Effort to Survive the Crisis Pushes Many Companies into Restructuring Mode

May 11, 2009 – As companies struggle in the brutal economic climate, many are choosing to restructure their entire operation in a last ditch effort to survive.

From automakers to retailers, companies are cutting back, letting go and looking to start over. And when companies decide to restructure, experts say the world changes very quickly.

“It’s not business as usual anymore,” said Perry Mandarino, a partner with PricewaterhouseCoopers’ U.S. restructuring and recovery practice. “You still have to maintain your day job, but you have almost another full time job added to it.”
The retail sector has been hit particularly hard during the current recession, resulting in restructurings, bankruptcies, and, in some cases, liquidation.

“What is a little different about this cycle,” Mandarino said, “is that a lot of issues companies are facing are top line issues. They are well-run businesses with their costs under control, but the revenue is not there because consumers are spending less.”

Kevin Shea, managing director at Loughlin Meghji & Co., said, “the current lending environment is virtually nonexistent for refinancing, which were often temporary sources for companies in trouble.”
In most cases, said Tim Weed, a partner with the accounting firm Plante & Moran in Southfield, MI, restructuring involves contracting the business through downsizing, eliminating jobs, or closing a portion of the business that cannot be rehabilitated.

With larger companies, he said, bankruptcies and restructurings tend to go hand-in-hand, as the firms use the courts as a mechanism for much of the restructuring. For smaller companies, Weed said that “bankruptcy is not always a viable option.”
“It can be very expensive, very uncertain,” he said. “You’re at the whim of a bankruptcy judge and you have other stakeholders who object to what you’re doing.”

“The heart and soul of restructuring,” said Howard Davidowitz, chairman of Davidowitz & Associates, a national retail and investment banking firm in New York, “is to say can we make this viable and at what cost and in what time frame? And the creditors normally have to buy into that because they’re the ones taking the huge haircuts.”

Davidowitz, who has over 35 years of restructuring experience, said he was involved in the restructuring plan at that eventually led to the creation of the chain store, Toys "R" Us.

“It takes a special backbone for a CFO,” Shea said. “They’re going to need to be prepared for substantial pushback, possibly from the CEO and possibly the board as the process gets underway.”

In presenting his or her case, Shea said a well equipped CFO, must be fact-based and un-opinionated, adding that “opinions and conclusions should be left to the CEO and the board.”

Shea said that a CFO headed for restructuring should check to see that the directors and officers liability policy is up to date.

“It’s virtually impossible,” he said, “for a CFO to make sound decisions where there is an element of personal risk in the equation.”

Shea said a financial professional has to focus on several areas at once. The CFO will be dealing with a senior lending group as other investors who are interested in distressed or potentially distressed securities buy into the deteriorating company.
A CFO must also understand the cash cycle of the business, he said, where to extract cash quickly and efficiently. The CFO must have a 13-week cash-on-cash flow and have expert knowledge of all layers of the credit agreement in the capital structure.

“Emotions can drive an organization that lacks proper guidance,” Shea said, “and that’s an organization that will fail at restructuring.”

Shea said it might be best for the company to get an outside attorney with experience with bankruptcies. Also, the company may also want to bring in restructuring advisor separate and apart from the legal division that “augment the CFOs skills.”
Davidowitz said restructuring “is the CFO’s worst nightmare because everybody goes after the CFO.”

“The CFO is central to everything,” he said. “The poor CFO gets carted out. It’s a 24-hour-a-day job. There is a never-ending demand for analyses and numbers; each creditor has a right to hire their own accountants, their own advisors.”
Davidowitz said that is likely in a restructuring that the entire management team will be replaced.

“They’re blamed when the company goes into bankruptcy,” he said. “The CFO and his staff are under tremendous stress. It’s a very negative atmosphere. Everyone hates everyone. The only winners are the lawyers and advisors.”

“They could be working themselves out of a job,” Mandarino said. Despite the tense atmosphere, experts say that a restructuring can also be a time when the CFO can shine.
“We live in a world of restructuring,” Davidowitz said. “If you’re a CFO who’s gone through a restructuring, it may be very good for your career.”

“Sometimes the CFOs are the most popular people because they are the gatekeeper of what will happen next,” Mandarino said.

Weed said that in many cases a CFO who could not make the changes he or she wanted to because of resistance from management can make things happen during a restructuring.

He said the CFO is the person an incoming restricting team wants to “know from day one.”

“They know where all the bodies are buried,” he said.

What constitutes a successful restructuring is a matter of opinion.

“It’s a difficult question to answer,” Mandarino said, “because success could mean a firm is sold to another company. So it doesn’t survive as an independent entity, but its business and employees survive. Is that successful? Some would say no because it no longer exists as a stand-alone company. But I will argue that it is.”

And, if all else fails, a company may have to liquidate its assets.

Noting that many “retailers are worth more dead than alive,” Weed said that in some cases it is better to liquidate while the company still has value than to prop it up as a money-losing operation.

“You may want to decide to exit on your own terms,” he said.

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