United Airlines. Providian Financial. Warnaco. Xerox. Gillette. Campbell Soup. Just a few of the companies that have hired so-called turnaround CEOs in the past year.
The list is growing daily — and little wonder. In these recessionary times, the promise of salvation by a white knight exerts a powerful hold on corporate directors of troubled companies. “Boards want to be seduced by someone whom they have been told is a turnaround artist. They’re looking for someone to help them out of a desperate situation,” explains associate professor Laura Resnikoff, who teaches a course in turnarounds at Columbia Business School. Investors like them, too: The appointment of a CEO with turnaround credentials rarely fails to boost even the most moribund stock.
But experience suggests that the phrase “turnaround CEO” is only rarely accurate. More often it’s simply optimistic (think Ford’s Jacques Nasser) or even a complete misnomer (think Sunbeam’s Al Dunlap). Few of them (think IBM’s Lou Gerstner) return a company to its former luster. At best, most of them succeed only in slowing the fall and providing a reasonably soft landing for investors, whether through sale, merger, or even Chapter 11 filing. In fact, a May 2000 article in the Harvard Business Review estimated that 70 percent of all turnaround efforts are failures.
But thanks to the itinerant nature of their careers, turnaround CEOs are usually off to the next assignment before the success or failure of their previous charge is known. “These guys get their halos way too early, before we’ve had five to seven years to see what they did,” says Resnikoff.
So how should their records be fairly assessed? What really separates the successes from the failures and the patch-up jobs? And what are the chances that their next turnaround will be the one that solidifies their reputations?
To find out, CFO examined the careers of three CEOs who have made names for themselves as turnaround guys: Norm Blake, CEO of Comdisco Corp.; Allen Questrom, CEO of J.C. Penney Inc.; and Robert S. “Steve” Miller Jr., CEO of Bethlehem Steel Corp. Collectively, their résumés include 20 attempted turnarounds, with only eight outright successes, five question marks, and several failures. And while the jury is still out on their latest efforts, their track records serve as fair warning to any company expecting “happily ever after”: turnarounds are inevitably painful, invariably different from what was envisioned, and often too difficult for one individual to achieve.
Three Leadership Styles
What Blake, Questrom, and Miller have most in common is that they have made careers out of troubled companies. Without question, their arrivals have been greeted with great relief (on Wall Street, if not necessarily in the employee ranks). That’s not surprising considering the messy situations they tackle, says Resnikoff. “Many troubled companies drift for a long time,” she says. “Someone who is willing to assess the problem and take action is recognized for his leadership.”
But that’s where the resemblance among the three men ends. Miller, for example, defines his primary objective as stabilizing a company–he usually adopts the title “interim CEO,” and describes himself as an expert in crisis management, not turnarounds. “My role is to arrest the decline and create a foundation for rebirth and growth,” he says. In fact, he adds, “I would not be a good hire for a company that is doing well–I’d probably mess it up.”
He’s also quick to point out that his success rate is considerably less than 100 percent. Proud of his work at Chrysler, Morrison Knudson, and Aetna, the 60-year-old Miller considers his efforts at Federal Mogul, Waste Management, and Reliance Group Holdings either mixed bags or outright failures. That’s no surprise, as he is famous for accepting assignments within 24 hours. “I come in without any due diligence; if you have to study a company for a month before you commit, you’re probably the wrong person for the job.”
Blake, in contrast, calls himself “more of a builder than a fixer.” Quick to express contempt for “Chainsaw” Al Dunlap, Blake winces at being dubbed “Pink-slip Norm” for cutting staff by 53 percent during his first three years at USF&G Corp. “Anybody can fire somebody,” he says. “The real tough stuff is building a new business on top of a broken one.”
In practice, Blake, 60, seems more likely to spruce up companies for sale. He sold USF&G to The St. Paul Cos. after eight years, sold Promus Hotels to Hilton after only a year, and is now orchestrating the sale of Comdisco’s top-performing businesses in bankruptcy court.
Of the three, Questrom, 61, seems most willing to see the building process through to completion. He has spent 30 of his 37 years in business working for various divisions of Federated Department Stores, including a 71/2-year stint rebuilding the parent company. And analysts believe his singular focus on retail will be an asset in his new role as CEO of troubled J.C. Penney. “Even Questrom’s competitors refer to him as one of the best merchandisers in the business,” notes Wachovia Securities analyst David M. Maura in a recent report. That’s key, says Resnikoff, in an industry where “there is an opportunity to disappoint your customers every minute.”
Phoenix or Turkey?
Obviously, none of these CEOs intends to disappoint stakeholders. But what constitutes success is another area of disagreement.
According to Dominic Di Napoli, head of PricewaterhouseCoopers’s turnaround practice and co-author of Workouts and Turnarounds II, a true turnaround involves not just stabilizing the finances but also analyzing the company, repositioning it, and building its market share. He concedes that failure to complete all the stages “doesn’t mean that the turnaround guy didn’t do a good job. To the extent it was impossible, he did the next best thing, which is to preserve value.”
By this criterion, the work of Blake and his former CFO at USF&G, Dan Hale, was a success. During their eight years there (Blake’s longest turnaround effort), “USF&G’s market cap increased 320 percent,” says Hale, adding that net income increased an average of 46 percent annually between 1992 and 1997.
Those results were achieved through deep staff cuts, the divestiture of $1.2 billion worth of unrelated investments, and the subsequent buildup of USF&G’s commercial and specialty lines into profitable units. Ultimately, however, USF&G was forced to sell out to The St. Paul Cos. because its personal-property-and-casualty (P&C) business couldn’t compete with newly formed giants like Citigroup (the merger of Citicorp and Travelers). “We were trying mightily to acquire something of size right before the sale,” recalls Hale. “We really needed to acquire or be acquired.”
Most observers agree with Blake’s decision. “If he hadn’t sold, USF&G would not be a stellar company today; a midsize P&C wouldn’t be able to compete,” says Keith Buckley, a managing director at Fitch. “He made a good strategic move in selling the company so that it became someone else’s problem.”
The Federated turnaround had an even happier outcome — except perhaps for its architect. Bankrupt when Questrom joined in 1990, it became the nation’s largest department-store chain with its acquisition of R.H. Macy & Co., and in 1996 boasted a net income of $265.8 million on sales of $15.2 billion. Of its competitors, The May Department Stores Co. alone made more profits.
In the end, only Questrom himself left unsatisfied. He sued Federated over the company’s estimate of its increase in equity value, on which his departure bonus was based. Federated’s estimate netted Questrom $16 million, whereas he sued for $47 million. A federal judge ultimately dismissed the suit, but Questrom is appealing.
For Miller, success in his latest assignment is going to require outside assistance. Bethlehem Steel’s $3 billion in pension liabilities is a common problem for U.S. steel companies, and one that prevents them from acquiring or merging with one another. Solving the pension issue will take nothing less than an industrywide turnaround, he says.
To that end, in a move reminiscent of his work at Chrysler, Miller is pushing for a federal-government bailout of the legacy health-care costs (which would erase barriers to consolidation) and protectionist tariffs. In early December, he increased the pressure on the government by announcing merger talks with U.S. Steel and encouraging as many as five other steelmakers to join in potential consolidation.”My first duty is to the shareholders,” he insists, “but their future is linked to a much stronger steel industry.”
Promoting from Within
Whatever the eventual outcome, the finance department plays a critical role in every turnaround. Blake, who was one of Jack Welch’s financial planners at General Electric, traditionally eschews COOs altogether, and relies heavily on his CFO. For finance types, however, the arrival of a turnaround CEO can be both a curse and a blessing. Invariably, incumbent CFOs are blamed for some of the companies’ problems: “If you look at a troubled company, you will find a weak financial organization,” insists Blake. And rare is the incumbent CFO who survives the first round of the inevitable management shakeout.
The good news is that fix-it pros like Blake, Questrom, and Miller have a history of promoting from within finance — after they send the top player packing. At USF&G, Blake immediately eliminated almost 70 percent of management, including the CFO. But he also elevated controller Edwin G. Pickett to the top finance slot (Hale stepped in 18 months later). And at Bethlehem Steel, Miller offered departing CFO Gary Millenbruch’s spot to treasurer Leonard Anthony just days after taking over. “The external financial community was very high on Len, and I took great confidence from them that I could promote him and not miss a beat in our external financial relationships,” says Miller.
For his CFO, J.C. Penney CEO Questrom selected Robert Cavanaugh, the onetime CFO of the company’s promising Eckerd Drug Stores division and a former J.C. Penney treasurer. That background, says Cavanaugh, was critically important for a company that needed to “maintain liquidity and flexibility.” And although Cavanaugh considered himself an outsider when he returned to the parent firm, his years as treasurer were a plus for Questrom. “Somebody who knows the lay of the land is a good asset to a turnaround CEO,” says Resnikoff. “For some people, troubled companies are a career enhancer.”
At Waste Management, where Miller served not one but two stints as interim CEO, that someone was Donald Chappel, a controller whom Miller elevated after taking over in October 1997. Says Miller, “I promoted him because he was a straight shooter and he knew where all the bodies were buried.” That was important, notes Miller, because “the company had been pushing the envelope on its reported earnings.” Chappel helped Miller take a $1.4 billion write-off — the largest in corporate history at the time. “We wrote off two thirds of the net worth of the company in one fell swoop,” says Miller.
Chappel was subsequently sidelined by what Miller considers “my biggest corporate belly flop ever,” when Miller merged the company with USA Waste and turned over control of the combined entity to executives of the smaller company. “I handed the company over to management that was totally incompetent,” recalls Miller. Nine months later, the board fired the entire management team and reinstalled Miller and Chappel as CEO and CFO.
Miller, who served double stints as interim CEO at Federal Mogul as well as Waste Management, is not the only CEO whose experience demonstrates that extracting value from a troubled company is often a drawn-out, repetitive process. Blake says he “looked long and hard” at exiting the personal P&C lines before selling USF&G — a move he admits “would have been a second turnaround.”
“Very few people get it right the first time,” notes Professor Resnikoff. “The question is whether CEOs are serial restructurers because they are not good at it, or simply because restructuring is such a hardship.” While there are certainly those turnaround CEOs who view turnarounds as lucrative hit-and-run assignments, says Resnikoff, most are simply dealing with “an iterative process that gets harder and harder.” No surprise, then, that when it gets too hard, many turnaround CEOs opt to sell a stabilized or recovering company.
For an increasing number of companies, the next step is not a sale but bankruptcy. So far this year, a record 230 public companies with more than $182 billion in assets have taken that route, according to BankruptcyData.com. Included in that figure are Comdisco and Bethlehem Steel — despite the fact that turnaround celebrities are traditionally loath to put their marquee-name companies into Chapter 11. “The weird thing is that the bigger the companies are, the better chance you have to save them,” notes Joel Getzler, president of turnaround boutique Getzler & Associates, in New York. “They have more assets and some cachet.” By contrast, one study notes that the average company emerging from bankruptcy is usually half its former size in revenue, people, and assets.
Until now, Blake had avoided a bankruptcy filing. He hoped to avoid it at Comdisco, where averting bankruptcy amounted to a race between the sale of some of Comdisco’s businesses and short debt maturities. “Unfortunately, the economy and other factors were not conducive to making those sales,” says Blake, who was almost immediately forced to draw down on Comdisco’s bank lines to meet its commercial-paper obligations. “When I came on, I told the board there was a 50 percent probability that I could save the company.”
And now that he’s taken the Chapter 11 route, he is not happy about the situation. “I hope I don’t have to do it again,” says Blake ruefully.
The main problem with bankruptcy, says Miller, is that “you don’t have control over your destiny in Chapter 11, and you’re always asking [the court], ‘Mother, may I?’” Having joined Bethlehem Steel on September 24, Miller initially announced he had no intention of declaring Chapter 11. But a deal with GE Capital for a new $750 million revolver to replace its $660 million revolver (providing $90 million in incremental liquidity) couldn’t be signed in time.
Even as Miller was calling Anthony at home on September 30 to promote him to CFO, business worsened. Year-to-date before the terrorist attacks, Bethlehem’s orders were down 13 percent; since then, they have been off an additional 20 percent. Chapter 11 proved to be the only way out. Under the revised $450 million debtor-in-possession deal struck with GE Capital, explains Anthony, the company was able to pay off a large portion of its previous drawdowns and was left with $190 million in incremental liquidity. In other words, he says, “we were able to raise more money in Chapter 11 than outside.”
A Matter of Balance (Sheet)
Raising money doesn’t seem to be an issue for Questrom these days, although the former CEO of Federated and Barney’s is no stranger to Chapter 11. While J.C. Penney is clearly suffering from an image problem and burdened by a high debt ratio, the company has a reasonably full war chest to fund its heavy spending on advertising and the centralization of merchandising operations that are the keys to its turnaround.
Questrom, who joined Penney in July 2000, can thank CFO Robert Cavanaugh for that financial flexibility. When he rejoined the parent, Cavanaugh’s first concern was “to ensure that our operating people did not have to be concerned on a day-to-day basis with debt retirements.” And since then he has made good on his promise.
Under Questrom and Cavanaugh, J.C. Penney has taken charges of more than $600 million and closed about 10 percent of both its drugstores and department stores. Last June, it also sold off an insurance subsidiary for $1.3 billion, leaving the company with $1.7 billion in cash and $5.47 billion in debt. Then, in October, Penney issued $650 million of 5 percent convertible notes.
The result? “I don’t believe there is one company in American history that has begun a turnaround with 45 percent of its long-term debt in cash,” says Cavanaugh. “The convertible [note sale] showed that even after September 11, the capital markets have confidence in Penney’s ability to turn around.”
Analysts agree. “We view the market reception of the deal, the ease by which the company was able to access the capital markets, and the increased financial flexibility afforded the company as positive developments,” Wachovia Securities’s Maura notes in his recent report. All this suggests, not surprisingly, that turnarounds are often a matter of time and cash. “J.C. Penney’s $2.35 billion cash position gives the company’s new management team the time it needs to execute its turnaround strategy,” says Maura.
That’s the Good News
Unfortunately, time is not on everyone’s side in a turnaround. “Whether Bethlehem is a surviving name is a question,” admits CFO Anthony, although Miller’s game of chicken with the federal government may yet deliver the very consolidation the entire industry needs. Likewise, says Comdisco’s Blake, “longer term, if we go through bankruptcy and reemerge, that doesn’t preclude the fact that some remnants might, in phoenix-like fashion, become reliable and profitable. But it is a long way to go before you can make that determination.”
On the other hand, if Questrom and Cavanaugh are able to sustain J.C. Penney’s apparent recovery in the current economy — and analysts are bullish on their chances — it will breathe new life into what Resnikoff calls “the allure of the heroic CEO.” Whatever the outcome, one thing is certain: the allure of the next assignment will probably ensure that not all of these turnaround CEOs will be around for the finale.
Tim Reason is a staff writer at CFO.
Brave New Whirl
They know finance. Bethlehem Steel Corp. CEO Robert “Steve” Miller Jr., a former Chrysler CFO, got his start at Ford, a renowned incubator for finance executives. Norm Blake, now CEO of Comdisco Corp., cut his finance teeth at GE Capital. And J.C. Penney Inc.’s Allen Questrom got his undergraduate degree in finance and marketing from Brown University.
Such expertise is crucial for CEOs who come in on short notice and in a time of crisis, says Columbia Business School associate professor Laura Resnikoff. But the pressure of a turnaround also forces even the most talented CEOs to lean heavily on their finance staff. They “walk into a company cold and don’t know where the coffee machine is,” says Dominic Di Napoli, head of PricewaterhouseCoopers’s turnaround practice. So it’s understandable that they don’t “know the financial systems and how the ledgers roll up.”
In addition, turnaround CEOs must often focus first on the needs of angry stakeholders. “The CFO has to work well with the CEO so the CEO has even more time to go out and spend face time with all the constituents,” explains Resnikoff. At Comdisco, Blake has even taken the unusual step of naming incumbent CFO Michael Fazio as COO, so he’ll have someone to run the business while he is in bankruptcy court.
Still, despite their celebrity status, turnaround CEOs know how to earn the respect of finance staffs. At USF&G Corp., for example, Dan Hale remembers how he and Blake “worked hand-in-glove” during that turnaround. “It wasn’t that Norm was making finance decisions,” says the former CFO, “but he was making sure he was informed.” And at J.C. Penney, CFO Cavanaugh remembers that some of Questrom’s earliest recommendations “were things that many in the finance area had been saying for some time.” —T.R.