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Back From the Brink

Five inspiring examples of companies that came back from corporate collapse. By By Timothy Inklebarger | Fall 2016

Turnaround-2


Everybody loves a comeback story—and the corporate world is no exception. Whether driven by a bold, uncompromising chief executive, a record-breaking government bailout, or the brilliant branding of a revolutionary product, the biggest corporate turnarounds often become legendary.

Will we continue to see such remarkable mega-turnarounds in the years to come? That’s not so clear. The turnaround industry has changed over the last decade, in part because of shifting laws governing turnaround deals and the economy, says Gregory Fine, CEO of the Chicago-based Turnaround Management Association.

Historically, banks were the primary watchdogs in tracking a company’s borrowing, strength and overall health. After all, they had a vested interest in making sure their loans were paid in full. More often these days, accountants and other finance pros entrenched in corporate America are discovering the shortcomings and irregularities a company faces long before anyone else.

“It can come down to whoever’s doing the taxes. A lot of times CPAs see red flags before anybody,” says Fine.

And most turnaround deals often take place in the middle and lower-middle markets, “Because those are the companies that don’t have nearly the access to capital or the infrastructure and typical corporate discipline of a larger company,” Fine confides.

Let’s be clear; corporate turnarounds are often a last-ditch effort to avoid bankruptcy, which is a far more complex undertaking since the financial crash of the late 2000s. Don Bibeault, a thought leader in the turnaround industry and author of the groundbreaking 1981 book, Corporate Turnaround: How Managers Turn Losers Into Winners, says tightened bankruptcy laws have expedited the schedule for forcing bad companies into insolvency—a change that inadvertently helped to clear the field of potential clients for turnaround managers. Laws passed around the time of the financial crisis give companies 120 days of exclusive rights to submit their bankruptcy plans. Prior to those laws, bankruptcy cases could drag on for years. Paired with regulations that allow banks to shed their worst loans in the wake of the crash, and the low interest rates now on the financial landscape, turnaround work has dried up and driven industry experts to refocus their business management expertise on keeping companies healthy.

“Initially, our membership was made up of people who were about saving the entity or maximizing the underlying value if it can’t be saved,” Fine explains. “Ultimately, turnaround professionals work with companies on improving performance management, disruption restructuring, working through insolvency, preserving equity, enhancing enterprise value and driving improved results. Most turnarounds are required because of a disruption as opposed to saving a company that’s headed for the cliff.”

Although a lot of the work in corporate turnarounds today hinges on smaller companies, the greatest comeback stories involve some of the nation’s most notable mega-corporations. Here are just a few.

Apple

Apple founder Steve Jobs is hailed by many as having pulled off the greatest corporate turnaround in history. Returning to the company in 1997 as its CEO, Jobs immediately began eliminating products, projects and employees in an attempt to soften the blow of the tech giant’s flagging sales. Unnecessary projects, like the company’s line of printers and cameras, the Newton PDA and Cyberdog applications, among others, were the first to go.

“Apple suffered from excessive product proliferation dilution and wasn’t focused on the right projects,” says Bibeault, adding that companies often find themselves in trouble when they direct too many resources towards losing products.

“You’re diluting your power on the winners and using your money on the losers; it’s robbing good Peter to pay bad Paul,” he says. “It isn’t always straightforward because when you start out, how do you know iTunes is going to be a big winner?”

He says companies usually get a sense of winning products within the first two years. “If there’s no traction within six to eight quarters and you have no real expertise with the product, I’d say you’re on dangerous ground then. I’d call that ‘product proliferation.’”
Righting the ship, however, isn’t just about cutting jobs and unsuccessful products.

Bibeault explains that turnaround specialists can help corporations reform themselves into leaner, meaner versions of their bloated former selves, while keeping top talent on task. “You’ve got to make sure your head of sales doesn’t go to your competitor,” he says.

Apple weathered the storm and lived to fight another day—and then some. The success of the iPod, iPhone, iPad and more has made it one of the world’s most valuable companies.

General Motors

You don’t get the nickname “Government Motors” without good reason. The turnaround of General Motors (GM) will almost certainly remain one of the most storied corporate comebacks in modern history, thanks to its emergency government bailout and historic return to profitability.

The auto manufacturer remains one of the nation’s oldest and most revered companies, but in the late 2000s, GM had grown bloated with products and a massive executive-level workforce. Bibeault wrote in a March 2009 Detroit Free Press op-ed that, “Management—aligned with labor, not shareholders—seeks to have taxpayers subsidize their profligate ways, or as promised, their less profligate ways.”

Despite the federal government pouring tens of billions of dollars into the company, GM eventually filed for bankruptcy protection as part of a massive reorganization plan that included cutting its less popular Saturn, Hummer and Pontiac product lines, and eliminating unnecessary middle-management and manufacturing positions. The result was a rebound that hardly anyone expected.

Some have argued that GM was always too big to fail, and letting it go bankrupt might have been worse than a government-sponsored bailout. We’ll never know. But that’s where turnaround specialists prove their worth, says Fine.

“What turnaround people do is keep the market healthy by returning failing companies to profitability or preserving as much shareholder equity as possible by breaking businesses up and selling off their assets. Turnaround practitioners are the trauma surgeons of the financial world.”

Of course, Illinois came out ahead here as well. Fine says the GM bailout resulted in one of the biggest corporate turnarounds in history to affect the state because of the auto manufacturer’s close ties to, and large manufacturing presence in, the Windy City.


Sparton Corporation

GM isn’t the only turnaround success story between Chicago and a Michigan-based manufacturer. Sparton Corporation spent most of the 20th Century producing farming equipment, various parts for auto manufacturers and, ultimately, a dizzying array of electronic devices. But by 2008, the company was in turmoil, reporting millions in quarterly losses, and finding itself on the brink of being delisted from the New York Stock Exchange. Shareholder complaints—led by the company’s biggest shareholder Lawndale Capital Management LLC—followed, and eventually forced Sparton to right its course.

The company first fired its long-time CEO David Hockenbrocht and brought in corporate turnaround expert Cary Wood. Under Wood’s leadership, the company slashed its workforce by more than half, closed a number of unprofitable manufacturing plants and moved its Jackson, Mich.-based headquarters to Schaumburg, Ill.

Crain’s Detroit Business reported in 2014 that during the layoffs Wood received various anonymous threats, one stating that he would “pay the price” for his actions. Despite the controversy of the downsizing, Wood prevailed and returned the company to profitability.
Fine says the instinct to move forward against great adversity comes naturally to the corporate turnaround greats. As Woods illustrated, the sign of a great turnaround manager is “the ability to read a situation quickly and have the guts to make a decision.”


Starbucks

Turning to outside experts was an essential strategy for Howard Schultz, who brought Starbucks Corp. back from the edge of the abyss in the late 2000s. The company had grown too far too fast, and its stock was plummeting. Schultz was able to reboot interest in the brand by making tough belt-tightening decisions and getting down into the trenches with individual store managers to find out just what was broken and what problems they were facing daily on the frontlines.

That hands-on approach is a vital part of any successful turnaround, says Bibeault, who contends that big decisions concerning how to save a company can’t all be made in the boardroom.

“A lot of private equity executives went to Yale and then Wall Street and then an equity fund,” he says, asking the questions, “Hey, have you ever been to the factory and talked to the people on the floor? Have you ever gone into the warehouse?”

Within a couple of years, Schultz’s hands-on efforts paid off, and Starbucks was back on its way to profitability. It was so successful, in fact, that he wrote a book about the turnaround in 2012 titled Onward: How Starbucks Fought for its Life Without Losing its Soul. Like the turnaround itself, the book was a big success and became a New York Times bestseller.

Massey Ferguson

The Ontario-based tractor and farm equipment manufacturer had a major problem in 1981, when it touted $3B in sales and 65,000 employees worldwide. Bibeault, who served as an advisor to the company, wrote in his 1981 book that the organization very nearly became another casualty of over-expansion.

Specifically, in the late 1960s Massey-Ferguson chose to focus on international markets rather than compete in North America. But “It shouldn’t have,” Bibeault wrote, noting that about 10 years after going international on “borrowed money,” the world farm equipment market “shriveled.” “Interest charges in 1977 were $198.5M compared to $48M in 1973,” Bibeault explained. Massey-Ferguson’s losses grew to $225M in 1980.

In addition to the agricultural market’s sectorial downturn driven by changes in export laws, the company also was plagued with distribution inefficiencies. Bibeault predicted a long-term secular downtrend. If you bet there’s a secular—not cyclical—downturn and you’re wrong, “you may deprive yourself of upside potential,” says Bibeault; but if that bet is right “you save the company.”

Massey-Ferguson followed his lead and bet on a long-term downturn. The company downsized its agriculture sector, going from about 80 percent of sales in 1981 to about 30 percent by 1986—and restructured itself to both survive and thrive.