Back from the brink - Savin Corp. bankruptcy reorganization

Chief Executive, The, Oct, 1994 by William R. Krehbiel

Cash flow is weak, foreign currency fluctuations are against you, your key customers are fleeing, and you fall into the abyss of Chapter 11. Seven stakeholder groups, from a Dutch lender to your Japanese supplier, are elbowing one another for a different outcome. Here's the plan...

What distinguishes businesses that survive crises from those that fail? Simply put: a recognition that the business environment has changed, and that the culture that worked for the growing company is likely to be a liability for the downsizing, troubled company. An organization in financial hot water must concentrate on profit and cash flow, not on growth or market share.

Savin Corp. learned this lesson the hard way. Deeply in debt and mired in a bankruptcy proceeding two years ago, the 30-year-old office copier and facsimile equipment company crafted and implemented a rigorous plan to get back in the black. The strategy focused on creating a survival culture; making money; retaining key people who could successfully engineer the Chapter 11 reorganization, and re-establishing credibility among customers and suppliers and international investors who did not understand the U.S. Bankruptcy Code.

The plan transformed Savin from a company with $400 million in accumulated deficit and a negative $200 million equity into a healthy organization that closed 1993 with a $25 million positive shareholder's equity. Examining what worked and why may prove instructive to the tens of thousands of U.S. companies that run the bankruptcy gauntlet each year.

SURVIVAL CULTURE

Savin management first turned its attention to the company's culture, a root cause of many of its difficulties. Savin's problems began in the early 1980s. Over the next decade, the company was redirected every few years by three successive owners. The majority owners consistently focused on market-leadership strategies, often with substantial up-front launch costs. As a result, profitability suffered. By the end of 1991, Savin's board could no longer believe that its current majority owner, the Dutch firm HCS Technologies, would arrest the company's financial slide. After an interviewing process with 10 crisis-management firms, Savin's board of directors appointed Regent Pacific Management as the company's general manager on February 21, 1992. Simultaneously, the board accepted the resignations of both the chief executive and chief operating officer, appointing me as the new CEO. The situation was acknowledged by industry observers and the board to be a crisis of both cash and confidence, since the stakeholders alleged that the succession of management at Savin had destroyed the company's credibility.

A crisis situation such as Savin's demands a survival culture. Savin didn't need people who were good at building a business and who knew how to launch new products into new markets, to "tool up" new production facilities, to attract bright people with a "ground-floor" opportunity and lavish stock options, to divisionalize for each growing product line, and to raise money through debt or equity offerings. It needed people who could pragmatically assess the success or failure of product lines, distribution channels, and plant efficiencies. Marginal products must be phased out, marginal plants must be closed, and marginal distribution must be dropped. Cash is king in this culture.

Savin had to retain key, overworked people without rising options on a stock that already was viewed as marginal. These executives had to generate cash through good management decisions to pay their own bonuses. Savin's management had to operate with a dry well, as its former debt-and-equity capital sources dried up. The culture restructuring was not an easy task, especially since Savin's former culture trader three majority owners during the 1980s focused on growth. Some people who refused to accept the downsizing culture as essential for the enterprise's survival had to be replaced.

TACTICAL MISTAKES

Once the only company that threatened Xerox in the U.S. plain-paper copier industry, Savin committed a series of mistakes in 1981 that contributed to the crisis that boiled over in 1992. Savin rashly told Ricoh, its supplier of copier equipment, that it intended to manufacture its own copiers and soon would directly compete with Ricoh throughout the world. After pouring over $250 million into a four-year manufacturing program, Savin gave up in 1985 and returned, hat-in-hand, to Ricoh, which had lost faith in Savin's judgment.

As Savin struggled to overcome the cash drain, its majority stakeholder, HCS Technologies, in 1991 took on several large institutional and governmental copier contracts, many of which turned out to be money losers.

The final mistake was made by Savin incrementally, over all the preceding managements' tenures. To raise cash, Savin sold portions of its lease and rental portfolios to third-party lessors. In 1990, a privately owned, third-party lessor in Minneapolis sued Savin for failing to live up to their contract agreement. Two years later, a unit of the ING Bank of Holland filed suit against Savin with similar allegations of non-performance.