Trouble is Randy Benson's business. The Toronto executive is a turnaround and restructuring specialist, a saviour-for-hire for broken corporations. His mission: Sort out the conflicting demands of management, employees, pensioners, suppliers, creditors, shareholders, debt holders and maybe a government or two. And do it while the clock is ticking toward final bankruptcy and liquidation.
This is not the sort of job that tends to make you Mr. Popular. "I would never expect to be considered a saviour," Benson says. "I always expect to be considered a lightning rod. Your role isn't to go in and be loved." But you do expect to not be interfered with.
On his first day as chief restructuring officer at Hollinger Inc., in July, 2005, Benson found the office of the deposed Conrad Black sealed off by court order. Black's newspaper holding company was-and still is-caught in a maelstrom of lawsuits, and an Ontario judge had barred Black, soon to face criminal charges, from exercising any authority. Just getting a document out of Black's ornate inner sanctum took operatic effort. First, an on-site inspector from the consulting firm Ernst & Young had to be contacted. The inspector would, in turn, phone E&Y's lawyer, as well as Black's counsel and lawyers for several other parties. "It was a massive process to breach the barrier of the doorway," says Benson. "Four or five people would show up for one person to try to go into the office."
In the end, Benson wasn't completely successful in this assignment-but then, Hollinger was an unusually dysfunctional company. Benson's objective is always to broker détentes among the parties warring over a wrecked company, figuring that "people will eventually come to their economic senses and there'll be some compromise." This time, it didn't happen.
Why do things have to get so out of hand at some companies before they call in a SWAT team? "I wish they would react sooner," Benson declares. On the other hand, the longer things fester, the fatter the fees. Turnaround specialists often earn more than $1 million for an assignment of a year or two.
The specialists come in varying vintages and temperaments. Some are hired guns who move from assignment to assignment. Others, already on the payroll at a troubled company, find their métier after they're tapped by the board to spearhead an overhaul. But one trait they all share is the ability to make a crisis atmosphere work to their advantage. "You have to harness that energy and see if you can make it constructive," says Benson. Call it proactive anxiety.
Lately, with major corporations or entire segments of financial markets blowing up regularly (subprime mortgages one month, Merrill Lynch the next), the turnaround business is thriving. To get a glimpse of its inner workings, we talked to a half-dozen Canadian masters of disaster about the secrets of a successful save.
SANDRA ROSCH & HAP STEPHEN Deadlines cut both ways One cold Friday in December, 2001, things looked bleak on the tarmac at the airport in Sault Ste. Marie, Ontario.
The team of Hap Stephen and Sandra Rosch were flying back to Toronto, their attempt to save Algoma Steel in tatters. For the second time in just over a decade, the lifeblood of the city was near collapse. Stephen and Rosch, who constitute Toronto restructuring firm Stonecrest Capital Inc., had come to town to solicit the approval of Algoma's creditors and debt holders for a restructuring plan. Four groups of stakeholders had voted yes, but a fifth, which held $349 million worth of junk debt, voted the plan down, demanding 100 cents on the dollar.
Stephen and Rosch were facing a Monday deadline to file a recovery plan under the supervision of a judge. If they failed, Algoma could be liquidated. "The whole community was distressed," Stephen, now 61, recalls. "I remember getting on the airplane and saying to the press, 'Look, we've got the weekend to refile.'"
As it turned out, the judge, Justice James Farley, helped mightily in two days of intense negotiations in Toronto. On Monday, Stephen and Rosch had a revised plan that essentially gave the note holders new notes with a slightly higher interest rate. The holdout group signed on. "The time pressure brings resolution," Stephen says with a chuckle.
The partnership of Stephen and Rosch, 47, was seeded at Eaton's in 1997. Stephen, a chartered accountant, had signed on that year as chief financial officer at the enfeebled retailer, hoping to turn it around alongside hard-driving former Bay CEO George Kosich. Rosch, for her part, had worked as an investment banker; Eaton's was a client.
Kosich's efforts notwithstanding, the Eaton family was forced to relinquish control. Stephen argues that the ensuing restructuring "was successful" for the most part. The chain went into a period of court-ordered protection from its creditors, cut costs, paid its creditors in full and raised $166 million by going public. But that wasn't enough to mitigate a brutal price war with the Bay. "You don't win a price war with somebody who's six times bigger than you," says Stephen.
Eaton's went bankrupt in August, 1999. Sears Canada bought the Eaton name and control of 19 stores for $80 million. Stephen says the result could have been better. He'd had a superior deal ready-to sell Eaton's to U.S.-based Federated Department Stores, which would have avoided bankruptcy. But in this case, time worked against him.
Federated got cold feet on a Friday, and too many of Eaton's suppliers and store landlords had heard rumours about the deal unravelling. That was a particular problem in Quebec, where an obscure law allowed suppliers to retrieve their merchandise from stores at any time. They rushed in on Monday. "It was like a run on the bank," says Stephen. That was the last straw.
Stephen and Rosch formed Stonecrest in 2001. Their biggest file to date is Stelco. Stonecrest was hired in 2003, and Stephen was appointed chief restructuring officer of the steelmaker in January, 2004. He engineered arrangements that saw Stelco emerge from temporary bankruptcy protection in early 2006. This past summer, U.S. Steel agreed to buy Stelco for $1.2 billion.
Yet Stephen and Rosch say the result isn't as brilliant as it looks. First, Stelco, which had been a laggard for decades, waited far too long to bite the bullet. "Virtually all the North American steel industry had gone through restructuring," says Stephen. Stelco had some viable products, but its rivals had all slashed costs, modernized and dealt with massive pension shortfalls. "Competitively, Stelco was at the bottom of the heap," says Rosch.
When Stephen arrived, he figured Stelco would run out of cash within nine months. But, coincidentally, world steel prices started to climb. Bye-bye, time pressure. "We were saying, 'Okay, you gotta act today to deal with this.'" says Stephen. "But the unions were saying, 'No, we don't, because prices are gonna stay up forever.'"
"We went through a long, deal-weary process," says Stephen. "I don't think it was as good as it could have been." As taxing as the process was, it was lucrative for Stonecrest: Court documents show the firm was paid $4.1 million, part of more than $100 million in fees paid to lawyers, accountants, investment bankers, and advisers to various stakeholders. Stephen has no apologies. "Our compensation is success-oriented. If we're not successful, we don't do that well," he says. And Stelco, he adds, could have saved a lot of money if stakeholders had acted more quickly.
PURDY CRAWFORD Apply the human touch In the world of Canadian corporate cleanups, Purdy Crawford is the dean. The 76-year-old lawyer, executive and director has advised on, or guided, more than a dozen restructurings, including those of Dome Petroleum, telecom Allstream and Canadian National Railway. "It's human nature that we don't like change," he says in his soothing Nova Scotia drawl. Many people won't act "until the alternative is going under."
Crawford has been through a long career without once blotting his copybook. That gets respect, as does his avuncular nature. And so the medicine goes down more easily-although the nature of the cure can vary wildly.
"I was involved in a case four years ago-four, or five, or six," Crawford says (precise details of old files are not his forte at this point). "This company was unionized with higher wages here in Canada than their U.S. competitors-a lot higher."
Even if it kept the peace in the short run, paying out more on wages when the company was already bleeding was just not on. So the company's managers, whom Crawford was advising, decided to force a strike.
Crawford happened to give a lecture to students at Dalhousie University in Halifax the day he heard that the union had settled. He parlayed the development into his talk: "I said, 'Look, this is a great illustration. Strategy is important, but executing it is fundamental.'"
Indeed. Can he name the company? "I don't remember," he says.
In other cases, Crawford says, the right prescription is to fire the incumbent CEO forthwith. "But until quite recently, the hardest thing in the world was to convince a board to sack a CEO," he says. "There were two cases where I wasn't strong enough in pushing that forward." Indeed. Can he name either company? "No, because the guy who was CEO at one of them is still a friend of mine."
This year, Crawford has been applying his wiles for clients caught up in the $40-billion debacle in Canada's asset-backed commercial paper market. The freeze-up this past summer is Crawford's biggest challenge yet, in terms of dollar value. And in terms of complexity: "There's conduits [issuers of paper debt] there's the investors who I represent," he says. "Some investors want liquidity, others are quite happy with a longer-term investment. Some worry about their fiduciary duties. Then there's the credit default people." And so on.
No matter how complicated the issue, however, Crawford says it helps if the parties involved have "emotional intelligence," not just technical expertise. "My job is to get a lot of people who have more know-how than I have, ride herd on them and make sure things get done-and treat people well."
ROBERT BROWN Remember-shit happens It's easy to see why the board of directors of ailing CAE Inc. were impressed by Robert Brown's CV when they hired him as CEO in 2004. The manufacturer of flight simulators was looking at a man who had been a senior civil servant, CEO of Bombardier and chairman of Air Canada during its darkest days of restructuring-just the kind of guy you'd want running a technologically complex and highly cyclical business.
So, what intricate strategy has Brown pursued to lead CAE back to profitability? "There's no rocket science here," he says. "Have a strong balance sheet so you can weather the storms. Make sure your costs are in line, and be very competitive. Invest in technology and be the leader. And make sure you've got an engaged work force." Brown has also tried to spread his bets along two axes, aiming to generate half of CAE's sales from military customers and half from civilian customers; half from products and half from services.
That overall balance is important, says Brown, because the external forces affecting the company are unpredictable, and it's too risky to rely on any one segment of the market.
"How can I say it? Shit happens in the world," he says. "You're going to have things happen that you can't anticipate."
Many of the storms that have buffeted CAE in recent years were the same ones Brown had to contend with at Bombardier and Air Canada: the bursting of the tech bubble, 9/11, the SARS epidemic, the soaring Canadian dollar and competition from aggressive rivals abroad.
To keep a tech edge, last year Brown unveiled Project Phoenix, a six-year R&D program worth up to $630 million (he received more than $200 million in commitments from the federal and Quebec governments). But Brown also made some painful cuts shortly after he took over. The company lost $347 million in 2004, and the following February he slashed 450 jobs, cut CAE's dividend to four cents a share from 12 cents, and took a $433-million writedown. He has also replaced about half of the company's senior executives and pushed to reduce the engineering hours devoted to each project. "We realized the simulators being built were too customized," he says.
How do layoffs, cutbacks and shorter deadlines improve employee morale? "You get the right people, and they like to be working for a winner," he says simply. CAE's bottom line has certainly improved. The company returned to the black in its 2006 fiscal year, and earned a profit of $124.4 million in its 2007 fiscal year ended March 31.
At age 62, does Brown have any plans to move on to another troubled company soon? "No."
CALIN ROVINESCU Sometimes you have to reinvent the wheel Calin Rovinescu, the gung-ho chief restructuring officer (CRO) at Air Canada for 12 drama-packed months in 2003 and 2004, seems to get an extra hit of adrenalin when the pressure in a crisis reaches a climax. "The expression we would use is a 'burning platform,'" he says. A favourite adage of his: "Nothing focuses the mind like a hanging in the morning."
Rovinescu, 52, is refreshingly immodest about the turbulent journey that began for Air Canada after CEO Robert Milton fought off a takeover bid by Gerry Schwartz's Onex Corp. in 1999. The old model of a full-service airline "was broken," says Rovinescu, "and we were among the first-if not the first-in North America to recognize that."
Often, only external catalysts will put a company's feet to the fire and force it to make massive changes. As Rovinescu recalls, Air Canada soon had no less than five major headaches to contend with. "It's a ridiculous expression that's been used many, many times, but in this industry, it was absolutely true: This was the perfect storm," he says.
First, there was the bust of the tech industry bubble in 2000. Companies like Nortel and JDS Uniphase were no longer flying flocks of lawyers and consultants around the continent. It was also the year that Air Canada made what Rovinescu calls its "highly politicized" acquisition of rival Canadian Airlines, which overloaded Air Canada with debt. Then came 9/11 the following September, damaging no industry more deeply than the airlines. Fourth, there was the SARS epidemic, which clobbered Toronto-the hub of Air Canada's operations-harder than any city in the world. Finally, WestJet, a low-cost discount airline, was stealing customers.
Rovinescu had been a managing partner with the law firm Stikeman Elliott in Montreal and a key adviser to Air Canada since the 1980s. When he signed on with the airline as executive vice-president of corporate development and strategy in 2000, he considered himself both an outsider and an insider. "I came in largely seen as being an agent of change," he says. But he also "had some history with the industry and some attachment to the previous team."
Rovinescu spearheaded three major initiatives over the next four years. One was to ratchet down costs. This included squeezing $1.1 billion worth of concessions from unions, cutting off incentives to travel agents and pressuring aircraft leasing companies for lower rates. Rovinescu became the proverbial lightning rod. "Frankly, I enjoyed that role," he says. "It didn't bother me at all."
There was also a flurry of organizational changes. The airline created new discount sub-carriers-Zip, Tango and Jazz-that bewildered many customers at first. Rovinescu said it was important to have a carrier in each niche of the market. "You had to re-educate the travelling public to segment the travel experience," he says-meaning that many customers hadn't realized that they didn't want to pay for meals. He also wanted to spin off the Aeroplan customer rewards program, which he figured would have a value of $1 billion. Other executives "thought I was crazy," he says. (Aeroplan was finally spun off in 2005, post-Rovinescu; it now has a stock market value of about $4.5 billion.)
Despite all these efforts, in April, 2003, Air Canada had to file for temporary bankruptcy protection, and Rovinescu was appointed CRO. In this period, the airline received two takeover bids, but neither was consummated. Many analysts thought the future looked bleak, and Rovinescu stepped down in April, 2004, joining investment banker David Kassie to co-found Genuity Capital Markets. "Rovinescu should hold the door for Milton," read one newspaper headline. But Rovinescu says his job was largely done at that point. The only unresolved question was, who would own the airline?
Air Canada emerged from bankruptcy protection in September, 2004, under the wing of its new, widely held parent company, ACE Aviation Holdings. ACE's share price has roughly doubled since then, to $28 recently. (He adds, "and with distributions of Aeroplan and Jazz [units] nearly $50 per share of value has been delivered.") Who could have predicted that Milton and Rovinescu's plan would have been so successful? Rovinescu, for one: "Yes, it could have been predicted," he says. "That was the vision we had in 2000 when we started."
RANDY BENSON Sometimes people rise to the occasion. Other times, not Randy Benson says one of the hardest parts of going into Hollinger Inc. as chief restructuring officer in the summer of 2005 was battling the perception that Conrad Black still controlled the company. "The fact was, he didn't," says Benson. "The court had intervened." But many reporters, and even some U.S. regulators and a few of Hollinger's minority shareholders, still assumed that Black, who had a 67% voting interest, was in charge. "I had to fax them copies of Judge [James]Farley's order," recalls Benson. "The amount of emotion and hostility toward the company and, obviously, toward Black and the others-it was just over the top."
Still, Hollinger's restructuring bore a strong resemblance to ones that Benson had worked on previously. Job one is providing accurate information to all stakeholders-investors, employees, creditors and their representatives-and then persuading them to get real. Everyone wants a piece of what's left of the company, but "people have to come to grips with the fact that there isn't enough to go around, and they're going to have to compromise," says Benson. "Your role is always, in one way or another, breaking down people's resistance to compromise."
Benson, who's now 48, had no idea that "the restructuring world existed" before he stumbled into it via his job as chief financial officer at Beatrice Foods. One day in 1995, he received a shocking request: Merrill Lynch Capital Partners, which controlled the company, "asked me to help them out with this little problem." Benson knew the company was highly leveraged, but Merrill gave him the lowdown: Beatrice was in peril.
Leading the cleanup introduced Benson to the parallel dimension that restructurings can break into. He had back-to-back meetings with shareholders and debt holders. Many shareholders had lost almost everything, but among the bond holders were U.S. hedge funds that stood to make a killing on distressed bonds that they'd nabbed for as little as 30 cents on the dollar. In the shareholders' meeting, "everybody hated the company," says Benson. In the debt holders' meeting, "everybody loved the company. And I thought, 'It's the same company.'"
Often hedge funds and so-called vulture funds are useful, says Benson, because they set a realistic market price for shares or bonds. "I would never want the hedge funds to think they're helpers," he says with a chuckle. "It doesn't quite go with the image."
In 2000, Benson became CFO of long-distance company Call-Net Enterprises-just in time for a déjà vu experience. The telecom bubble burst, and Call-Net with it. Benson remains proud of what he accomplished at Call-Net. A standard goal in many restructurings is to get bond holders to take shares in the company, instead of cash, for their debt. At Call-Net, he managed to reduce long-term debt from $2 billion to $600 million by arranging such a swap, and avoided a filing for court protection. Still, he left Call-Net in 2002, despondent that the share price was languishing near $3. But in 2005, Rogers Communications paid almost $9 a share for the company.
"After Call-Net, I thought to myself, 'I can do this. I can keep doing it,'" says Benson. In 2004, he took an assignment as chief restructuring officer at insolvent Montreal steelmaker Ivaco Inc., which was in temporary bankruptcy protection. The stint reinforced two lessons. One is that although protection gives temporary debt relief, it lends more impetus to the process because creditors have an official voice in the company along with shareholders and bond holders.
The other lesson was positively uplifting: "Some people really rise to the challenge," says Benson. "Often they're not the highest-paid guys in the company." Early on, he thought the company would have to close a small factory south of Montreal that made "low-value-added" items like nails. "It looked like it would run out of cash," says Benson. "But the local plant manager and the local comptroller developed that 'We are not going to give up' attitude." They had weekly meetings with their union about saving the plant. Mission accomplished: The factory was one of the businesses Ivaco sold to Chicago-based Heico Cos. for $375 million later in 2004.
The trouble at Hollinger, says Benson, is that "you didn't have economic balance at all. You just had emotion and a lot of irrational behaviour." Some stakeholders just wanted to get Black: "They were motivated by that trophy." The parties seemed bent on fighting until everything left in the company's kitty had been spent on lawyers. Benson stepped down this past January-not bitter, but frustrated. He is proud that he was at least able to patch up relations with regulators and get Hollinger filing proper financial statements. And cash was raised by selling off more than $50 million in assets, including Black's beloved HQ at 10 Toronto Street.