile, furniture, steel, retail and entertainment. “We’re losing textile companies left and right,” says Peter Tourtellot, managing director and principal at Anderson Bauman Tourtellot Vos & Co., a Greensboro, N.C.-based turnaround management firm. “We’re working on saving three right now, trying to get them in shape for liquidation.”

Companies are undermined by many of the same troubles: an ill-founded strategy, a pronounced lack of understanding about the costs of doing business, extraordinary naivete regarding cash flow and untimely decision-making. Once off-track, management typically is unable to figure out how to get the train rolling again. “Senior management at a company in trouble usually can’t see the end game,” says Ted Stenger, a principal at Jay Alix & Associates, a Southfield, Mich.-based corporate turnaround and financial advisory firm.

Stenger should know. He was hired in 1997 by shareholders of then-bankrupt Maidenform Worldwide, the maker of ladies intimate apparel, to restore it to profitability-a gargantuan challenge. “The company had tried to sell itself and when the deal fell apart, it was out of compliance with its lending arrangements and was cash negative in operations,” he recalls. “Senior management unfortunately had no plans in place for how to remedy this.”

Maidenform was beleaguered by competition from upstarts like Victoria’s Secret, and by archaic business practices. “The order fulfillment rates were 40 percent, while competitors’ rates were 80 to 90 percent,” Stenger says. He worked quickly to revive the company, paring expenses enterprisewide. Within the first three months, Maidenform’s product offerings were slashed by 44 percent, which caused only a 15 percent loss in revenues. A private-label brand and a couple of high-end labels were dropped, the shapeware line (read: girdles) was eliminated and several plants were shuttered in Puerto Rico.

The surgery kept Maidenform alive. The company is “much healthier but still a middling player beset by a slowdown affecting the entire apparel industry,” notes Stenger, who left, as expected, after his 11-month stint with the company. The bottom line, though, is that it is still in business,” he adds, “which looked doubtful back in 1997.”

First things first: diagnosing the problem

 

Maverick
McGavick

When Mike McGavick became president and CEO of sputtering SAFECO Insurance Co., he let employees know things were going to be different. “I told [them] when I got here that if they were used to an operation where everyone talked down the command chain, they’d need to adjust to a new style,” he says. “The power of a company is its collective ideas. I just don’t believe in the kind of management where managers are tough on employees and resort occasionally to verbal abuse. Listening has always been the foundation of my leadership style.”

After turning around the fortunes of the property and casualty insurance division of Chicago-based CNA Insurance Cos., McGavick was recruited to rebuild SAFECO, a Seattle-based insurer whose operating earnings had dropped 88 percent to $9.5 million in first quarter 2000, a few months before McGavick was named CEO.

He’s made some very tough decisions: reducing the dividend by 50 percent; selling a major subsidiary, SAFECO Credit Co.; consolidating regional offices from 13 to five locations; and downsizing the workforce by a planned 10 percent-roughly 1,200 jobs. The strong medicine is taking effect. SAFECO’s stock price is up 24 percent since McGavick came on board. It recently reported fourth-quarter income, before charges, of $17.4 million, compared with an operating loss of $13.6 million in the same quarter of 2000.

As Stenger and other turnaround masters know well, the first step in turning around a troubled company is diagnostic-an analysis of the problems that caused the company’s downfall. Distressed companies typically are cash-starved and have difficulty paying the bills, generating a need for expeditious triage.

“Allowing your priorities to drift in a crisis situation is a luxury turnaround CEOs cannot afford,” explains Gary Brooks, chairman and CEO of Allomet Partners, a New York-based consulting and crisis management firm. “They must establish very understandable short-term goals measured by cash and not by the income statement or balance sheet. Most CEOs are trained to run a business using the balance sheet and income statement as the priority metrics. In a crisis management situation, the priority objective is to generate and preserve cash-period.”

Tourtellot agrees. “The first objective in a corporate renewal is to stop the bleeding,” he says. And to generate cash, the CEO often has to close or sell unprofitable divisions, downsize the workforce and restructure the loans. “When your cash flow is impinged, you’re not thinking about how to grow the company. That comes later. You must analyze and determine the firm’s core strengths and get rid of anything that isn’t core.”

Another way to generate cash is to liquidate inventory. Some troubled companies wind up with a warehouse full of inventory that has less value than when it was manufactured. “The company will take a terrible loss in terms of asset value and P&L,” Brooks notes. “But if it doesn’t liquidate, there’s no cash. And cash is king.”

But deciding to liquidate inventory would be a tough call for more traditional CEOs, since their compensation plans often are linked to balance-sheet and income-statement metrics, Brooks says. The liquidation also would have a negative impact on lines of credit, for example, liquidating assets at values that are less than their collateral value at the time of borrowing. “Sometimes you have to make tough decisions that will affect your lines of credit-simply to save the company,” Brooks argues.

Fact is, more conventional CEOs are trained to run an ongoing enterprise-not deal with crisis every moment of the day. “When survival is threatened, typical CEOs often are deer in the headlights, in such a state of denial that they’re frozen to the spot, keeping their fingers crossed that a big customer will come in and save the day with a huge order,” says Tourtellot. “But that rarely happens.”

Selling out
Although the sale of a company in distress often is the end game, turnaround CEOs usually are hired to salvage the company intact. “Boards generally are not assuming a liquidation is around the corner,” says Spencer Stuart’s Neff. “They’re loathe to even consider this possibility-at first.”

That was the case when Stephen Coffey took the helm at Edwards Theaters, a Newport Beach, Calif.-based movie-theater chain. “Bankruptcy wasn’t on the table at all when I was called in by the board to help,” says Coffey, who was the company’s CEO until this past December, when he left, as expected. “It wasn’t even in their lexicon.”

Edwards Theaters jumped headfirst into the mega-plex boom of the ’90s, availing itself of attractive lending to build more theaters than it should have – 25 percent more screens than was economically prudent. “The building boom was off the charts,” says Coffey. Edwards Theaters wasn’t the only one. The entire movie exhibitor industry overbuilt in the past five years to alarming proportions. Attendance didn’t keep pace, and half a dozen chains, including Edwards, were forced into bankruptcy.

“When I got there in January 2000, the board had taken out a $250 million credit facility to fund their building expansion and had chewed through $213 million of it,” says Coffey. Management had also depleted the company’s cash reserves. “Meanwhile, the money coming in the door could not meet the bills flying over the transom. Within 60 days, we would have been insolvent.”

It took 10 days for Coffey to craft a short-term plan. It called for closing 40 theaters out of 90 and terminating 19 development projects. He then orchestrated a credit facility amendment with the company’s bankers that delivered $15 million in short-term cash. The final step was to file for bankruptcy protection in August 2000. A year later, after emerging from bankruptcy, Edwards was sold to an investor group led by The Anschutz Corp. and Oak Tree Capital. The group subsequently has purchased two other bankrupt theater chains, United Artists and Regal.

Coffey has performed similar magic as the CEO of D&L Sheet Metal, a small commodity producer, and before that a division of The Bekins Co. “People who do this-and I fit the mold-love challenge; it’s what gets us juiced up,” he says. “Most distressed companies find that having someone external without an historical

perspective is a huge help in saving them.”

An academic approach
Larry Weinbach, chairman and CEO of Unisys, also wasn’t hired, “to make the company pretty and then sell it off,” as he puts it. “To me the greatest legacy is to have a company up and running and successful, as opposed to selling it out of existence.” Since coming to Unisys five years ago, Weinbach has transformed the Blue Bell, Pa.-based technology company from predominantly a hardware supplier into what is now a services-led hardware company. This transformation was predicated on Weinbach’s on-target assessment that the hardware market would continue to contract.

The metamorphosis required intensive retraining of the workforce. So Weinbach created Unisys University, an internal educational initiative to teach employees how to develop the leadership skills needed to run a services company. The effort paid off. Today, Unisys derives 75 percent of its revenues from services, up from 25 percent when Weinbach took the helm. Other signs of a turnaround: From 1997 to 2001, Unisys’ debt-to-capital ratio plunged to 28 percent from 59 percent, its interest payments dropped to $70 million from $350 million annually, and its backlog of services business is up to $5.7 billion from $2.3 billion. “I can look back and say we did it,” Weinbach says.

Skills of a Turnaround Artist: Do You Have What It Takes?
What is it that distinguishes a Larry Weinbach, Bob McLaughlin or Stephen Coffey from more traditional CEOs? “Keen survival instincts,” says Spencer Stuart’s Tom Neff. “These CEOs are decisive, action-oriented, totally driven people who act quickly and can shift gears on the spot.”

Speedy decision-making. “The timeline for making decisions in a turnaround is measured in weeks, whereas at a healthy company it is measured in multiple years,” says Allomet Partners CEO Gary Brooks. “You don’t want a conventional CEO in a turnaround situation because they tend to want 100 percent of the data before making a decision. You can’t afford that luxury when a company is bleeding cash.”

Stenger compares a CEO turnaround specialist to a general in war time. “Decisions have to be made quickly based on information that is not as good as you’d like it to be,” he explains. “That requires a level of maturity, experience and confidence that is higher, perhaps, than what you get in a traditional CEO.”

The willingness to bare all. “Many CEOs are uncomfortable being direct and transparent with employees, customers and vendors, but this is absolutely critical in a turnaround situation,” says Ted Stenger of Jay Alix & Associates. “You must be willing to look at the brutal truth and then be very honest about it.”

The ability to cheerlead. Turnaround CEOs must motivate an often demoralized labor force, as well as recruit talented executives into a high-stress situation. That requires an extremely positive attitude, tenacity and enormous self-confidence. “Otherwise how can you convince anyone to follow you?” asks Neff. “The job also demands resilience, since you will be hounded by naysayers until success is realized.”

There is also a messianic aspect to leading a company in dire straits. “Most corporate leaders shy away from troubled companies because of all the personal heartache that comes with it,” say Korn/Ferry’s David Nosal. “You’re often viewed as the person with the black hat arbitrarily making decisions that change people’s lives. But the people attracted to the post don’t think in those terms. They get excited by saving the organization.”

Brooks agrees. “Most CEOs are not trained academically or experientially, or equipped emotionally, to handle things like discharging people, closing down pet projects or shutting down plants that may be the major source of employment in a small town. That’s why the job often requires someone coming in without long-held allegiances.”

Legal-ease. Yet another skill distinguishing the corporate renewal specialist is knowledge of bankruptcy law, since many troubled companies will seek this form of financial protection. “You often have to manage a company that may go through the bankruptcy process, so it is incumbent to know the law to use it to your advantage if and when that comes to pass,” says turnaround expert Peter Tourtellot.

Given all the skills they have to master, it’s not surprising that turnaround CEOs often are paid more than their more conventional counterparts. “If the company succeeds, the upside is substantial because the compensation package usually is heavily equity-oriented,” says Neff. Nosal concurs. “By and large the compensation is greater. The higher risk merits greater reward.”

And the risk is what this restless breed hunts for, often growing bored with the companies they head once the challenge is gone. “They’re not in this to hang around and build a company,” Neff says. “That’s just not their game. Their last act is to hire their successor. Then they’re off to the next impossible situation.”

What can traditional CEOs learn from these mavericks? “You have to change with the times,” says Tourtellot. “A company that isn’t constantly re-appraising itself, its products, services, technology, workforce and markets is destined for trouble.”

Just the kind of situation that gets Bob McLaughlin fired up. “I should be wrapping up this assignment soon,” he notes. “Then, who knows?” - R.B.