Most companies suffer a crisis at some point in their existence. These moments can offer bold investors a great opportunity to buy a valuable asset very cheaply. But if such corporate rescues are to succeed, they need exceptional managers and a radical agenda. The intensity and urgency of effort required makes fixing troubled businesses an all-consuming endeavour, and not many executives are equipped for the role.
Businesses generally go wrong because they don’t adapt to changing conditions. They lose market share because of new competitors, or changing customer tastes, or shifts in technology; they generate no cash and suffer a liquidity squeeze; they diversify and lose focus on the core business; they suffer a catastrophe such as a fire, flood, fraud, or customer bankruptcy; they overtrade; they have poor financial controls; they allow overheads to expand too fast — or any combination of the above.
The best company doctors can swiftly diagnose the problems in a troubled company. Symptoms include stretched creditors, litigation, slow-moving and overvalued stock, a deteriorating credit rating, unhappy lenders, late management accounts, and a qualified audit report.
In my experience, the managers of a business in distress are normally in denial about the gravity of the situation and unwilling to carry out the necessary surgery to cure the sickness. Consequently, the leadership almost always has to be replaced.
How do the experts bring declining firms back to life? First they analyse the problems, and then they rapidly produce a plan — which they execute with vigour. It will probably include many of the following elements: selling or shutting loss-making divisions; raising cash wherever possible; arranging standstill agreements with lenders and suppliers; cutting costs ferociously and continuously, and eliminating all unnecessary overheads; increasing prices if feasible; reducing stock; collecting debtors more vigorously; and obliging management to shape up or ship out.
I have tackled a handful of turnarounds over the past few decades. Some went well, and one or two were disasters. By their nature they are high risk: taking on a failing business will always be much more of a challenge than acquiring a stable operation.
The most hazardous ventures are those where the company is suffering from structural rather than cyclical threats. For example, I bought Borders bookshops hoping to revive the retailer, but did not realise that the business model was broken, thanks to the rise of Amazon, ebooks and supermarkets selling books. It was a similar tale for Kodak, unable to reinvent itself for the digital age having established itself as a silver halide film maker.
By contrast, the best turnarounds are those when a superficial setback has temporarily laid low a good business. In 1992, Pizza Express was losing money but the underlying fundamentals were sound. The brand was a sleeping giant waiting to be exploited. We were fortunate enough to be able to buy at its nadir, and saw its value rise at least 20-fold over the next five years.
When a business goes bust and shuts down, society looks for someone to blame. So the closure of Monarch Airlines put Greybull Capital, its principal backer, in the frame. They have tackled a number of turnarounds that have not prospered, including Comet electrical stores, M Local convenience stores and Rileys snooker halls, although various steel assets bought from Tata may prove a good bet. But if Monarch had not been bought by Greybull in 2014, it may well have gone broke even earlier. Nevertheless, the Meyohas and Perlhagen families behind Greybull must now realise, even if they did not before, that it is not just cash at risk in turnarounds — reputations can also get battered.
A turnaround specialist who knows this harsh truth is Jon Moulton of Better Capital. He was heavily criticised over the collapse of City Link in 2014, but he has enjoyed some big winners, too. In June he sold Gardner Aerospace for £326m, making a sevenfold return on its original cost. Another turnaround firm, accused by a parliamentary select committee of “lining its own pockets” at the expense of the employee pension scheme, is Rutland Partners, which attempted to save the Bernard Matthews turkey business. It was eventually sold to 2 Sisters through an insolvency process. Again, overall, Rutland actually has a pretty good record of revivals, including Pizza Hut and Edinburgh Woollen Mill.
To undertake a turnaround requires a certain type of personality: unsentimental, sceptical, decisive, tough, financially focused and self-confident. I am delighted to see a new team appointed at the ailing parcel delivery business DX. They possess plenty of these traits and an excellent track record, with unrivalled domain knowledge. If anyone can address the difficulties at DX, they can.
And if all else fails, get out — or claim victory and retreat, as senator George Aiken advised over the Vietnam War.