As Interviewed By Lisa M. Goetz, Editor, ABF Journal
Q&A With Jeff Baker, Turnaround & Restructuring Practice Leader, Wipfli
ABF Journal: Can you please provide some background on the launch?
Jeff Baker: Dave joined Wipfli in late February, and I joined in April. We had been in the turnaround and restructuring business for quite some time doing deals in the upper Midwest. We have completed a number of high profile cases over the years. One of those engagements was the Genmar bankruptcy. Genmar was one of the country’s largest recreational boat builders. We also assisted one of the large national lenders in connection with a case involving the largest salmonella recall in U.S. history.
We were interested rejoining an accounting firm because a lot of issues that we ran into, especially in these larger transactions, required so many different skill sets and expertise – tax, forensic, etc., and having those all under one roof really made sense to us. Wipfli on other hand, wanted to be able to increase their service offerings to help companies at every stage in the life cycle. Joining forces fit both of our needs. Dave and I acquired the additional skill sets that we were seeking, and Wipfli got the opportunity to add to its portfolio.
When we first came on board, we were pretty swamped. But now we are going to start actively marketing the turnaround services that Wipfli is offering companies. We come from a background of driving turnarounds from a sound business strategy, versus just cutting cost for the sake of cutting cost. We help companies create a sustainable business model to survive and to reposition themselves within the competitive landscape when they do emerge. Regardless of the level of company distress, these downturns are often a good opportunity for companies to reposition themselves.
ABFJ: In our recent survey of senior managers of a sampling of turnaround firms, a majority of respondents noted there were fewer opportunities due to economic uncertainty and the reluctance of banks to call a default. What’s your take on the current environment to do business?
JB: You don’t have to look past the fact that the national debt went over $16 trillion [recently]. It is still a very difficult climate out there. That level of borrowing has a big impact on confidence. Likewise, it certainly seems the lenders are deferring things and pushing them down the road. You see signs already that we clearly aren’t out of the woods, and I don’t think we’re going to be out of the woods until you see some meaningful actions to deal with this debt level, the housing market and unemployment. We need a resolution of all three of these things before we have any meaningful sustained improvement. What we’ve seen so far are occasional “sugar highs” that sometimes are driven by monetary policy and other factors.
ABFJ: Please share your thoughts on the uncertainty that currently prevails given the slowing economy in the U.S. and clear indications out of Europe that contraction has set in. In your view, are there certain U.S. industry sectors that will be impacted more than others and why?
JB: Europe’s economy is struggling and it impacts business in the U.S. Just in the last few weeks, I have been involved indirectly in a situation involving a European company that bought a U.S. company a few years earlier. They are exiting that company now, which impacts a lot of jobs and the local economy. It wasn’t a bad business deal, but the company is so focused on its problems in Europe and is diverting all of its assets back to Europe to deal with the issues there. That capital is returning to Europe, which means much less capital in our side of the yard.
One industry sector that comes to mind is building products. The decline in U.S. home starts has been catastrophic to building products, so that sector will continue to struggle. While we have seen some stability in overall markets, what has improved is on the lower and entry level. Companies that sold into the higher-end markets are going to continue to struggle. Other [struggling] industry sectors are in retail, consumer-related and any sort of luxury or recreational sectors because those are discretionary dollars that people don’t have to spend.
ABFJ: As you reflect on the many turnaround experiences that you’ve had, can you comment on some of the most significant challenges that seem to be a constant in the majority of assignments that you’ve completed. Can you provide a few anecdotal insights that serve to illustrate?
JB: The toughest thing we see is the unwillingness of management to make difficult decisions. Usually the first thing they tell us, after we tell them what needs to be done, is “you can’t do that.” That’s their mindset often because it’s not what they do for a living. They sometimes really can’t do it, but we can. It’s getting people over that hump – not a question of can or can’t – it’s something they have to do.
You also see, particularly with some of these older companies, they’ve overcomplicated their businesses. We went through an era where everyone had to be very responsive to the consumer. You had to offer your product in every shape, size and color. Before long, you have product and brand proliferation. It’s great from the customer’s standpoint, but in times like these, when you have to focus your assets, you can’t be everything to everybody. We have to greatly simplify those businesses because the more complex they are, the more resources you need. There has been a tendency also over the years when times were good everyone got on the “bigger is better” train. Bigger is nice, but it’s better to be profitable and generate cash.
For example, in one case, the company built products in every shape, size and color. It didn’t matter if they only sold one of them, they were going to make it for the customer. When you start running that backward through the supply chain, you need more inventory, you need paint, you start stocking things and using capital on things you are only going to do once. We had to greatly downsize the number of offerings.
Another example is a company that is more than 60 years old and over time they produced and maintained over 500 different catalogues because of the vast range of products. When you start thinking about what the cost is to maintain those, it was killing them. But that’s the way they’d always done it.
ABFJ: Because most turnaround situations involve a debt restructuring to ease a cash-flow burden, what’s your view on the reluctance of some lenders to actively participate in this major element of a turnaround? Do you think the current regulatory environment is exacerbating a lenders posture in this regard? From your experience, do asset-based lenders typically play a pivotal role here because of their unique specialty?
JB: Lenders have been greatly reluctant over the years. The ones that are probably most closely participating right now are the asset-based lenders. In the recent months, there has been a lot more capital out there. That’s been helpful because now you have banks lending a bit and other sources of capital available that make these restructurings possible. A couple years ago it was pretty tough.
We had a situation where there were three players that provided of the majority of the floorplan financing for dealers, and at the time the company entered into bankruptcy, two of the lenders announced they were leaving the industry altogether. It left us with one lender. And with only one out there, they dictate the terms.
Luckily, today the asset-based lenders are more likely to have the appetite to finance the kinds of things that we see. On the other hand, the banks are facing a tougher regulatory environment and don’t want to put a loan on their book that’s going to have a reserve against it soon thereafter.
ABFJ: Given that many business constituents are a party to a turnaround or restructuring – clients, lenders, customers, vendors – can you comment on how each is approached to ensure the possibility that a successful turnaround can be achieved?
JB: It varies by the circumstances. The client has to be committed to making the necessary changes. In a perfect world, we would be dealing with companies that have outside independent directors, and we would work with a special committee of the board. Those people tend to be a little more objective and understand why they have to do what they have to do. Getting the client to do the things you need to do is critical.
Clients also have to understand the need to provide transparency with other constituencies. Often that’s a difficult hurdle for them to get over because in many cases those relationships have become adversarial.
As far as the lenders, you have to be able to see the world from their side. Sometimes, it is just a case of lender fatigue, and if you are good about it you can get them reoriented toward practical solutions by giving them a little transparency and helping them from turning a small problem into a bigger problem. More than anything, lenders appreciate the ability to have transparency and the ability to understand what’s going on inside the business. We stress with our clients that we must have the ability to communicate freely with the lenders.
On the customer side, it’s more delicate. On the one hand you want to have transparency and honesty and build their confidence to reach a favorable outcome, but the minute they get nervous, that’s when they jump. The real key there is driven by the nature of the industry and how difficult it is for them to switch. We obviously prefer those situations where the barriers for them to switch are higher, but when they are not, we do the best we can to help them along in the process to stick with us.
With the vendors it’s more about managing the “five stages of grieving” – denial, anger, bargaining, depression and acceptance – it’s managing them through that and helping them understand they aren’t the first ones to go through this. We get them to understand that their cooperation is really their best path to maximizing their recovery.
ABFJ: As an accounting firm, will Wipfli be precluded from engaging in certain situations because of Sarbanes-Oxley and perceived conflicts?
JB: Obviously, we have to abide by the independence rules both in the clients we take on as well as the lenders for our clients and often times the vendors as well. As a partner in the chairman’s office of PwC, I was all too familiar with the issues and complications that are created by these types of practices. At Wipfli it is a very different situation. While Wipfli has a substantial financial services practice, it is focused on community banks that typically don’t carry the size of credits we work on.
ABFJ: Can you provide our readers with some insight into your background and comment on what led you to embark upon a career as a consulting services practitioner?
JB: I originally started out as an auditor back in the old days, and at one point in my career was before I was assigned to a project, which had just filed bankruptcy and became one of the largest bankruptcies in the country at that time. From that point on, I became more focused on distressed companies and M&A. I spent the majority of my career at PwC, working in client service. I worked on some of the biggest clients over the years, until I made partner in the late 1990s and moved into the chairman’s office at PwC, and there I helped with strategy and corporate development with the firm.
In the early 2000s, I left the chairman’s office to join PwC Consulting, where I led its efforts to separate the business from PwC and later negotiated the sale of that business to IBM in 2002. After that, I was president and CEO of a number of companies. But at the end of the day, consulting is what I do, and I’d much rather do that than be in the public company environment again.