Distressed Investing Conference #3

January 27, 2009

During one of the most interesting panels of the conference, Mike Heisley, a self-made billionaire according to Forbes, made an incredibly important point about the management skills required of a CEO running a distressed businesses.

He said that there is a huge difference between “managing” and “managing a distressed business” and that the latter requires a

  • Different psychology
  • Different temperament
  • Different experience

I could not agree more. Why?

  • In my experience, leading a turnaround requires being a combination of general on the battlefield, teacher, psychologist, negotiator and camp counselor. Being able to make on-the-spot decisions and to “rally the troops” may spell the difference between success and failure.
  • Decision-making time lines are dramatically compressed. Decisions that would take weeks, months or years in a “normal” company may have to be made in minutes, hours or weeks in a troubled company. There simply is no time to do otherwise.
  • The patient is in the emergency room, so saving the company takes priority over everything else other than legal and ethical considerations–because most stakeholders will be worse off if the company folds. As a result, the turnaround CEO has to make tough calls–quickly.

I’ve seen managers who think that they have “turned around” a division fail spectacularly when they find themselves running troubled companies because

  • They were used to having effective systems and procedures in place rather than having to create them
  • They were used to being able to have HR recruit the creme de la creme at competitive salaries rather than having to work with most of the people who were already in place, regardless of their skill sets
  • They didn’t have to worry about whether they would be able to pay payroll or vendors–They knew that cash would be available
  • They did not have to worry about being placed on credit hold or C.O.D. and facing the possibility of not having materials necessary to production

Do you remember the opening scene in Saving Private Ryan? That’s exactly how it feels in the early days of a “real” turnaround, but without the physical danger (although I have had nails put into tires and had an employee try to attack me physically). If you don’t remember the scene, rent the movie. It will be an eye-opener.

Firms and individuals investing in distressed companies will be well served by following Heisley’s admonition.