Reversing the Slide Join Us at JJoosseybass.com Register at www.josseybass.com/email for more information on our publications, authors, and to receive special offers. Reversing the Slide A Strategic Guide to Turnarounds and Corporate Renewal James B. Shein Copyright © 2011 by John Wiley and Sons. All rights reserved. Published by Jossey-Bass A Wiley Imprint 989 Market Street, San Francisco, CA 94103-1741—www.josseybass.com No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the Web at www.copyright.com. 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You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profi t or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. Jossey-Bass books and products are available through most bookstores. To contact Jossey-Bass directly call our Customer Care Department within the U.S. at 800-956-7739, outside the U.S. at 317-572-3986, or fax 317-572-4002. Jossey-Bass also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Library of Congress Cataloging-in-Publication Data Shein, James B., 1942- Reversing the slide : a strategic guide to turnarounds and corporate renewal / James B. Shein. — 1st ed. p. cm. Includes index. ISBN 978-0-470-93324-4 (hardback), 978-1-118-00845-4 (ebk), 978-1-118-00846-1 (ebk), 978-1-118-00847-8 (ebk) 1. Corporate turnarounds—United States–Management. 2. Corporate turnarounds— United States—Case studies. 3. Working capital—United States. 4. Strategic planning– United States. I. Title. HD58.8.S4798 2011 658.4'06—dc22 2010050247 Printed in the United States of America fi rst edition HB Printing 10 9 8 7 6 5 4 3 2 1 Contents Introduction: Conditions and Causes of Distress ix Box 1: Typical Covenants Tripped by Downturns xxviii 1 The Phases of Decline and Early Warning Signs 1 Box 2: The Effects of Financial Shenanigans 17 2 The Turnaround Tripod 29 3 Leadership in a Crisis 58 Box 3: Governance and Leadership Issues in Family-Owned Businesses 80 4 Cash Not GAAP 93 5 Downsizing Is a Tool, Not a Goal 121 Box 4: Other Legal Issues in Announcing Layoffs 130 6 The Bankruptcy Process as Sword and Shield 152 Box 5: State Laws 156 Box 6: DIP Financing 159 Box 7: Committee Formation 162 Box 8: Plan Confi rmation 181 7 Managing International Turnarounds 203 8 Turnarounds at (Intentionally) Nonprofi t Organizations 231 Box 9: Chapter 9 Bankruptcy 257 9 Turning Duds into Dreams 259 Box 10: Additional Issues in Valuing Distressed Companies 278 v vi Contents Box 11: Fiduciary Duties of Directors in M&A Transactions 300 10 A Different Fresh Start 306 Notes 313 Acknowledgments 325 About the Author 327 Index 329 Dedicated to my wonderful sons, Justin and Jered, for their encouragement, their senses of humor, and for teaching me what’s important in life Introduction: Conditions and Causes of Distress Employees at Rhodes Plastics in Linden, New Jersey, trudged through another dreary March day. The plant received its raw materials and supplies at one end of the building, converted them into sterile packaging for the food and drug industry, and shipped them out the other end. The offi ce workers were the fi rst to reg- ister shock and confusion when armed sheriff deputies stormed in and ordered everyone out of the building. “ You will take nothing, not even the family pictures on your desks! ” one offi cer shouted. “ Not until the bank fi gures out who owns what. ” While locksmiths arrived to change all the locks, the plant workers were ordered out and told to leave even their own tools behind. Unbeknownst to everyone there, the company ’ s top offi - cers had failed to convince the company ’ s lenders that they could turn the company around. Unpaid suppliers and customers with unfi lled orders would soon share in the employees’ shock. Although your problems may not be as dramatic, chances are, at some point in your career, you will participate in a turnaround. No matter how profi table you have made your business, or how recession - proof you consider your industry, you will fi nd yourself dealing with a troubled company. Perhaps your own company will need to reinvent itself to deal with new competitive realities, or perhaps a valued customer will begin paying you later and later due to its own internal distress. You may even serve on the board of a nonprofi t organization that requires its own strategic, opera- tional, and fi nancial initiatives to remain viable. Whatever the case may be, you will — with near 100 percent certainty— be party to a turnaround at some point in your professional career. ix
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