Michael Bruder has been
yelled at, hung up on
and hustled quickly out
of offices. A bill collector
might expect such treatment, but it is
not what Bruder, a company turnaround
expert for Macquarie Capital, expected
when he entered the field of corporate
restructuring. It is Bruder’s job to tell chief
executives that a bankruptcy filing may
be the best option to save their struggling
company since it can protect them from
lawsuits and creditors. He’s not finding it
an easy pitch.
“You can dance around it a little bit, but a
lot of times you get very harsh pushback,” said
Bruder, who heads Macquarie’s restructuring
and special situations group.
Business bankruptcies soared 63
percent in 2008 from the year before, as
the global recession, consumer spending
slump and near freeze in the market
for business loans hit companies hard,
according to law firm Jones Day. The
number is expected to climb again this year,
according to Macquarie Capital research.
But despite a weak economy, which
might provide cover to executives,
shame, pride or hubris prevent corporate
chieftains from letting their companies
file for bankruptcy protection, even when
stalling can delay a turnaround or result in
a total collapse.
“We probably did take longer (to
file for Chapter 11) than we should have
because you never want to have that
feeling of failure, and you always want
to fight it out,” said Joseph Vicens,
Chief Operating Officer at bankrupt
1800mattress.com, which sold bedding
over the phone, internet and in stores.
Vicens said a company turnaround
was delayed by three to six months since
filing earlier would have helped it get out
of expensive real estate leases and other
obligations. The lag had also caused
creditors to force the issue by filing an
involuntary Chapter 7 petition against the
company, asking a court to appoint a trustee
to take over operations. 1800mattress.com
had to respond to the creditor’s move by
filing for Chapter 11 and is now planning to
sell itself to competitor Sleepy’s.
“You can call it wishful thinking, but
we basically thought we could work this
through internally,” said Vicens. “No one
wants to go through a Chapter 11.”
Executives resist
Executives, especially those who started
a business, believe they know a company
better than any outside adviser possibly
could. They resist admitting that they weren’t
as nimble as they should have been when
business first began slowing, and they fear
the stigma of failure attached to bankruptcy
will follow them throughout their career.
Bankruptcy is also expensive since
companies have to pay for their own legal
counsel, management consulting help,
attorneys for the credit committee and other
advisers. “They always wait too long,” said
William Henrich, Vice Chairman of corporate
turnaround adviser Getzler Henrich and
Associates LLC.
Restructuring pros cite the example of
electronics retailer Circuit City, which had to
liquidate after late attempts to fix its finances
and find a buyer failed.
Calling in restructuring advisers or filing
for bankruptcy earlier could have allowed
the company to streamline its business or
address expensive real estate agreements,
said Heidi Sorvino, head of the bankruptcy
practice for Smith, Gambrell and Russell LLP.
“Now look at what they’ve done – they’ve
liquidated all those people out of work, all
those stores closed, all those leases rejected,”
Sorvino said.
Financial pros hired to fix a struggling
company come girded with business degrees
and a deep understanding of balance sheets.
But their most useful skills are often more
therapeutic.
“You have to understand the motives,
agendas and objectives because you
are trying to compel people to do things
they were otherwise un-inclined to do,”
said Henrich. “The real success in helping
a company manage a turnaround or a
bankruptcy is really, truly the psychological
part of it.” Bruder of Macquarie Capital has
a spreadsheet that helps him identify the
desires and fears of all parties affected by a
corporate restructuring.
And Sorvino draws on skills developed
from her Master’s degree in clinical social
work when she works with clients.
“Admitting failure is really tough,” she
said. “A lot of them are in disbelief. (They say)
‘How could this happen?’”
Early in, early out
But if executives swallow their pride and
go into bankruptcy court with a good
reorganisation plan, companies can have
a better chance of surviving a turbulent
economy.
“You can’t wait to file,” said Sorvino,
adding that an early bankruptcy filing can
preserve cash and prevent judgments from
creditors.
Companies “can be so crushed by debt
and litigation – and filing for bankruptcy puts a
stop to that,” she said.
Vicens of 1800mattress.com said that
the mood at the company and among its
creditors and vendors has improved since it
filed for bankruptcy.
“It stops the uncertainly everywhere,”
said Vicens. “We feel at ease since we filed
the Chapter 11 because we know that we
can focus on moving forward. The past is
the past.”
Struggling businesses can turn to a socalled
prepackaged bankruptcy, in which a
company works out a deal with its creditors
then files in bankruptcy court with all the
agreements in place. A prepack helps a
company emerge more quickly and with
much less disruption to operations.
Bankrupt telephone equipment maker
Nortel Networks Corp is seen as an example
of a company that moved when it still had
cash on hand and thus will have a better
chance of restructuring successfully.
Some restructuring pros also say
bankruptcy is a good option for struggling
automaker General Motors Corp, which is
limping along even after billions of dollars in aid.
GM has said a bankruptcy filing would
wipe out thousands of jobs, but some
turnaround specialists insist that a wellthought-out
bankruptcy filing would allow the
company to reinvent itself.
“Bankruptcy is a process where
companies have the opportunity to
reorganise themselves, get out from heavy
debt loads, renegotiate labour contracts,”
said Jerry Mozian, National Segment Leader
of restructuring for executive services firm
Tatum LLC. “This is the time when everyone
needs to be thinking outside the box.”
But not all companies, or their
executives, are willing to take such early
measures.
“You get yelled at, you get the ‘Who the
hell are you?’ speech,” said Bruder. “We
had a CEO who said to us, ‘I have a solution
and it’s not bankruptcy. We’re just going to
run faster.’ And six weeks later they were in
bankruptcy.”
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