March 2011

Beyond Bankruptcy … You’re Emerged … Now what?

The process of successfully guiding a company out of bankruptcy is not an easy task. It takes a strong team of players, a clever plan of action and a dogged commitment of stakeholders to make it happen. Once a company emerges, it does not mean it is out of the woods. Therefore, stakeholders should leverage the skills developed, plans constructed and relationships formed through the next phase of the cycle.

As we find ourselves coming out of the Great Recession, record numbers of companies, management teams, owners and lenders are facing a new predicament: How to manage life after bankruptcy. For each different constituency, there are new things to consider and manage on the “other side” that may require a whole new mindset and approach. While there are unique considerations within each stakeholder group, some of the underlying themes that help affect positive outcomes remain the same: 1.) maintaining the urgency of the bankruptcy, 2.) focusing on core competencies and 3.) building strong, long-term relationships. Each of these themes will be addressed in greater depth and examples of how stakeholders can strengthen their positions post-bankruptcy will be provided.

Keeping the Edge

As a turnaround manager, one of the more rewarding parts of my vocation is witnessing the small victories we see day-to-day with our clients. This includes witnessing lower management people step up to tackle difficult challenges. It includes observing CEOs and CFOs rolling up their sleeves and getting to work. When things are working well during a restructuring, all oars are in the water together, and people do more with less. Some of the office politics fall away, some of the dead weight is shed and people are generally in survival mode, acting with a great sense of urgency. Everyone in the organization focuses on how their daily decisions impact the bottom line.

Indeed, sometimes the business is operating most efficiently when it is most exposed. Perhaps it is a result of the added scrutiny the court, lenders, unsecured creditors’ committee, buyers and other stakeholders bring to bear on the company. Perhaps it is the lack of tolerance for mistakes that motivates everyone to bring their “A Game.” There are many factors that may contribute to this phenomenon, but one defining principle does not change: Just because a company emerges from bankruptcy, does not mean that the sense of urgency should change.

As companies emerge, they are often faced with fairly arduous expectations and challenges. These include:

New Lending Covenants/Reporting Requirements

If a company leaves bankruptcy with a new credit facility, there will often be a new set of requirements placed on it to prevent the dreaded “Chapter 22” scenario. In successful emergences, the financial staff tends to manage the new loan similarly to how they managed their DIP loan. This includes maintaining 13-week forecasting discipline, closing the books in a timely fashion, and studying and reacting to the variances from budget. This also includes pro-actively communicating with the lenders and owners on upcoming issues — positive and negative — that are facing the business. By maintaining the discipline that the bankruptcy process dictated, many of the issues can be managed ahead of time to avoid a similar result.

Aggressive Forecasts From New Owners or Lenders

A number of fairly aggressive financial forecasts have accompanied plans of reorganizations and §363 sales within the last 12-18 months. While not all of the forecasts are hockey stick-shaped, it is safe to say that any bankruptcy practitioner worth his or her salt has seen enough of these forecasts to equip a Stanley Cup roster. With the exception of covenant breaches, most missed forecasts are more an issue of expectation management than full crisis. As a result, a company’s response is almost more important than the reason for the miss.

During the most recent restructuring cycle, many problems were blamed on the general economic malaise. While that was certainly a major challenge, many exceptional companies re-trenched, leaned out and got stronger through the crisis. They did more with less. The difference is decisive, aggressive moves to react to the situation at hand. In the event of an aggressive forecast, a similar response should be employed to cut off problems before they happen.

Frustrated Customer and Vendor Bases

Strong, secure vendor and customer relationships are critical for a company to achieve elite performance. The bankruptcy process stresses these relationships, and companies must focus intently on rehabilitating them post-emergence. Leading up to and through the bankruptcy process, our team advises senior management to pro-actively visit with top customers and vendors to keep them apprised of the progress in a case.

After emerging from bankruptcy, managers should continue that discipline to reinforce the value of those bonds. Particularly with vendors that may have been impaired with the bankruptcy, pro-active communication and attention should be increased to show that the company is committed to getting back in their good graces.

New Managers

Bankruptcies often result in changes to management teams. Unlike similar situations with their healthier counterparts, these managers are often not afforded the luxury of a “honeymoon period.” These managers are expected to execute immediately, and step right into the role of peak performer. They must be keenly focused on their value-creation mandate from the outset, and decisive in their actions to affect immediate change.

Further, these managers must be willing to embrace the work and experience of the remaining managers and professionals to lessen their learning curve. Pride of authorship and wheel reinvention are not options for these managers.

New Boards of Directors/Owners

With a change in equity, the board of directors and owners of a company may change. This could result in a cosmic shift in how the company is run, and in its corporate culture. For example, a family owned business that emerges from Chapter 11 with a private equity/hedge fund owner will likely have a new level of discipline, reporting, timing and expectations imposed on it from the ownership group.

The new ownership group will likely require management to hold itself accountable to a different standard than they it is accustomed to. Further, the owner/board may have a more defined strategic direction or hold-period that could be dramatically different than the prior ownership. Ownership must be vigilant about communicating their strategies and expectations to other stakeholders in an effort to achieve their goals.

In each of these cases, the lessons learned in bankruptcy can be applied to the post-bankruptcy world. Proactive communication amongst stakeholders, thoughtful and timely analysis of results, and decisive and meaningful action-taking are skills that are highly valued and cultivated through the bankruptcy process. Upon emergence into a potentially tenuous circumstance with new managers and owners, aggressive forecasts and covenants, and a miffed customer and vendor base, these skills are more important than ever.

Do What We’re Good At

One of the real benefits of the bankruptcy process is the ability to transform a business into its best, most efficient form. Sins of the past can be washed away, and core competencies can be pursued with a renewed focus.

While in some cases identifying a company’s core competencies may be obvious, in other cases it is more difficult. For example, certain retailers may emerge from bankruptcy with a smaller footprint, yet better performance, by virtue of eliminating underperforming leases through the bankruptcy process. The lesson the retailer should learn is why it is better at serving some markets than others. It should seek to understand what the core dynamics of its markets are, and thoughtfully plan for growth around that plan.

As a turnaround manager, I often see that top-line growth is placed as a paramount goal of many businesses. As a business owner, I am more concerned with bottom-line growth than top-line, and I take that perspective into my client engagements. What to take from this: not all companies can be Walmart, Boeing or Apple. Growth for growth’s sake is not a good business strategy, and many companies are better off remaining smaller, more nimble, more efficient and, hopefully, more profitable. While it may be more exciting and interesting to build a dynamic, global footprint, shareholders and lenders will likely only share in that excitement if it makes sense to the bottom line.

The experiences of certain old-line manufacturing companies provide good examples of the importance of core competency recognition. In one client engagement, the company’s core competency was distribution and customer service, rather than manufacturing itself. As the global economy evolved, the company could not compete with its foreign competitors on the manufacturing front. However, the company had an exceptional brand and customer relationships that could not be replicated by the foreign competition. Through thoughtful analysis, the professionals and management collectively identified that the core competency was its distribution and product knowledge more than the actual production process. To that end, the company re-shaped its business around its core competencies and set the company up for a robust turnaround.

In general, the court, stakeholders, professionals and other constituents in a bankruptcy pay exceptional attention to the plan of reorganization or other method of conveying assets out of bankruptcy. These plans are typically well thought out and heavily stress-tested prior to emergence from bankruptcy. Stakeholders should embrace the change, be objective about the opportunity they have been given to reorganize and commit to making smart decisions in the future that demonstrate that they have learned a valuable lesson through the bankruptcy process. After all, as Albert Einstein said, the definition of insanity is: “Doing the same thing over and over and expecting different results.”

Stay in Touch:

Through the bankruptcy process, stakeholders will build many relationships with people and firms that they may have never met before, including credit managers or owners at customers and vendors, professionals and lawyers engaged by various parties, and investors or investment bankers that sought to invest in or purchase the assets. In any case, the stakeholders have likely met a wide range of new people that may become valuable resources as the business embarks upon its new phase of growth.

For example, new relationships with vendors fostered through the reorganization process may result in credit extensions and help in future negotiations. The shared experience of going through the reorganization may inure to the benefit of the company going forward.

The relationships developed with the lawyers and professionals in the case may also prove valuable. These professionals have invested substantial portions of their life to try to help the company navigate a rough stretch of road. They have formed valuable knowledge bases and opinions about the business that they can share after the case has emerged. They often have a vested interest in the future of the company as their professional reputations are imprinted on the reorganization. Maintaining these relationships allows the company to benefit from a well-informed constituency that wants to see the company succeed.

Finally, the investment bankers and investors can be valuable sources of deals or financing for the company upon emergence from the case. A company can leverage these relationships into future acquisitions, industry information and other opportunities in the future.

Overall, the stakeholders have likely invested an enormous amount of time, effort and money building relationships through the bankruptcy process. The simple task of staying in touch with these professionals may yield valuable information or opportunities for the company on the other side of bankruptcy. For the price of a cup of coffee, you can likely pick the brains of highly educated and informed people that understand the dynamics that the company is facing.

So What’s It All Mean?

The process of successfully guiding a company out of bankruptcy is not an easy task. It takes a strong team of players, a clever plan of action and a dogged commitment of stakeholders to make it happen. Once a company emerges, it does not mean it is out of the woods. The stakeholders should leverage the skills developed, plans constructed and relationships formed through the next phase of the cycle to ensure that they all do not find themselves back in the same position that led them all to come together in the first place.

Lawrence R. Perkins is a senior managing director in the Los Angeles office of Conway MacKenzie with more than 11 years of experience guiding both private and public companies through the turnaround process. He has played leading roles as a turnaround advisor, strategic consultant, investment banker, interim chief financial officer, and crisis manager to middle-market companies. Perkins has a broad range of industry experience, but specializes in manufacturing, business services and retail. Prior to joining Conway MacKenzie, Perkins was the founder and president of El Molino Advisors, a boutique turnaround consulting firm focused on serving the middle market. Prior to that, he was an associate in Arthur Andersen’s Strategy Group and was later recruited as a senior associate at a boutique investment banking firm in southern California, specializing in distressed M&A, debtor advisory, creditor advisory and other traditional investment banking roles. He then provided consulting services under the umbrellas of Alvarez & Marsal and Nightingale & Associates, two premier firms in the operational turnaround industry. Perkins completed his undergraduate studies at the University of Southern California Marshall School of Business. He is a member of the Turnaround Management Association and the American Bankruptcy Institute.