Turnarounds aren’t what they used to be.
Like a good spy movie, turnarounds used to center around a strong central figure making things happen. Turnaround stars and distress experts were born, like Stephen Cooper of Enron and Krispy Kreme fame.
In 1985 the Turnaround Management Association started as a conference of company turnaround specialists in Chapel Hill, ultimately creating a rigorous formal program and exam for Certified Turnaround Professionals.
“Back then the time frame for turnarounds was long,” Richard Lindenmuth, an executive who has completed 23 turnarounds over the years said. “There was bridge financing from banks that would facilitate a turnaround and bankruptcy was really used as a tool for restructuring a company.”
Times have changed. Many of the Fortune 500 companies from those days have merged or disappeared due to outdated technology, products, or services (think RCA, Blackberry, Zenith). At the same time, the way to turn around a struggling business has transformed, being driven by several factors:
First came a new post-recession banking ethos to “amend and extend” existing loans in an environment of low interest rates, and collect the associated fees. There was little incentive to force the introduction of a turnaround pro who might be able to fix in a crisis – or might just as likely deliver the final fatal message that the company couldn’t be saved.
Second, there emerged another lesser-of-two-evils option: sell off the problems.
Many kinds of buyers were ready to scoop up the next distressed asset or portfolio in hopes of making a killing. Hedge funds, for example, stepped up their interest in middle-market companies, regardless of illiquidity. At the same time, the private equity fund industry got a whole lot more sophisticated in buying distressed companies, divisions and assets. Where before most funds would only look at profitable companies, an entire new class of funds like KPS Capital Partners, Apollo Global Management and Metropoulos & Company specialized in buying troubled companies, no matter how deep the distress. Most tellingly, career turnaround professionals like Stephen Cooper ended up starting his own PE shop.
The case of Twinkies shows the depth of expertise, where Apollo and Metropoulis bought the twice bankrupt Hostess for about $185 million and reaped a $1 billion profit by the time they sold to Gores Group.
So how has that impacted how a company turnaround is defined today? “Today, more and more interim executives are invited to join a company to improve performance and fix things before an ‘old-fashioned’ turnaround is needed,” Lindenmuth said.
He adds that everyone seems to say they are a turnaround executive, but most executives simply improved declining sales and never experienced a true company turnaround.
So are the foundations of a traditional turnaround dead? Lindenmuth says that the basis is still solid, but today is mostly applied to performance improvement and successful integration of major acquisitions.