Capitalizing on Uncertainty

Everywhere we turn, uncertainty reigns. In the capital markets. In executive suites. In the work force. And, even in our government.

Few if any of us have seen anything like this current environment before.

Just as with the horrific tragedy of 9/11, none of us had seen anything like that before.

Turning around troubled companies has always been difficult. Turning around a troubled company in the midst of a sliding economy is difficulty squared. And,

turning around a troubled company in the midst of a sliding economy which in turn is at a time of unprecedented uncertainty is difficulty cubed.

Perhaps it is the optimist in me, but I believe that there will be companies and individuals prospering in these times. In fact, I write regularly on that belief in my Prospering in Tough Times blog.

Recently, I had a chance encounter with an individual who has a long history of helping companies deal with uncertainty. The one hour discussion I had with this man, Paul J. H. Schoemaker, Ph.D., brought my beliefs about what is possible to new levels.

Shortly after 9/11, Schoemaker wrote a book, Profiting from Uncertainty, Strategies for Succeeding No Matter What the Future Brings. After spending the hour with Paul Schoemaker, I ordered the book and quickly devoured it.

This book should be required reading for any Restructuring professional. It is that good. (You can read my review here on Amazon.)

No, Paul Schoemaker is not a long time friend...or a client...or a family member. He is just an example of the kind of exceptional wisdom that this country...and specifically the Restructuring profession that I am hoping will lead the way...needs to absorb.

The times may be unlike anything we have ever seen before. But, there are professionals, among our midst, who have pieces of the puzzle for righting this ship. This country...in fact the world....needs that wisdom to be shared. No one person...no one firm...has a corner on the universe of wisdom needed to turnaround this economy in something less than 3-5 years. 3-5 years of hell!

With each day of missteps coming out of Washington, I am more and more convinced that this turnaround will come from the "field," and the speed of the turnaround will be heavily influenced by how quickly the Restructuring profession absorbs the need for new business models, new approaches, new thinking, etc.

The Future of Retailing

This is the third and concluding post in the TMA Webinar on Retailing held last Wednesday (2/18)/ The three part series starts here.

In this post, I hope to stretch the thinking of readers as to the need for business models to change in most industries, including retailing.

Now, I don't consider myself a retail expert. Early in my career, I was the bank workout specialist on a very large regional grocery store chain and on a national specialty retailer. Then, during my years with Coopers, I served as CRO for a couple of large regional retailers. And, I have enjoyed a twenty five year client relationship with a major retailer. But, even with (all) that, I consider myself an informed observer, not an expert.

My retail exposure has, however, brought me into contact with some amazing retail executives. A couple that come immediately to mind are Jeff Holczer who I consider to be one of the sharpest retail CFO's, and Marvin Shapanka who has a rare combination of deep, traditional merchandising experience and deep experience in internet retailing. I am always pushing Jeff, Marvin and other retailing execs that I know as to their thoughts on how retail needs to fundamentally change in view of the present economy.

In the interest of stirring up the pot as to the need for fundamental change in business models, let me suggest six changes that every retailer should be carefully considering:

1. “Own” your customers. Reinvigorate a focus on customer loyalty by applying best practices being successfully used in other industries.

2. Take advantage of the shift in the labor market to get higher quality store personnel and dramatically increase the expectations as to their performance in providing great service to customers.

3. Fully leverage the company’s internet retailing presence by following an aggressive cross channel strategy, with respect to marketing and sale of goods.

4. Rethink store design and store location so as to increase real estate efficiency. Aggressively pursue getting all stores to (current) market rate leases, for the right size stores, in the right locations.

5. Rethink the inventory investment levels in a store and make better use of internet option (and fulfillment center) for slower moving items, so as to increase inventory efficiency.

6. Rethink the role of the CFO in an environment where uncertainty is likely to reign supreme for the foreseeable future, where the efficiency of capital usage will be more important than ever, where deflation will likely be more of a factor, and where operational efficiency will be key to creating competitive advantage.

Now, those of you with retail experience can undoubtedly add to my list. But, here is my point: how many Restructuring consultants are focusing their retail clients on these kind of fundamental issues, not just on slashing expenses.

I am big believer in aggressively cutting expenses in view of rapid declines in revenue. But, what Restructuring consultant worth his or her weight can't do that...almost in their sleep. The real test is how many consultants can also show their clients how to increase market share of the business that does exist out there in a given market segment?

The bottom line is that lenders and investors are not being kind to any business that does not have a compelling value proposition. Seldom will just tinkering convert an average company into one with the requisite compelling value proposition. What an opportunity for Restructuring consultants with insights into the necessary business model changes in a given industry!

Takeaways from TMA Webinar - Retail 2009

In my last blog post, I provided an overview of this TMA webinar. In this post, I want to list my major takeaways from the presentation by the panel:

1. The future for retailers lacking a compelling value proposition is very bleak. One of the panel members (it wasn't easy to follow who specifically was speaking) said the ultimate test is "if your store/brand went away, would people even care?"
2. Cash is king (in this and every other segment of the economy). Presume that this downturn will last years...do rigorous scenario planning...and stress test to understand under what scenarios cash runs out.
3. Plan for the worst (and be pleasantly surprised if things get better anytime soon).
4. Every retailer needs to be using a food retailer's mentality...watch the pennies. One of the panelists went so far as to suggest that C-level executives with this kind of mentality and experience would be welcome in forms of retailing that have not operated like this in the past.
5. Look to renegotiate leases and all other contracts. Challenge is how to do so when bankruptcy is not imminent???
6. If bankruptcy becomes the necessary option, get started with planning early. Obviously, nothing new about this very appropriate advice.

Running throughout all of the commentary was the notion that nobody really knows what to use as a base planning scenario. The combination of this uncertainty plus the distress makes every retailing situation extremely challenging.

I really admire the panel. Tough subject under any circumstances, and certainly challenging to condense into one hour. To a person, they did a fine job and my concise summary of takeaways does not do full justice to the thoughtfulness of their presentation.

My one surprise was that I did not come away from the presentation sensing that any of the panelists were championing the need for fundamental changes in the business model for retailers. I am a strong believer that:

virtually every industry will end up with fundamental changes in business model as a result of the severity and duration of this downturn.

Not only is that my expectation, but it is also my hope as I believe that such changes are critical to the United States regaining some of its competitive advantages.

Restructuring the business models of our many industries represents great opportunities for restructuring consultants with deep industry expertise and a commitment to avoid being blinded by all their years of experience in how an industry has traditionally operated. From the restructuring of business models comes the opportunity to create a compelling value proposition.

As opposed to the liquidations that have become the norm in the retail industry, a comprehensive restructuring provides an opportunity for skilled legal counsel to add value by facilitating the restructuring, and for skilled financial advisors to arrange appropriate financing for the restructured business.

Up Next: To stimulate the kind of thinking I believe needs to be done in every industry, I am going to suggest some things that I fully expect that the best of the Restructuring advisors will be working on with their retailing clients...or at least those retailers committed to prospering even in the down times. My post on The Future of Retailing follows here.

TMA Webinar - Retail 2009: Is There a Light at the End of the Tunnel?

Today, I participated in TMA's webinar on the state of the retail industry.

Peter Schaeffer, from Carl Marks Advisory Group, assembled a quality panel consisting of:

Jeff Bloomberg from Gordon Brothers

Burt Feinberg from CIT Retail Finance

Jay Indyke from Cooley Goward and Kronish

Jeff Perlman from LNK Partners

It would have been great to have an operating retail executive or two, although clearly this is almost impossible given what retailers are facing in their own company. Not exactly a time to be out speaking, and a tough time to be gratuitously candid, especially if an officer of a public retail company.

Given the state of the retail industry, the state of the economy, and the tremendous general uncertainties of these times, I thought the panel did a very credible job. Add in the fact that panel presentations always have the issue of what exactly is the audience (experts or relative novices) and I, for one, appreciate what these five Restructuring professionals served up today.

Sometimes the real utility of a program like today's is not what, per se, the speakers convey but ones own take when given the opportunity to focus on the subject matter and mentally challenge that which is being said.

In my next post, I will report on my specific takeaways from the presentation. In the meantime, I can definitively say that although each of these pros believe better days will come for retail, every one of them is very clear that they are as clueless as all of us as to when that will happen. In fact, my take of their position as to the Webinar subject question is that

all five believe there will eventually be light at the end of the tunnel, but not one of the panelists reported seeing the light yet.

Buckle in...it is going to be a long and very bumpy ride!

Up Next: In my next blog post, I will summarize my specific takeaways from this webinar.

Dinosaur Speak

I am a strong believer that what we are experiencing in this downturn is unlike anything most of us have seen before. Comparing it to the last two or three downturns can confuse rather than enlighten.

Recently I read a column where a well known columnist suggested this wasn't really that bad a downturn because the "misery index" was much lower than in other downturns. Now as you may recall, the so called "misery index" is the sum of the inflation rate and the unemployment rate. With our current misery index at less than 10 and half of what we had in the downturn of the early 80's, he concluded things really aren't that bad.

So let me get this right. As unemployment rises, but deflation roots and even accelerates, we really will not be in trouble because the misery index will be relatively low???

That is an example of dinosaur speak. Thinking and talking about concepts relevant in another era. Concepts with virtually no relevance to the challenges of today.

Is your counsel to client filled with dinosaur speak?

Is your Restructuring practice plan filled with dinosaur speak?

This downturn is unique. The successful restructuring professionals will be those that see things as they are, as opposed to trying to shoehorn this mess into how they remember past downturns.

Separating the Truth from the BS

By now, all manner of Restructuring professionals are expected to be having more business than they can handle. After all, we are experiencing the worst economic meltdown in decades.

So, everywhere one turns you hear about how well a given restructuring practice is doing. You probably have heard the conversation, or even been a part of one, that goes something like this:

Sam (a hypothetical restructuring attorney): "So Bill how are things going?"

Bill (a hypothetical restructuring consultant): "Gee, Sam these are interesting times. You busy."

Sam: "For sure."

Bill: "Yea, I know the feeling."

Sam: "Want to have lunch?"

Bill: "Sure, I can do it any day next week."

Why do I have the feeling that the truth is that a handful of firms are very, very busy, while most others have yet to come close to operating at capacity? And even those practices that are operating at close to capacity are not throwing off the collateral work to come close to carrying the rest of their firms.

Of course, every professional wants to portray the image of being very busy. Obviously, being less than very busy during such a meltdown would have others wondering about your proficiency.

But,

proficiency...alone...is not determining how busy a given firm is. Practice strategy and strategy implementation are having, as they always do, a major impact.

The buying patterns are very, very different in this downturn, at least so far. Practices marching to their playbook from 2000-2001 downturn, or from that in the early '90's, are likely to be sub-optimizing their performance relative to their talent. Truth be told!

There will be some huge winners among professional service firms in this extended downturn. And most competent restructuring professionals...whether attorney, consultant or investment banker...will do better than they have done in recent years. But, many practices will end up disappointing Managing Partners looking for the Restructuring practices to carry their firms in these challenging times.

Is your practice positioned to be among the winners in this new world?

Worlds Toughest Turnaround

Regular readers of this blog know that I believe that turning around a troubled company is tough stuff. Very, very tough! Even in good times, a turnaround is tough; and in an economy like that which exists today, a true turnaround is like a 1 in 100 shot.

Now my handicapping may seem a bit extreme, but consider the rate at which creditors are preferring some form of liquidation over supporting a turnaround. The high number of liquidations would suggest that my number may not be as far out of line as at first it may seem.

But, the post is not really about general turnaround odds. I was using my opening statements to set the table for the fact that we are now watching the mother of turnarounds...that of the economy of the United States.

We have all heard the analogy of how difficult it is to quickly turnaound a battleship (i.e., a big company). Well, just imagine how difficult it is to turnaround the world's largest aircraft carrier (i.e., this country's economy), and do so in the worst weather ever experienced (i.e, a global recession).

And imagine the turnaround needs to be accomplished with the most self centered set of constituents (i.e., the House and the Senate) at the table. Many of whom are playing Russian roulette as the bigger game is played out.

It is no wonder that this turnaround isn't going well. And, make no mistake about it, this turnaround is not going well. On my Prospering in Tough Times blog, I wrote about the snowball effect back in October. Here we are , four months later, and the snowball hasn't slowed one iota. (I get no comfort that the mess might have been even worse if some things had not been done, as some would have you believe.)

Although the downturn has been a boon for Restructuring professionals,

I hope that no one in this profession is under any false delusions that continued lack of progress on stopping this slide is a good thing.

Restructuring professionals need to be doing all they can to get the word to Washington that the time has come to stop doing business as usual.

Even if Washington begins to quickly slow the snowball, we are looking at a protracted downturn. No turnaround is ever instantaneous, and this is the mother of all turnarounds. We will be witnessing many friends and relatives losing their jobs, their homes and their life savings, before this turnaround occurs.

Let there be no joy in Mudville that good times are back for the Restructuring profession. If we are part of a true profession, then the profession must do its part to let Washington know that turnarounds require swift, skilled action. And, we must also let Washington know that we need more of our elected officials to be true patriots who put the interests of the country above personal needs to grandstand for their constituents.

Tranche Warfare - Who Will Be the Experts?

Remember the days of old when debt when most Restructuring cases involved relatively simple capital structures. Obviously, those days are long gone.

Over the last decade, through the growth in securitization and in trading of risk layers, many troubled companies now have complex capital structures and even more complex debt ownership issues.

Welcome to the era of tranche warfare, where the combination of contractual legal rights, bankruptcy law, and debt holder negotiating skill will determine the winners and losers in a given battle.

Although the majority of the early wars have been occurring in real estate matters (one example of which is well described in a recent Wall Street Journal article regarding the John Hancock Tower in Boston), versions of tranche warfare will also be playing out in non real estate distressed situations.

So here is the relevant question for this blog:

who are the professionals who will quickly carve out a name for themselves as being the best at tranche warfare?

Will this be exclusively the turf of lawyers, or will some investment bankers become the "go to" resource for holders of paper?

Fortunes will be made...and lost...playing the high stakes game of tranche warfare. Professional reputations will be made...and presumably lost...in these high stakes games.

Certainly not your father's Oldsmobile.

Change represents such great opportunities for the astute, who are also agile.

The Current Buy Sell Gap in Distressed Assets

I recently spent time in Vegas (at the TMA Distressed Investment Conference covered in earlier posts) and in South Florida. In both locations, I continue to marvel at the "trophy" properties sitting empty or near empty, and to think about how these distressed assets....and many more across the country...will get worked out. And, even more importantly for this blog, which professionals will take the lead in getting these assets worked out.

My sense is that there is still a significant gap between what most savvy distressed investors are willing to pay and what most sellers are willing to accept. The latter seem to still be thinking about ranges of discounts from what they have invested. Some potential buyers are excited about big discounts from recent investment levels, but the savvy ones understand discounted cash flow ("DCF") and are basing their decisions on DCF analysis.

If one assumes that this downturn will be long, DCF analysis gets interesting. If an asset (real estate or operating company) is likely to generate negative cash flow until the overall economy turns up (say three or four years), then the DCF for many distressed assets will be amazingly close to zero...or in some cases even less than zero...because of the way that DCF weighs the earliest years! Less than zero DCF suggests, of course, that the lender should pay the buyer just to be freed up from carrying cost burden. Ouch!!!

A trophy that cost a billion dollars within the last year or two, now could well really be worth close to nothing. Now there is a huge discount!

Most lenders and investors are not going to be able to take the accounting impacts of such reality on very many assets, any too quickly, less they expose just how precarious their own financial position is.

So, for the near term, we are likely to see a whole lot of dancing going on between potential buyers and potential sellers, with relatively few deals consummated.

But, this is not some investment advisory letter...my focus is on the Restructuring process and who will be the firms that read best this new playing field and position themselves to be market leaders for these very different times.

Change presents such great opportunities for those who shed the blinders of what has worked well in past downturns and fashion winning strategies for this downturn.