Averting disaster: think giving CPR to companies in crisis is hard? Try doing it in the middle of a downturn - Turnarounds

Chief Executive, The, April, 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 lacocca 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."