A Conversation with Carter Pate, Co-author of
The Phoenix Effect

Carter Pate is a world-renowned restructuring expert at PricewaterhouseCoopers with more than twenty years experience providing strategic consulting and implementation strategies. He is the co-author of The Phoenix Effect - 9 Revitalizing Strategies No Business Can Do Without (John Wiley & Sons; 2002).

You call yourself a restructuring expert. What exactly is it that you do?

I come in when a company is in a significant downward trend - when there have been three straight quarters of negative earnings, bond downgrades, plummeting stock prices, loss of creditor confidence, and angry shareholders. I quickly size up the situation, and immediately implement a plan to restructure the capital structure, before creditors bail.

What is the Phoenix Effect?

It's an immediate way to bring a corporation from near ruin to rebound. By identifying the signs of trouble, and responding quickly, even the worst financial situations can be resolved. Corporate decision makers can reorient their business, manage scale, handle debt, and get far more from assets, employees and products.

How does today's corporate shakeout compare to earlier recessions? Is anything different going on?

The growth of the high-yield bonds and debt during the 1990s has created much more troubled debt and more distressed companies than in the previous recession. Ten years ago, creditors were willing to work out a debt structure, now creditors are bailing out on companies more easily and frequently , and pushing for asset sales at the first chance. This means that any company in trouble has to be addressing problems immediately, because the chances of survival are far lower than the last recession.

How can a seriously troubled company avoid liquidation and accomplish a turnaround?

In today's environment, speed is of the essence. There are three basic steps: restructure, renegotiate, or merge. You restructure to extend debt repayments or change the debt composition by converting one type of liability to another. You renegotiate agreements with partners or creditors to reflect your changed circumstances. And in many cases, you look to merge with another company that can bring you more financial stability.

What is your biggest goal in a restructuring?

To establish credibility with creditors and to convince them that patience and cooperation will maximize investment return. Many companies today are besieged with excessive debt.

What do you do when things start getting ugly with creditors?

As I mentioned, creditors are far more likely in the current environment to want to bail. To convince them not to do so, you need to make sure you have a restructuring plan that benefits all stakeholders, you need to construct a realistic scenario for the company's future performance, and you need to put a talented team in place. This helps ward off vulture investors and can encourage creditors to become long-term stakeholders who are willing to wait for a fair return on their original investment. Easier said than done.

How exactly can you restructure to make creditors become stakeholders in your company?

The most common way is to exchange your existing vendor debt for new equity shares. But never give away too much control of your company to creditors or they may try to sell your assets or engage in a merger. A second way is to entice new investors with special preference equity shares: either a discount price or an option to buy more stock later at a fixed price, or shares that pay cash interest now and can later be converted into regular stock. Lastly, contingent restructuring can link debt repayment to specific financial events such as the sale of an asset or a positive cash flow quarter. The toughest moment must be the negotiations with creditors.

What's your secret for negotiating the best possible deal?

Credibility. Persuade them that you've taken all the obvious first steps and have beat creditors to the basics of cost cutting and sale of expendable assets.

Get across that the bank needs the management team to guide the restructuring.

And strike the right balance to earn creditors trust and so they don't think you are too aggressive and self-serving.

What sets today's corporate renewal strategies apart from the "downsizing" of the eighties?

The days when you turn a company around by just slashing the number of employees are over. We've discovered through experience that it's never that simple. Employees are usually a company's most valuable asset. That doesn't mean that lay-offs aren't necessary, but they must be done quickly and with prudence.

Certainly many companies have bungled layoffs. In the book you say there is a right and a wrong way to handle layoffs. Can you share one of the many layoff tips from the book with us?

Most people think Friday is the best time for layoffs, but I always recommend Monday morning. A Friday layoff leaves your employee with two days of unstructured time that can't be spent on a new job search. And the remaining employees will be unsettled all weekend having had no opportunity to ask questions and process the changes. After you've conducted the layoffs in the morning, call a meeting for Monday afternoon to present the financial data explaining why the layoffs were necessary and how the saved costs will help put the company back on course.

So you've told us how to fix companies in big trouble, but how did these companies get to this point in the first place? The past year brought five corporate bankruptcy filings that made the list of 15 largest Chapter 11 filings of all times. Why are so many companies failing right now? Is it more than the recession?

There are a lot of companies today that have been investing in untested business plans: they have assets that are worth far less than what was paid for them. Much of this stemmed from management's inability to face a new economic picture and take fast action. These are companies that are going to fail. However, healthy companies don't fail because they are victims of a bad economy. Healthy companies with strong fundamentals can ride out a recession.

What's preventing managers from taking appropriate action?

Number one: Denial. Few things are harder than admitting to yourself, your board and your shareholders that your own strategy is failing and its time to try something new. And two, neglecting the nuts and bolts of the company. It's essential that you keep a watchful eye on four key factors of your business operations, they are:

  1. debt-to-equity ratio;
  2. market share;
  3. cash flow; and
  4. resignations of key-personnel or morale issues.

What are the most common mistakes made by managers that could send their company off the cliff into bankruptcy?

Managers in trouble often try to expand into a new business when they really should be shedding one. They neglect their own assets where there are unrecognized sources of wealth. They produce the wrong product at the wrong time. And they miss out on process improvement opportunities. All of these can be fatal mistakes in troubled times.

Any closing comments you would like to get across?

That America is built on comebacks, on second chances. It is the one culture where nearly every failure gets another crack at success. No matter how bleak things look, never say never.


Carter Pate is a world-renowned restructuring expert at PricewaterhouseCoopers with more than twenty years experience providing strategic consulting and implementation strategies. He has served as both CEO and Chairman of several public companies and advisor to companies including Ericsson Corp, Crown Books, K-Mart, and NeoStar Retail Group, and was a founding partner of Pate, Winters & Stone, a national consulting firm. Mr. Pate received his B.S. in Accounting from Greensboro College, Greensboro, N.C., and is a past member of its Board of Trustees. Mr. Pate is a contributing author to Workouts and Turnarounds II, published in 1999 by John Wiley & Sons, Inc.

The Phoenix Effect The Phoenix Effect
9 Revitalizing Strategies No Business Can Do Without

by Carter Pate and Harlan Platt
John Wiley & Sons
2002

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