July, 2006 Flashwire Interview with
Edward Story, Managing Partner, IRONWOOD ADVISORY LLC
IRONWOOD ADVISORY has thirty consultants, mostly in southern California, and some in other parts of the U.S. who focus upon “transition management” (www.ironwoodadvisory.com). Ironwood professionals assist management or directly manage the overcoming of difficulties in moving a company from one stage to another higher or healthier position. Ironwood’s focus is on companies which have encountered difficulties and need help in overcoming them such as an early stage company encountering a ‘plateau’ in growth and desiring an injection of new thought, new money or even additional interim or long term management. Transition management also covers the traditional areas of corporate restructuring, “turnaround” and crisis management.
Ironwood’s professionals include mostly senior executives who have decades of experience as CEOs, COOs, CFOs. Among the firm’s professionals there is experience in over thirty five industries.
Q: In such a competitive market, are you finding distressed companies more valuable now?
A: It depends heavily on the industry and the particular circumstances of the distressed company. For supplier companies dominated by very large ultimate manufacturers – think aerospace – there is a consolidation going on giving the advantage to the company doing the “rolling up,” be it the ultimate manufacturer or parties wishing to counter the ultimate manufacturers’ negotiating powers. However, companies finding themselves in a position of having to sell can still command a good price if their intellectual property is recognized as unique or their operational efficiency provides competitive advantage.
Q: How often are you involved with public companies?
A: It happens, but for us it is more likely privately held companies.
Q: When do you usually get involved with a company?
A: Often later than is optimal. It is usual for management or other stakeholders to call in outside experts when the situation – whatever it may be – has escalated to the point that either management feels it is beyond its capacity or the stakeholders feel it is beyond management’s capacity either in terms of expertise or simple time and brainpower devoted to the challenge.
For turnarounds, it is often the case that we are brought in late in the game. Sometimes bankruptcy looms and is the trigger for bringing in outside help. We tend to be brought in earlier – and the earlier generally the better – by stakeholders such as the Board of Directors, the lead bank, or investors than we do by management.
For early stage companies we are more likely to be brought in earlier as management will likely view us as extensions of themselves and as enhancing their positions.
Q: How common is it to plan for acquisitions as a part of the turnaround process? What about spin-offs?
A: Companies in the throes of a turnaround are most likely husbanding cash and the attention is focused on ‘righting the ship’ rather than increasing the fleet! The focus is on the key variables in the company – how these have been affected and how these variables (such as marketplace, margin, distribution, brand, etc.) can be brought into line to help in a recovery. In crisis situations there is substantial focus upon negotiating for time with lenders, creditors and, perhaps, investors. All of this leaves little attention span for acquisitions.
However, it is entirely possible that to raise cash there may be a sale of assets including spin-offs of an operating division or a product line.
And in the ultimate spin-off there may well be a sale of the company (or its assets) if it cannot be turned around fast enough for the liking of creditors or investors.
Q: Are most of the companies you're dealing with trying to spiff up for a sale, or keep existing ownership?
A: Almost invariably the companies we are dealing with are interested in maintaining current ownership. To the extent to which additional ownership is sought, it will more than likely be non-controlling ownership that is sought.
Q: Could you give me an example of some issues you've recently worked on for a company?
A: In early stage or temporarily stymied companies – those on a ‘plateau’ and not growing as fast as the management would like – for these companies there is often some form of business plan or business modeling and planning required. Staid and even academic as it may sound, we often find that there is no coherent business plan and that a lot of the work to be done can be done by experienced executives working with management to model the growth of the company.
Specific issues may involve how to acquire a strategic partner, how to approach another market or better mine the current one, development of brand, development and protection of intellectual property, financing growth, and more.
In turnaround or restructuring and crisis management situations there is a lot of negotiation and re-negotiation, efforts to liquefy receivables and to delay payables, refinancing of inventory, adjusting the terms on leases or other contracts to buy time and husband cash. Simultaneously, we help management plan a more ideal structure for the company – that is the people, the markets, the financial structure, etc – that, in the managements’ minds and our minds, will be sustainable and have growth potential.
Hopefully this can be done without interference by the courts. However, should the company’s situation have deteriorated to the point of bankruptcy or incipient bankruptcy then we will work with bankruptcy attorneys to protect the company to the extent afforded by law and, perhaps, restructure it under the protection of Chapter 11 proceedings.
Q: How would you characterize the distressed debt market right now?
A: There is money available. DIP (debtor in possession) financing provides lenders with relatively secure loan opportunities and good yields. There are some banks and lending institutions that specialize in providing distressed loans; for other institutions this is not a priority.
If Ben Bernanke moves interest rates up on a continuing basis there will be more distressed companies and more DIP loans in the offing – and more business for the turnaround activities of Ironwood!
Q: Why bring in outsiders to turn a company around? Why not use existing management?
A: In many cases it is simply an issue of management not having the horsepower – not enough heads to devote to burgeoning or potentially out-of-control challenges – and sending in additional cavalry can be the saving grace.
In other cases, specialized expertise involving a team of experienced managers and attorneys can save a company from the trough of bankruptcy or, at least -- to mix metaphors – ease it over that yawning crevasse in a safe manner.
In still other cases, the management has exceeded its level of expertise or capacity and we substantially augment management or replace it by direction of the Boards of Directors or dissatisfied investors or otherwise critical stakeholders. In rare situations this can occur due to internal company fraud or malfeasance. Lenders may bring us in but by way of a “beauty contest” whereby the lender will agree to “forbear” on debt payments only if the management selects us or another firm from two or three firms named by the lender to help it in digging out of its hole.
At minimum, a fresh look by experienced eyes is key. Often management is well intentioned and has specific industry experience that is valuable. We try not to replace management except in the most dire or egregious situations. Our role is more likely as consultants than as interim management although we do play the interim management card often for project management to augment a company’s operations.
Q: Do you believe in autocratic management during a turnaround?
A: If we are brought in to replace management it is usually in critical situations. The company may be imploding for any of a number of circumstances and that requires rapid decision making. Just as for the military, in a battlefield, commanders must rely upon rapid compliance with orders. Although personal life and death may not be at stake in a business turnaround, certainly the company’s life or death and the life and death of many jobs are likely at stake. So, yes, a certain amount of autocratic command and immediate response may be part of what is needed.
We should not overlook, however, the fact that the turnaround of a company is very dependent upon multiple parties both those who have likely developed a certain antagonism for the company (creditors, vendors and even customers) and those parties who are working together, we hope, to bring about the restructuring. So, although certain decisions must be made rapidly and executed quickly, planning for what the eventual company structure should look like and the strategy of how to get there will involve collaboration with numerous parties: existing management, key stakeholders, attorneys, lenders, investors, particular financial experts and more.
Q: What are the common issues you find in companies needing your assistance?
A: Almost everyone either needs or thinks they need money! More money appears to be the panacea in the minds of most management: “If we only had – you name the number – we could do X, Y and Z.” Frequently that IS the case. And frequently, it is not the whole story. Usually there are more issues and sometimes, not always, of course, the objectives can be met without an injection of new funding.
We often encounter a displacement from market. This is increasingly the case with manufacturing firms competing with overseas sourcing. In these cases, we have experts who can analyze and usually adjust the manufacturing operations to lower price points and keep quality level or improve quality. If this does not solve a price point problem, we have direct links to outsource through facilities in Southeast Asia, China, India, Latin America and Canada. Or we can work with the company to develop new markets given the capacities it has at hand.
Other issues we encounter in companies is an over-leveraged balance sheet. All business problems have some element of the financial – financial issues are at least the clues to difficulties in a company. Sometimes these difficulties are truly financial in the sense that the solutions are restructuring the balance sheet and sometimes the financial clues lead to operational difficulties or loss of market share in which cases we concentrate primarily on those areas in order to fix the company.
Q: What is your estimate of the level of deal prices?
A: Deal prices are still high and the people we encounter are beginning to talk about these prices being too high historically. With an analogy to the real estate market or the stock market, holders of equity in privately held companies – i.e. business owners – might want to look seriously at their timing for exit and the probability that their expected growth can offset any potential decline in the M&A market over the next couple years. Ironwood is well positioned to help with that analysis as well as to assist in the tweaking of the firm to maximize its value at the right time for the owners.