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Hard to spin turnaround tales lately
Gurus to today’s struggling firms find value in the small victories
By Elaine Pofeldt
Published: August 1, 2010 – 5:59 am
When Jeffrey Kaiserman sold his window and related vinyl manufacturing businesses to an investment group 11 years ago for $23 million, they were raking in a profitable $17 million in annual sales. But by 2007, NorthEast Windows, which supplied many contractors in the Bronx and Queens, and its sister company, Quality Lineals, which made components used in window frames, suffered financial woes exacerbated by the building industry slowdown.
As a result, the two companies filed for Chapter 11 bankruptcy protection in December 2008. In February 2009, Mr. Kaiserman bought them out of bankruptcy for $1.5 million, plus about $500,000 in legal costs and other expenses. He was confident he could revive the businesses and knew that the machinery and other assets were worth more than that.
In preparation for the purchase, Mr. Kaiserman used some of the $1.5 million to buy out a $965,000 note from a bank that had loaned it to the companies. Owning the debt gave him the legal standing to approve spending decisions at the troubled companies. The decisions were being made by court-approved Chief Restructuring Officer Nat Wasserstein, a crisis manager at NS Wasserstein & Co. in Manhattan. Mr. Wasserstein was hired to run and stabilize the companies during a period of about two months before they were put up for auction.
TAKING ACTION
Before the sale, cash flow at NorthEast Windows and Quality Lineals was extremely tight. Some vendors required C.O.D. payments or, in certain cases, cash in advance before shipping supplies. Mr. Wasserstein stabilized sales at the equivalent of $8 million a year,down from a run rate of $11 million, so the two companies could keep up with the payroll and supplies needed to fill orders. Hediscontinued low-profit-margin product lines and those that were labor-intensive or required expensive resources—and eliminatedslow-paying customers.
This year, Mr. Kaiserman is thrilled that, after establishing credit for both companies—now renamed NorthEast Windows USA and Quality Lineals USA—and expanding his sales team, they are on track for combined 2010 revenue of $10 million to $11 million. “It was worth every penny I paid [for them],” he says. “We’re profitable.”
Excited about the increase in year-over-year sales, he encouraged his 21-year-old son, Steven, to help him run NorthEast. “There’s business out there,” Mr. Kaiserman says. “You have to be really aggressive about getting it.”
Welcome to the world of turnarounds in 2010, where few of those involved expect miracles, and victories that might have been considered unimpressive in boom times can seem monumental. It is so hard to boost sales that many companies are happy withsimply staying alive, says Mr. Wasserstein.
To be sure, it’s always difficult to resuscitate a troubled company, thanks in part to the tendency of managers and owners to delay seeking help until it’s almost too late. “They see it as a reflection of their own failure,” says turnaround specialist James Sinclair. Some, he adds, are in denial. Mr. Sinclair began advising struggling hospitality companies in cities including New York and Las Vegas through his firm, OnSite Consulting, after buying and reviving a few of his own.
Even if lenders force a company to work with a turnaround consultant because bankruptcy seems likely, the owners tend to resist it—requiring tough measures, such as their complete removal from the scene, says Mr. Sinclair. “Our contract is quite serious,” he says. “It expresses, to a certain extent, that martial law is about to happen.”
NEW OBSTACLES
Many turnaround specialists who work in and around New York City say their jobs are more difficult today than after the post-Sept. 11 slowdown for several reasons. First, it’s nearly impossible to secure cash infusions for many distressed firms. “A lot of troubledbusinesses lack adequate financing options because of the banking situation,” says Fred Gunzel, an independent turnaround consultant.
If a struggling business is able to boost sales, reinvesting the resulting funds in the company may be tough because incoming checks may be owed to factors or asset-based lenders. “[Checks] go to a lockbox,” says Mr. Wasserstein. “You’ve got to basically beg the bank to release your funds so you can meet payroll, buy materials and expedite whatever you need to expedite.”
On top of this, even mismanaged firms have usually cut general, administrative or sales costs by now to survive the recession, says Mr. Wasserstein. “There was a lot more fat in companies that needed turnarounds 10 years ago,” he says.
Nationwide, turnaround conditions have become so difficult that professionals in the field are now debating exactly how to define a turnaround, says Turnaround Management Association Chairman Patrick Lagrange. “The nature of a turnaround has changed dramatically,” says Mr. Lagrange, who is based in Manhattan as managing director of merchant bank Carl Marks Advisory Group. “You’re not seeing as many classic turnarounds where you go in and cut costs and fix operations. Instead, you’re seeing companies that will do what they can to survive.”
In some cases, he says, that means a turnaround specialist will focus on completing a transaction like a loan modification, which will buy time but not necessarily solve core problems as a traditional turnaround would. “That’s hoping the economy improves and raises all boats,” he says.
TURNAROUNDS TOUGH IN NYC
Against this dreary backdrop, the high cost of doing business in New York City can make turnarounds tougher than they are elsewhere. That means a brutally realistic approach is the only effective one. After sales of apartments stalled at Battery Park City’s
Riverhouse in early 2010, the majority partner sought help in March from Centurion Real Estate Partners, which had experience selling condominiums in New York City and California. At the time, rumors flew as existing apartment owners worried that the bank or owner would unload the remaining units in a bulk sale, says John Tashjian, a founder of Centurion.
To determine how to move the high-end condos, Mr. Tashjian says he personally comparison-shopped every potentially competitive unit he could find in other buildings. He discovered that most rival condominiums were advertised at 2006 prices, but that salespeople immediately offered big discounts. “I would see a very nice unit with water views and three bedrooms and the asking price was $3.6 million,” he says. “They’d say, ‘I can give it to you for $3 million.’ ”
Realizing that this approach might raise doubts about pricing accuracy in buyers’ minds—as it did in his own—he based the advertised selling prices at Riverhouse on the units’ current value. Acknowledging that the market was far from its peak did the trick.
Since Centurion Real Estate Partners became involved, the building has sold or closed more than 25 units, which currently go for around $1.2 million to $8.5 million; units in the $3 million range are most popular. “We’re negotiating by a couple of percentage points, as opposed to by 20% to 25%,” Mr. Tashjian says. “Our contracts are sticking.”
While Mr. Tashjian acknowledges that the Riverhouse turnaround has a way to go, he does point out that the building is now 80% sold. “We’re getting there,” he says. These days, that’s saying a lot.
BIGGEST THREATS
IN A POLL of corporate renewal professionals in December, the Turnaround Management Association found that 92% of respondents cited economic conditions as the greatest threat to distressed industries for 2010.
78% OF RESPONDENTS said too much debt is one of the top two internal reasons that companies in these sectors will face problems.
52% CITED LACK of access to capital as one of the top two reasons.
THE INDUSTRIES expected to have the greatest operational difficulty were:
REAL ESTATE 75%
RETAIL 35%
AUTOMOTIVE 31%
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