"The Buck Stops at the CEO"

A company gets into trouble because of its leader, says turnaround guru Tony Alvarez. And sometimes, Chapter 11 is the only way out

Tony Alvarez II and Bryan Marsal are widely regarded as the dynamic duo of corporate turnarounds. Since co-founding consultancy Alvarez & Marsal 20 years ago, they have managed to save or salvage value in companies such as Timex, Arthur Andersen, Warnaco, and, most recently, HealthSouth. New York City-based Alvarez & Marsal now has about 100 active clients and 220 employees worldwide. Alvarez is running the day-to-day operations, while Marsal is busy as chief restructuring officer (CRO) at HealthSouth (see BW Online, 11/7/03, "HealthSouth Takes a Turn for the Better").

Earlier this year, Alvarez finished up a two-year stint at apparel giant Warnaco, where he acted as CEO from November, 2001, to April, 2003. With $2.4 billion in debt, a series of legal wrangles, and management problems, Warnaco filed for bankruptcy soon after he arrived. It has since emerged with minimal debt, reorganized operations, and a far more stable earnings picture. BusinessWeek Associate Editor Diane Brady recently met with Alvarez to discuss his experiences and why so many companies continue to implode. Edited excerpts of their conversation follow:

Q: How bad were things when you first went to Warnaco (WRNC )?

A:

When I came in, the chief problem was liquidity. The company was about to hit the wall. The vendors were very insecure and wanted faster terms. There was a heavy debt service on the company. It was clear that there would either be a major sale of an asset or a major refinancing. I immediately advised them to put together a contingency plan of filing Chapter 11, as it was the only way they were going to get cash.

Q: Is Chapter 11 generally to be avoided at all costs?

A:

The main reason to file for Chapter 11 is if it's the only way you can get money. In America, we have this wonderful thing where you go into Chapter 11 and all the prior creditors are stayed. Even though you gave security before, the new money coming in trumps that -- it has a preference over all other money that has come in.

Europe doesn't have that, which is why they have trouble rehabilitating companies. Over there, you either fix it or you die. They have trouble with the notion of new money coming in on a superprotected basis. But no one will lend money if their position as a creditor is the same as [those who lent] the $2 billion that went before them. Another 10% to 20% of companies that file for Chapter 11 are trying to avoid a lawsuit.

Other than those two reasons, you ought to really avoid Chapter 11 because it's very expensive and requires a lot of things that cost money, such as professional help. It comes at a cost to employees and customers. You take that risk when it's the only way to get blood to the patient.

Q: Your partner, Bryan Marsal, is currently involved with HealthSouth (HLSH ), and you spent two years at Warnaco. How do you decide when each of you needs to get personally involved?

A:

There are some situations where people ask for one of the two of us. But we have about 100 cases right now. Bryan is good for one, and I'm running the firm. We take turns. When I was on Warnaco, he ran the firm. Now he's on HealthSouth. Sometimes we overlap, but we try to have someone watching the store.

Q: Do you think you complement each other?

A:

I tell people that I have two wives. Bryan and I have been together in work situations for 25 years.

Q: How do you decide when to get involved in a company?

A:

We reject some cases that come our way. We meet the company and learn about the industry. But the judgments are more around the players -- the boards, the CEOs, the creditors. You have to negotiate the role that you'll play.

At Warnaco, I came in as a chief restructuring officer. Linda [Wachner, the former CEO] brought me in. She was already under extreme pressure from creditors to supplement the management. From the day that I walked in there, that board was extremely supportive. They were the ones who made the decision to make me CEO.

Q: Did you feel a need to take over the whole company in order to save it?

A:

The first four months, I was committed to making Linda successful. When we come in as CRO, we deal with the creditors, the financing, the restructuring. The idea is to insulate the CEO so they can focus on whatever fundamental problems there are with the business. You try very hard to be a teammate.

But there came a time when it was increasingly difficult. The business was deteriorating from a combination of factors, including September 11 and previous legal problems. The board felt it needed a fresh leader.

Q: What was the high point?

A:

It was right after I took over as CEO. The first 60 or 90 days, the speed with which we were able to change behavior was great. It told me there were fundamentally good brands. There was a good cadre of hard-working, dedicated people. I'm not going to bash Linda. She was hot for many years. She's very charismatic. She fills a room. She's also a very hands-on manager. That's terrific -- until you become too big.

Q: What was a low point in your career?

A:

I was brought in to Phar-Mor [a chain of discount drugstores]. The day I came in, all the top guys were fired. That was tough. The creditors were telling me this was unfixable. How could Phar-Mor sell at the price of Wal-Mart (WMT ) and still make money? The answer was: They cheated. [Both COO Michael Monus and CFO Patrick Finn were convicted for financial misconduct.] I didn't want to give up. I said I would shut down a lot of the stores and raise prices. In the end, we made money.

Q: Do you take equity stakes in the companies you work with?

A:

Sometimes. In this case, we did.

Q: Why do you think we've been seeing so many high-profile implosions of companies?

A:

I haven't studied the issue but, in the last 10 years, a lot of megacompanies have been born. If you had 20 companies, there were maybe three bad apples. Now that there are seven, there's one bad apple, and it's worth $3 billion. We've seen a lot of acquisitions, and it can be easier to hide the health of a company when you have a lot of acquisitions.

Human nature will never change. Give us five years where there are no headlines, and, trust me, there will be scandals again. Right now, boards are paying more attention, and due diligence is tougher.

Q: There are new accounting rules in place.

A:

Accounting isn't a science. Never has been. Give me [a] rule, and there will be a tax attorney to tell you how to minimize the rule.

Q: Do you find commonalities in terms of how companies get into trouble?

A:

All companies are admired [while they're growing]. There's a period of success that leads to growth, but there's often a tenuous foundation to the house that's being built. [For example] managers that were good at one division are awful at managing 13. The infrastructure can't handle it. They're trying to catch up.

Most of the companies we're reading about today have grown through acquisitions. The acquisitions buy time. They get more money [from acquired companies]. That buys more time. And then it starts to fall apart. Hubris is often part of it [and] an appetite for risk. Nobody is telling the top guy that the railroad is going too fast. In most well-run companies, there's usually a marriage -- a CFO, COO, or some other person who acts as a reality check on the top guy.

At the end of the day, the buck stops at the CEO. It's not the force of history [that gets companies into trouble], it's the leader.

Q: Have you ever been tempted to stay on as CEO, or even run a big company for more than two or three years?

A:

You're either broken, you're running in place, or you're growing.... I like to grow things, and I like to fix them. I'm a blessed man. At A&M, I'm growing the business. I can be patient. I can nurture the business. Then I can go into a company to fix things. I get to do both. That's pretty fun.

At our firm, we're growing slowly but surely -- organically. It can be tempting to do rollups, but that's not the way we want to grow.

Q: Do you like the constant stress of being under the gun?

A:

You know what stress is? My wife being ill, my son being ill, or someone dying. This is just a problem to be solved. When my wife and I are fighting, that's stressful. This stuff isn't stressful -- it's fun. I'm a happy man.

Edited by Patricia O'Connell

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