FINANCIAL TURNAROUNDS: P R E S E RV I N G VA LU E Henry A Davis Henry A Davis & Co William W Sihler Darden Graduate School of Business Administration University of Virginia Prentice Hall PTR One Lake Street Upper Saddle River, NJ 07458 www.phptr.com Editorial/Production Supervision: KATHLEEN M CAREN Executive Editor: JIM BOYD Marketing Manager: BRYAN GAMBREL Manufacturing Manager: MAURA ZALDIVAR Cover Design: NINA SCUDERI ©2002 Financial Executives Research Foundation, Inc Published by Financial Times/Prentice Hall PTR Pearson Education, Inc Upper Saddle River, NJ 07458 Prentice Hall books are widely used by corporations and government agencies for training, marketing, and resale The publisher offers discounts on this book when ordered in bulk quantities For more information, contact: Corporate Sales Department, Phone: 800-382-3419; Fax: 201-236-7141; E-mail: corpsales@prenhall.com; or write: Prentice Hall PTR, Corp Sales Dept., One Lake Street, Upper Saddle River, NJ 07458 All rights reserved No part of this book may be reproduced, in any form or by any means, without permission in writing from the publisher Printed in the United States of America 10 ISBN 0-13-008757-2 Pearson Education LTD Pearson Education Australia PTY, Limited Pearson Education Singapore, Pte Ltd Pearson Education North Asia Ltd Pearson Education Canada, Ltd Pearson Educación de Mexico, S.A de C.V Pearson Education—Japan Pearson Education Malaysia, Pte Ltd Pearson Education, Upper Saddle River, New Jersey A D V I S O R Y C O M M I T T E E Paul A Smith Treasurer (retired) Beutel, Goodman & Company Ltd Richard H Fleming Senior Vice President and Chief Financial Officer USG Corporation H Stephen Grace, Jr., Ph.D President H.S Grace & Company Inc Gracie F Hemphill Director – Research Financial Executives Research Foundation, Inc Robert Sartor President, Business Support and Chief Financial Officer The Forzani Group, Ltd David R A Steadman President Atlantic Management Associates, Inc Edited by: Rhona L Ferling and Carol Lippert Gray III FINANCIAL TIMES PRENTICE HALL BOOKS For more information, please go to www.ft-ph.com Thomas L Barton, William G Shenkir, and Paul L Walker Making Enterprise Risk Management Pay Off: How Leading Companies Implement Risk Management Deirdre Breakenridge Cyberbranding: Brand Building in the Digital Economy William C Byham, Audrey B Smith, and Matthew J Paese Grow Your Own Leaders: How to Identify, Develop, and Retain Leadership Talent Jonathan Cagan and Craig M Vogel Creating Breakthrough Products: Innovation from Product Planning to Program Approval Subir Chowdhury The Talent Era: Achieving a High Return on Talent Sherry Cooper Ride the Wave: Taking Control in a Turbulent Financial Age James W Cortada 21st Century Business: Managing and Working in the New Digital Economy James W Cortada Making the Information Society: Experience, Consequences, and Possibilities Aswath Damodaran The Dark Side of Valuation: Valuing Old Tech, New Tech, and New Economy Companies Henry A Davis and William W Sihler Financial Turnarounds: Preserving Enterprise Value Sarvanan Devaraj and Rajiv Kohli The IT Payoff: Measuring the Business Value of Information Technology Investments Jaime Ellertson and Charles W Ogilvie Frontiers of Financial Services: Turning Customer Interactions Into Profits Nicholas D Evans Business Agility: Strategies for Gaining Competitive Advantage through Mobile Business Solutions Kenneth R Ferris and Barbara S Pécherot Petitt Valuation: Avoiding the Winner’s Curse David Gladstone and Laura Gladstone Venture Capital Handbook: An Entrepreneur’s Guide to Raising Venture Capital, Revised and Updated David R Henderson The Joy of Freedom: An Economist’s Odyssey Philip Jenks and Stephen Eckett, Editors The Global-Investor Book of Investing Rules: Invaluable Advice from 150 Master Investors Thomas Kern, Mary Cecelia Lacity, and Leslie P Willcocks Netsourcing: Renting Business Applications and Services Over a Network Frederick C Militello, Jr., and Michael D Schwalberg Leverage Competencies: What Financial Executives Need to Lead Dale Neef E-procurement: From Strategy to Implementation John R Nofsinger Investment Madness: How Psychology Affects Your Investing… And What to Do About It Tom Osenton Customer Share Marketing: How the World’s Great Marketers Unlock Profits from Customer Loyalty Stephen P Robbins The Truth About Managing People…And Nothing but the Truth Jonathan Wight Saving Adam Smith: A Tale of Wealth, Transformation, and Virtue Yoram J Wind and Vijay Mahajan, with Robert Gunther Convergence Marketing: Strategies for Reaching the New Hybrid Consumer C O N T E N T S F O R E W O R D V I I I n t ro d u c t i o n Executive Summary Case-Study Summaries, Key Findings, and Early Warning Signs Comparison of Financial Turnarounds 27 Comparison of Turnaround Methods 45 P reventive Medicine for Healthy Companies C A S E 69 S T U D I E S Manufacturing Sector 73 Maytag Corporation Navistar International Corporation USG Corporation Forstmann & Company Pepsi-Cola Bottling Company of Charlotte, N.C Sampson Paint Company 73 78 90 105 121 127 Re t a i l i n g S e c t o r Ames Department Stores, Inc Jos A Bank Clothiers, Inc Edison Brothers The Forzani Group, Ltd Musicland Stores Corporation Red Rooster Auto Stores VII 135 135 146 155 167 180 189 11 H i g h -Te c h n o l o g y S e c t o r 199 Parametric Technology Corporation and Computervision 199 GenRad, Inc 205 Kollmorgen Corporation 217 10 Real-Estate Sector 225 Cadillac Fairview 225 11 Service Sector 241 Burlington Motor Carriers, Inc Fairmont Hotels & Resorts St Luke’s Hospital—San Francisco Microserv Technology Services 241 246 253 260 A P P E N D I C E S A Annotated Bibliography 273 B Glossary 291 C Turnaround Specialists Interviewed D CEpilogue 296 A b o u t t h e Au t h o r s 297 Ac k n o w l e d g m e n t s 299 I n d ex VIII 301 295 F O R E W O R D Turnarounds are not for the faint of heart The hardest aspect of a financial turnaround to convey on paper is the emotional strain on everyone involved Family breadwinners lose their jobs and worry about their mortgage payments Financial officers, lawyers, line managers, and others directly involved in the turnaround work 18 hours a day, seven days a week and live from deadline to deadline Their adrenaline wanes The company has violated its loan covenants The bank has given it only until the next meeting—about two weeks—to stop the bleeding, reposition the business, motivate the staff, and develop a plan to deleverage the balance sheet The company’s bankers will not simply agree to relax some of the covenants; they will concede only under pressure in a room full of lawyers with everyone screaming When a turnaround team comes into a company and makes changes, it may create resentment, skepticism, and suspicion among employees who feel their stewardship of the business is being condemned But once the bleeding has stopped and the business has been “fixed,” many of those same skeptical employees will have to stay on to ensure the turnaround’s success Companies must therefore convince employees to look at members of a turnaround team as essential elements in a new business direction, not as outsiders In short, turnarounds are not simply a matter of tinkering with the company’s product development, marketing, or financial strategy A turnaround is an emotional roller coaster representing a fundamental upheaval The turnaround team has the fate of the company and its employees in its hands The knowledge that hundreds, if not thousands, of people’s livelihoods depend on its decisions and actions, combined with that most visceral of emotions—the fear of public failure—makes a turnaround one of the most stressful business endeavors imaginable Although some managers thrive on the pressure and even consider it a career opportunity, others become paralyzed with indecision That’s why this guide to the turnaround process is so important It analyzes 20 case-study companies in various industries, explaining how they ran into financial difficulty and how they turned themselves around IX ACKNOWLEDGMENTS A research project of this nature is not completed without the help of many people The authors thank the entire Research Foundation staff; Jim Lewis, former executive vice president, for his overall guidance; Gracie Hemphill, director – research, for her help in managing every phase of the project; and Rhona Ferling and Carol Lippert Gray for editorial support We appreciate the hard work, frequent communication, and expert advice provided by the Advisory Committee, including Paul Smith, chair, and David Steadman, Stephen Grace, and Bob Sartor We also thank the turnaround specialists and executives at each of the case-study companies who took the time to be interviewed, shared their valuable insights, and reviewed the case studies in detail Finally, we thank Libby Eshbach for her background research on case-study candidates and other technical aspects of the project 299 INDEX A Ames Department Stores, Inc., 137 Burlington Motor Carriers, Inc., 243 Edison Brothers, 158 emergence from See bankruptcy, emergence from filing for, 83 living through, 139 Musicland Stores Corporation, 185, 188 prepackaged bankruptcy, 95–96 Forzani Group, Ltd., 178–179 bankruptcy, emergence from Ames Department Stores, Inc., 138–139 USG Corporation, 100 banners, consolidating, 174–175 bargaining position, 71 board of directors changes in, 209 Edison Brothers, 160 Musicland Stores Corporation, 186 role of, 66–67 Forzani Group, Ltd., 172 budgeting policies, 61–62 Sampson Paint Company, 129 budgets, 70 Burlington Motor Carriers, Inc., 17 background, 241 bankruptcy process, 243 business characteristics, 241–242 causes of financial difficulty, 242–243 cost reduction, 244 financial targets, 245 information systems, 245 key findings, 246 overview, 241 product and customer focus, 244–245 purchase from bankruptcy, 243–244 turnarounds, 243–245 unliquidated administrative claims, 244 business cycles, 27–29 business performance indicators, 180–181 business plans, 70 business strategy accountability, 70 accounting deficiencies, 41 Pepsi-Cola Bottling Company of Charlotte, N.C., 122–123 Sampson Paint Company, 128 acquisitions Kollmorgen Corporation, 221–222 Maytag Corporation, 74–75 problems, 33–34 Forzani Group, Ltd., 177 Ames Department Stores, Inc., 13–14 background, 135 bankruptcy filing, 137 Caldor acquisition, 145 capital structure strategy, 145 causes of financial difficulty, 135–138 CFO's role, 143 emergence from bankruptcy, 138–139 expansion plans, 144 financial communications, 146 G.C Murphy acquisition, 136 Hills Stores Company acquisition, 145 key findings, 146 living through bankruptcy, 139 merchandising strategy, 140–143 overview, 135 problems with Zayre, 137–138 SG&A expenses, 143–144 turnarounds, 138–146 Wertheim suit, 139–140 Zayre acquisition, 136–137 annotated bibliography, 273–290 asset reduction, 51 B Bahr, Charles C., 25 bank and vendor negotiations, 181–183 bank debt, 97–98 bankruptcy 301 INDEX Forstmann & Company, 112 USG Corporation, 102–103 buyout Red Rooster Auto Stores, 191 Sampson Paint Company, 130–131 summaries of, 11–18 cash receipts and disbursements, management of, 50 cash reserves, 87 cash-flow management, 42, 70 Forstmann & Company, 110 Forzani Group, Ltd., 170–171 CFOs Ames Department Stores, Inc., 143 GenRad, Inc., 214–215 implications for, 7–9 role of, 71–72 Chapter 11 filing, 108–109 claims trading, 161 Commercial Lending Review, 21–22 communication Red Rooster Auto Stores, 193–194 with stakeholders, 51–52 comparative ratios, 129 compensation, 124 compression of margins, 38 computer system, 195–196 contraction, 56–57 control deficiencies, 41 control systems, 63 Cooper, Stephen F., 27, 31–32, 40–41, 295 cooperation with suppliers and landlords, 52 core business, identification of, 209–210 core competencies, focus on, 56 corporate culture, 213–214 corporate problems, causes of ill-advised strategic decisions, inadequate financial management, marketing failures, corporate reorganization, 197 corporate staff, 223 corporate strategy, 235 corporate structure, 158 corporate valuation Forzani Group, Ltd., 178 USG Corporation, 103–104 cost analysis, 112–113 cost reduction Burlington Motor Carriers, Inc., 244 Navistar International Corporation, 83– C Cadillac Fairview, 16–17 background, 225–226 business characteristics, 226 Canadian banks' role, 233 capital structure, 235–236 causes of financial difficulty, 226–230 corporate strategy, 235 creditor groups, 232 decline in real-estate values, 228–230 distressed-security investors' role, 233– 234 key findings, 238–239 later performance and sale, 236–238 LBO, 226–228 managing in default, 231–232 new management team, 235 overview, 225 reorganization, 234 restructuring proposals, 234 strategic investor, finding, 233–234 turnarounds, 234–236 capital expenditures GenRad, Inc., 212–213 Sampson Paint Company, 132 capital investment program, 107 capital spending Maytag Corporation, 75 Musicland Stores Corporation, 184 capital structure Ames Department Stores, Inc., 145 Cadillac Fairview, 235–236 GenRad, Inc., 215 Navistar International Corporation, 88 policies, 61–62 Forzani Group, Ltd., 176–177 case studies key findings, 18–21 302 INDEX 84 cost structure Jos A Bank Clothiers, Inc., 152–153 Sampson Paint Company, 129 court protection, reasons not to file for, 178– 179 covenants, 71 creditor groups, 232 creditors' committee, 158 crisis turnaround management asset reduction, 51 cash receipts and disbursements, management of, 50 communication with stakeholders, 51–52 cooperation with suppliers and landlords, 52 culture change Navistar International Corporation, 88 USG Corporation, 104 customer and product focus problems, 37 customer and product profitability analysis, 129 customer profile and merchandising strategy, 34 customer relationships, 211–212 customer service, 113 economic conditions, 93–94 Edison Brothers, 14 background, 156–158 bankruptcy filing, 158 board of directors, 160 claims trading, 161 corporate structure, 158 creditors' committee, 158 Dave & Buster's spin-off, 163–164 debtor-in-possession financing, 159 equity committee, 161–162 exclusivity, 160–161 import letters of credit, 159 information systems, 164–165 key findings, 167 liability structure, 158 new management, 165 overview, 155 reclamation program, 159–160 reexamination of business, 164 reorganization plan, 162–163 second bankruptcy filing, 166–167 store closings, 160 employee benefits, 133 employee compensation, 191, 193 employee philosophy, 64–65 enterprise value, incentive to maximize, 99 equity allocation, 98 equity committee, 161–162 equity infusion described, 63 Forzani Group, Ltd., 176 ERP system, 213 exclusivity, 160–161 expansion plans, 144 expense control, 193 external causes of financial difficulty business cycles, 27–29 hostile takeover attempts, 30 labor strikes, 30 market shifts, 29 D Dangremond, Robert N., 51, 295 data processing and reporting, 123 debt, 39–40 debtor-in-possession financing, 159 defense business, 219 disbursement management, 42 distressed-security investors' role, 233–234 distribution, 124 distribution center closing, 184 diversification, 218 divestitures, 220–221 dividends policies, 61–62 Forzani Group, Ltd., 177 F E early warning signs of trouble, 21–25 Fairmont Hotels & Resorts, 17 303 INDEX background, 247 business characteristics, 248 causes of financial difficulty, 248 key findings, 252–253 KPIs, 251 market research, 250 market segmentation, 250 new management, 249 operating margins, 251–252 overview, 246 pricing, 251 product profitability, 250 sales, 250 turnarounds, 249–252 valuing the business, 252 filing for bankruptcy, 83 finance function Navistar International Corporation, 88– 89 role during turnaround, 59–60 financial advisors, 185–186 financial communications, 146 financial controls, 192 financial difficulty, causes of, 28 Ames Department Stores, Inc., 135–138 Burlington Motor Carriers, Inc., 242–243 Cadillac Fairview, 226–230 external causes of financial difficulty See external causes of financial difficulty Fairmont Hotels & Resorts, 248 Forstmann & Company, 109 GenRad, Inc., 207 internal causes of financial difficulty See internal causes of financial difficulty Jos A Bank Clothiers, Inc., 147–148 Kollmorgen Corporation, 218–220 Maytag Corporation, 74–75 Musicland Stores Corporation, 181 Navistar International Corporation, 79 Pepsi-Cola Bottling Company of Charlotte, N.C., 121–122 Red Rooster Auto Stores, 190–192 Sampson Paint Company, 128–129 Forzani Group, Ltd., 168–169 USG Corporation, 91–94 financial function, role of, 153–154 financial history, 107–108 financial management measures, 58–59 financial management weaknesses, 39 financial performance measures GenRad, Inc., 215 Navistar International Corporation, 87 financial reorganization plan, 115–116 financial reporting described, 63 Sampson Paint Company, 132–133 financial restructuring Jos A Bank Clothiers, Inc., 149–151 Navistar International Corporation, 80– 81 financial results, 78 financial targets Burlington Motor Carriers, Inc., 245 GenRad, Inc., 208–209 financial turnarounds comparison of, 27–43 prevention of See prevention of financial turnarounds financing and capital structure, 115 described, 70–71 Finley, Tim, 67 Forstmann & Company, 12 background, 105–106 business characteristics, 106 business strategy development, 112 capital investment program, 107 cash-flow management, 110 causes of financial difficulty, 109 Chapter 11 filing, 108–109 cost analysis, 112–113 customer service, 113 financial history, 107–108 financial reorganization plan, 115–116 financing and capital structure, 115 inventory management, 113 key findings, 119–120 key performance indicators, 114–115 management reorganization, 110–112 manufacturing process, 106–107 304 INDEX G market changes, 107 overhead reduction, 114 overview, 105 product rationalization, 113 quality control, 114 second bankruptcy filing, 115–119 stakeholders, communication with, 109 turnarounds, 109–119 Forzani Group, Ltd., 14–15 acquisitions, 177 background, 167–168 bankruptcy, reasons not to file for, 178– 179 banners, consolidating, 174–175 board of director's role, 172 capital structure, 176–177 cash-flow management, 170–171 causes of financial difficulty, 168–169 corporate valuation, 178 court protection, reasons not to file for, 178–179 dividends, 177 equity infusion, 176 helpful parties, 177 information systems, 176 inventory and product mix, 171 investments, 177 key constituents, cooperation from, 172– 173 key findings, 179 KPIs, 175 merchandise mix, reengineering, 173 new top management, 170 SG&A expenses, 171 shareholders and management, conflicts between, 177–178 store employees, 174 stores, reengineering, 174 structural issues, 170 taxation, 178 turnarounds, 170–178 fountain sales, 125 fulcrum security, 97 G.C Murphy acquisition by Ames Department Stores, Inc., 136 general management, 30–33 GenRad, Inc., 16 background, 206–207 capital expenditures, approval of, 212–213 capital structure, 215 causes of financial difficulty, 207 CFO, role of, 214–215 changes in board of directors and management, 209 core business, identification of, 209–210 corporate culture, 213–214 customer relationships, 211–212 ERP system, 213 financial performance measures, 215 financial targets, 208–209 high-technology sector See GenRad, Inc key findings, 216–217 management style, 213–214 market share, 212 new business paradigm, 211 overview, 205 reorganization, 213 sale of real estate, 209 skunkworks, 210–211 taxes, 216 turnarounds, 208–216 Getzler, Abraham, 32, 34, 43, 45, 295 glossary, 291–293 Goodman, Jeff, 24–25, 42–43, 49–50, 60, 295 Grace, Stephen H., 70, 295 gross margins, 184 H health care buydown, 85 helpful parties, 177 Hickey, Denis, 21–22 high-technology sector GenRad, Inc., See GenRad, Inc Kollmorgen Corporation See Kollmorgen Corporation 305 INDEX disbursement management, 42 financial management weaknesses, 39 general management, 30–33 indecisiveness, 33 information systems deficiencies, 41 marketing weaknesses, 37 overdiversification, 35–37 overexpansion, 34–35 performance measures, lack of, 40–41 poor or declining margins, 33 product development and marketing efforts, 37–38 product pricing, 38 product quality problems, 38 profitability analysis, lack of, 38 receipt management, 42 underinvestment, 37 Internet sales, 153 inventory and product mix, 171 inventory management described, 62 Forstmann & Company, 113 Jos A Bank Clothiers, Inc., 151–152 Red Rooster Auto Stores, 196 investment discipline, 76 investment grade, plan to achieve, 100–101 investment priorities, 76–77 investments, 177 investor relations, 187 investors, 97 Parametric Technology Corporation and Computervision See Parametric Technology Corporation and Computervision Hills Stores Company acquisition by Ames Department Stores, Inc., 145 hostile takeover attempt described, 30 USG Corporation, 91–92 human resource management employee philosophy, 64–65 incentive compensation, 65 leadership style, 64–65 management style, 64–65 outside professionals, 65–66 Hunn, Paul, 53–54, 295 I ill-advised strategic decisions, import letters of credit, 159 inadequate financial management, incentive compensation described, 65 Navistar International Corporation, 88 indecisiveness, 33 information sharing, 192 information systems Burlington Motor Carriers, Inc., 245 deficiencies, 41 described, 62–63 Edison Brothers, 164–165 Jos A Bank Clothiers, Inc., 152 Forzani Group, Ltd., 176 innovation, 77 internal causes of financial difficulty accounting deficiencies, 41 acquisition problems, 33–34 cash flow management, 42 compression of margins, 38 control deficiencies, 41 customer and product focus problems, 37 customer profile and merchandising strategy, 34 debt, 39–40 J job design, 191, 195 Jones, Seymour, 23, 34, 40 Jos A Bank Clothiers, Inc., 14 background, 147 causes of financial difficulty, 147–148 cost structure, 152–153 financial function, role of, 153–154 financial restructuring, 149–151 information systems, 152 Internet sales, 153 inventory management, 151–152 key findings, 154–155 306 INDEX manufacturing, 152 merchandise mix, 151 new management, 148–149 overview, 146 price promotions, 151–152 sales staff, 153 store design and expansion, 153 surviving turnaround, 154 turnarounds, 148–154 junior-subordinated debt prevented from becoming free rider, 98 leverage reduction, 222–223 leveraged buyouts, 226–228 leveraged recapitalization, 92–93 liability structure, 158 loan defaults, 94 long-term remedial action, Lyons, Jim, 51–52 M Macdonald, John, 65 management error, 19 focus, 70 new management See new management new top management, 170 reorganization, 110–112 during restructuring period, 99 management style described, 64–65 GenRad, Inc., 213–214 Pepsi-Cola Bottling Company of Charlotte, N.C., 126 managing in default, 231–232 managing risk of financial difficulty, 187–188 manufacturing process, 106–107 manufacturing sector Forstmann & Company See Forstmann & Company Maytag Corporation See Maytag Corporation Navistar International Corporation See Navistar International Corporation Pepsi-Cola Bottling Company of Charlotte, N.C., See Pepsi-Cola Bottling Company of Charlotte, N.C Sampson Paint Company See Sampson Paint Company USG Corporation See USG Corporation margins, poor or declining, 33 market changes, 107 market research, 250 market segmentation, 250 market share GenRad, Inc., 212 K key constituents, cooperation from, 172–173 key performance indicators See KPIs Kollmorgen Corporation, 16 acquisitions, 221–222 background, 218 causes of financial difficulty, 218–220 corporate staff, 223 defense business, 219 diversification, 218 divestitures, 220–221 high-technology sector See Kollmorgen Corporation key findings, 223 leverage reduction, 222–223 new management team, 220 outsourcing, 222 overview, 217 turnarounds, 220–223 unsolicited takeover attempt, 219–220 workforce reduction, 220 KPIs Fairmont Hotels & Resorts, 251 Forstmann & Company, 114–115 Forzani Group, Ltd., 175 L labor strikes, 30 LBO, 226–228 leadership style, 64–65 lending syndicates, 71 307 INDEX Navistar International Corporation, 86– 87 Pepsi-Cola Bottling Company of Charlotte, N.C., 125 market shifts described, 29 retail industry, 42 market strategies, 19–20 marketing failures, finance coordination with, 60 measures, 57–58 Sampson Paint Company, 129, 132 weaknesses, 37 Maytag Corporation, 11 acquisitions, problems with, 74–75 background, 73–74 capital spending, 75 causes of financial difficulty, 74–75 European business, sale of, 75 financial results, 78 innovation, 77 investment discipline, 76 investment priorities, 76–77 key findings, 78 overview, 73 product development, 75–76 turnarounds, 75–77 merchandise mix Jos A Bank Clothiers, Inc., 151 Forzani Group, Ltd., 173 merchandising strategy, 140–143 mergers, 205 metrics, 70 Microserv Technology Services, 18 background, 260–261 capital spending, 265 cash-flow management, 265–266, 267 causes of financial difficulty, 263–267 CFO's role, 270–271 customer needs, changes in, 267 exit strategy, 271 industry characteristics, 261–263 key findings, 271 management, 270 marketing strategy, 267–268 overview, 260 parts and logistics, 268–269 priorities, 264–265 strategic choices, 269 turnarounds, 267–271 vulnerability to large customers, 266 Minor, Raleigh C., 30, 32 Musicland Stores Corporation, 15 background, 180 bank and vendor negotiations, 181–183 bankruptcy, avoiding, 185 bankruptcy law, observations on, 188 board of directors, 186 business performance indicators, 180–181 capital spending, 184 causes of financial difficulty, 181 cost of financial difficulty, 187–188 distribution center closing, 184 financial advisors, 185–186 gross margins, 184 interests of shareholders and management, 187 investor relations, 187 key findings, 189 managing risk of financial difficulty, 187– 188 music sales, 185 overhead, 184 overview, 180 store closings, 183 surviving turnaround, 188 tax issues, 188 turnarounds, 181–185 working capital, 184 N Navistar International Corporation, 11–12 background, 79 capital structure, 88 cash reserves, 87 causes of financial difficulty, 79 cost reduction and divestitures, 83–84 culture change, 88 308 INDEX P filing for bankruptcy, 83 finance function, role of, 88–89 financial performance measures, 87 financial restructuring, 80–81 first restructuring, 81 fourth restructuring, 82–83 health care buydown, 85 incentive compensation, 88 key findings, 89–90 market share, 86–87 next-generation vehicle program, 85–86 overview, 78–79 rebuilding company, 84 recent initiatives, 86 second restructuring, 81 third restructuring, 81–82 turnarounds, 80–89 union and, 86 new management, 55 Cadillac Fairview, 235 Edison Brothers, 165 Fairmont Hotels & Resorts, 249 Jos A Bank Clothiers, Inc., 148–149 Kollmorgen Corporation, 220 Red Rooster Auto Stores, 192 new ownership, 54–55 new partners, 197 new top management, 170 next-generation vehicle program, 85–86 Parametric Technology Corporation and Computervision background of Computervision, 199–200 background of Parametric, 202–203 key findings, 205 merger, 205 overview, 199 Parametric's acquisition of Computervision, 203–204 recapitalization, 200–202 unexpected benefits, 204–205 partners, new, 197 Pepsi-Cola Bottling Company of Charlotte, N.C., 13 accounting and cash management, 122– 123 background, 121 causes of financial difficulty, 121–122 compensation, 124 data processing and reporting, 123 distribution, 124 fountain sales, 125 key findings, 126 management style, 126 market share, 125 overview, 121 personnel, 124 production, 123–124 production and warehouse facilities, 122 schools and special events, 125 security, 122 turnarounds, 123–126 vending machines, 125 performance improvement, 101–102 performance measures described, 60–61 lack of, 40–41 personnel Pepsi-Cola Bottling Company of Charlotte, N.C., 124 Sampson Paint Company, 131 personnel management, 133 players, changing, 97 O operating margins, 251–252 outside professionals, 65–66 outsourcing, 222 overdiversification, 35–37 overexpansion, 34–35 overhead, 184 overhead reduction described, 62–63 Forstmann & Company, 114 overleveraging, 20 ownership, new, 54–55 309 INDEX prepackaged bankruptcy, 95–96 prevention of financial turnarounds accountability, 70 bargaining position, 71 budgets, 70 business plans, 70 cash-flow management, 70 CFO role, 71–72 covenants, 71 financing, 70–71 lending syndicates, 71 management focus, 70 metrics, 70 stakeholders, 71 targets, 70 price promotions, 151–152 pricing Fairmont Hotels & Resorts, 251 Sampson Paint Company, 129, 131 product and customer focus, 244–245 product development and marketing efforts, 37–38 Maytag Corporation, 75–76 product lines, 129 product pricing, 38 product profitability, 250 product quality problems, 38 product rationalization, 113 production Pepsi-Cola Bottling Company of Charlotte, N.C., 123–124 Sampson Paint Company, 132 and warehouse facilities, 122 professional services, 99 profit margins, 191 profitability analysis, lack of, 38 Cadillac Fairview See Cadillac Fairview real-estate values, decline in, 228–230 rebuilding company, 84 receipt management, 42 reclamation program, 159–160 Red Rooster Auto Stores, 15 background, 190 buyout financing, 191 causes of financial difficulty, 190–192 communication, 193–194 computer system, 195–196 corporate reorganization, 197 employee compensation, 191, 193 expense control, 193 financial controls, 192 information sharing, 192 inventory management, 196 job design, 191, 195 key findings, 197–198 new management, 192 new partners, 197 new performance measures, 194–195 outside professionals, role of, 192 overview, 189–190 profit margins, 191 sales culture, 190–191 store rationalization, 196 turnarounds, 192–197 workforce reduction, 195 reexamination of business, 164 remedies for corporate problems long-term remedial action, overview, 5–7 short-term crisis management, 6–7 reorganization Cadillac Fairview, 234 described, 52–54 Edison Brothers, 162–163 GenRad, Inc., 213 new management, 55 new ownership, 54–55 restructuring, 21 restructuring plan, 94–95 restructuring proposals, 234 retailing sector Q quality control, 114 R real estate, sale of, 209 real-estate sector 310 INDEX vendor negotiations, 131–132 working capital reduction, 132 Sartor, Robert, 70 schools and special events, 125 second bankruptcy filing Edison Brothers, 166–167 Forstmann & Company, 115–119 security, 122 service sector Burlington Motor Carriers, Inc., See Burlington Motor Carriers, Inc Fairmont Hotels & Resorts See Fairmont Hotels & Resorts Microserv Technology Services See Microserv Technology Services St Luke's Hospital–San Francisco See St Luke's Hospital–San Francisco SG&A expenses Ames Department Stores, Inc., 143–144 Forzani Group, Ltd., 171 shareholders and management, interests of, 187 Forzani Group, Ltd., 177–178 USG Corporation, 98–99 short-term crisis management, 6–7 skunkworks, 210–211 specialists interviewed, list of turnaround, 295 St Luke's Hospital–San Francisco, 17 addressing financial challenges, 256 background, 253–254 care for needy, 257 causes of financial difficulty, 254–255 cost reduction, 256 diversification, 257 finance staff, 259 guiding principles, 256 key findings, 259–260 management style, 258–259 mission, 257–258 overview, 253 stakeholders, 71 communication with, 51–52 crisis turnaround management, 51–52 Forstmann & Company, 109 Steadman, David, 23, 32, 295 Ames Department Stores, Inc., See Ames Department Stores, Inc Edison Brothers See Edison Brothers Jos A Bank Clothiers, Inc., See Jos A Bank Clothiers, Inc market shifts and, 42 Musicland Stores Corporation See Musicland Stores Corporation Red Rooster Auto Stores See Red Rooster Auto Stores Forzani Group, Ltd., See Forzani Group, Ltd Ryles, Gerald, 23 S sale of company, 133 sale of real estate, 209 sales, 250 sales culture, 190–191 sales staff, 153 Sampson Paint Company, 13 accounting and financial reporting, 128 background, 127–128 budgeting, 129 buyer's background, 130 buyout, 130–131 capital expenditures, 132 causes of financial difficulty, 128–129 comparative ratios, 129 cost structure, 129 customer and product profitability analysis, 129 employee benefits, 133 financial reporting and controls, 132–133 key findings, 133–134 marketing, 129, 132 overview, 127 personnel, 131 personnel management, 133 pricing, 129, 131 product lines, 129 production, 132 sale of company, 133 turnarounds, 130–133 311 INDEX store closings Edison Brothers, 160 Musicland Stores Corporation, 183 stores design and expansion, 153 employees, 174 reengineering, 174 strategic investor, finding, 233–234 strategic turnaround management budgeting policies, 61–62 capital structure policies, 61–62 contraction, 56–57 control systems, 63 core competencies, focus on, 56 dividend policies, 61–62 equity infusion, 63 finance function role during turnaround, 59–60 financial management measures, 58–59 financial reporting, 63 information systems, 62–63 inventory management, 62 marketing, finance coordination with, 60 marketing measures, 57–58 overhead reduction, 62–63 performance measures, 60–61 structural issues, 170 surviving turnaround, 67 Jos A Bank Clothiers, Inc., 154 Musicland Stores Corporation, 188 crisis turnaround management, 50–52 human resource management, 64–66 reorganization methods, 52–55 strategic turnaround management, 56–63 surviving turnaround, 67 turnaround process, 45–50 turnaround stages, 47 turnarounds Ames Department Stores, Inc., 138–146 Burlington Motor Carriers, Inc., 243–245 Cadillac Fairview, 234–236 Fairmont Hotels & Resorts, 249–252 Forstmann & Company, 109–119 GenRad, Inc., 208–216 Jos A Bank Clothiers, Inc., 148–154 Kollmorgen Corporation, 220–223 Maytag Corporation, 75–77 Musicland Stores Corporation, 181–185 Navistar International Corporation, 80– 89 Pepsi-Cola Bottling Company of Charlotte, N.C., 123–126 Red Rooster Auto Stores, 192–197 Sampson Paint Company, 130–133 Forzani Group, Ltd., 170–178 USG Corporation, 94–104 U underinvestment, 37 underperformers, common attributes of, 22–23 unions, 86 unliquidated administrative claims, 244 unsolicited takeover attempt, 219–220 USG Corporation, 12 background, 90–91 bank debt, 97–98 business strategy, refocusing, 102–103 causes of financial difficulty, 91–94 corporation valuation, 103–104 cultural changes, 104 economic conditions, 93–94 emergence from bankruptcy, 100 enterprise value, incentive to maximize, 99 equity allocation, 98 T targets, 70 tax issues GenRad, Inc., 216 Musicland Stores Corporation, 188 Forzani Group, Ltd., 178 threat of bankruptcy, 96 trade credit, 94 Treleaven, Wes, 22–23, 30–31, 42, 51, 295 “Turnaround Management Every Day,” 69 turnaround methods boards of directors, role of, 66–67 comparison of, 45–67 312 INDEX threat of bankruptcy, 96 trade credit, 94 turnarounds, 94–104 venue selection, 98 fresh start charge, 102 fulcrum security, 97 hostile takeover attempt, 91–92 investment grade, plan to achieve, 100– 101 investors, 97 junior-subordinated debt prevented from becoming free rider, 98 key findings, 104–105 leveraged recapitalization, 92–93 loan defaults, 94 management during restructuring period, 99 new goals after bankruptcy, 100 overview, 90 performance improvement, 101–102 players, changing, 97 prepackaged bankruptcy, 95–96 professional services, 99 recent priorities, 103 restructuring plan, 94–95 sale of businesses and cost reduction, 93 shareholders, 98–99 V valuing the business, 252 vending machines, 125 vendor negotiations, 131–132 venue selection, 98 W Whitney, John O., 69 workforce reduction Kollmorgen Corporation, 220 Red Rooster Auto Stores, 195 working capital Musicland Stores Corporation, 184 Sampson Paint Company, 132 313 .. .FINANCIAL TURNAROUNDS: P R E S E RV I N G VA LU E Henry A Davis Henry A Davis & Co William W Sihler... Manufacturing Manager: MAURA ZALDIVAR Cover Design: NINA SCUDERI ©2002 Financial Executives Research Foundation, Inc Published by Financial Times/Prentice Hall PTR Pearson Education, Inc Upper Saddle... Senior Vice President and Chief Financial Officer USG Corporation H Stephen Grace, Jr., Ph.D President H.S Grace & Company Inc Gracie F Hemphill Director – Research Financial Executives Research