The Shredder

Did CEO Dunlap save Scott Paper-or just pretty it up?

Albert J. Dunlap had just completed the biggest deal of his life. On Dec. 12, Scott Paper Co. shareholders approved his $9.4 billion merger with Kimberly-Clark Corp. amid cheers at Florida's luxurious Boca Raton Resort & Club. "It was almost like a rock concert," says "Chainsaw Al," as he is known to detractors and friends alike. Rather than pop the cork on a bottle of champagne, however, Dunlap went home to his wife, Judy, for what he describes as a "quiet and pensive" evening. "It was a bit of an empty feeling for me," he says. "There was this hollowness there. It was like part of me was gone."

Investors and Wall Street analysts did plenty of celebrating, though. The deal created a $12 billion global consumer-products company. And it represented a professional triumph for Scott Chairman and CEO Dunlap, who has won widespread plaudits for transforming Scott from a stodgy, tired underperformer into a profit powerhouse. Under his leadership, Scott's stock rose 225%, adding $6.3 billion in value to the company. The latest numbers for the world's largest maker of tissue products left nearly everyone dazzled: Thanks to hefty price hikes and deep cost-cutting, third-quarter earnings more than doubled, to a record $155.4 million, surpassing even the rosy expectations of Wall Street.

"WAKE-UP CALL." Dunlap is hardly demure about what he has wrought. "The Scott story will go down in the annals of American business history as one of the most successful, quickest turnarounds ever," he says. "It makes other turnarounds pale by comparison." In the process, Dunlap transformed himself into a high-profile business leader and outspoken champion of the shareholder. "He has been a wake-up call to a lot of CEOs, and he has been good for American business," says Wayne R. Sanders, chairman of Kimberly-Clark.

Little known before his arrival at Scott in April, 1994, the 58-year-old Dunlap has garnered widespread attention and acclaim in the media. He now speaks before MBA students at Wharton and Harvard business schools, and a ghostwriter is hard at work on his autobiography. Headhunters canvas the boards of other sleepy companies that need to be, as Dunlap so willingly puts it, "Dunlapped."

Much as his brief tenure at Scott did for Dunlap's reputation, it did more for his personal worth. After less than two years' work, Dunlap walked away with nearly $100 million in salary, bonus, stock gains, and other perks. Kimberly-Clark had agreed to pay Dunlap and a corps of his loyal lieutenants an extraordinary $41 million in the most lucrative noncompete agreement ever crafted in American business. Dunlap alone got $20 million in exchange for his agreement not to work for a rival for five years, while five senior executives pocketed $4.2 million each.

But critics inside and outside Scott say Dunlap is leaving the company in a much less healthy position than he claims. While it is reporting record profits and while investors have reaped big gains, Scott is losing U.S. market share in its three major product fields: paper towels, bathroom tissue, and facial tissue (table, page 58). Dunlap maintains the numbers are "distorted" because he weeded out numerous unprofitable products. Yet sales numbers in the U.S., according to an independent research firm, are down in such key brands as Cottonelle bath tissue, Scotties facial tissue, and the renamed Scott Clean paper towels. In Britain, an important overseas market, Scott's share in toilet paper has fallen from 31.5% to 26.4% in the past two years, according to A.C. Nielsen Co.

Former execs say that's partly because Dunlap cut plenty of muscle along with the fat--pumping up short-term results at the expense of long-term health. More than 11,000 people--71% of headquarters staff, 50% of the managers, and 20% of hourly workers--saw their jobs eliminated under Dunlap. At the same time, he slashed spending on research and development and staff training. These former executives believe the deep cuts in both workforce and long-term investment will make it hard for Kimberly to achieve the full $600 million in "synergies and cost reductions" that Wall Street is expecting from the combined companies.

What galls many former executives, employees, and union leaders is their belief that Dunlap and his team took credit for improvements that had been in the works for months, if not years. Scott's board of directors began to consider the $1.6 billion sale of publishing papermaker S.D. Warren Co.--which Dunlap himself calls "the linchpin of my strategy"--in the spring of 1993, a full year before Dunlap arrived. A modern tissue mill in Owensboro, Ky., that Dunlap opened with great fanfare last May had been under way since 1990, when managers selected the site. Several of the new products that Dunlap's team claims responsibility for are the result of years of effort by ousted staffers. Even many of the employee layoffs had already been approved by Scott before Dunlap came on board. Counters Dunlap: "It's one thing to make an announcement. It's another to actually do it."

BROKEN PLEDGE. Then there are the human and social costs of Dunlap's tenure. Besides the thousands of employees laid off, many more were cut loose after Scott sold various pieces of itself. Several communities have lost a generous corporate citizen--especially in the Philadelphia area, where the company was headquartered from its founding in 1879 until last year. Before moving the world headquarters to Boca Raton, Fla.--just after he bought a $1.8 million house there--Dunlap also eliminated all corporate gifts to charities, even reneging on the final $50,000 payment of a $250,000 pledge to the Philadelphia Museum of Art.

The debate over what a company owes its shareholders and what it owes its stakeholders--the people who work for it and the communities in which it operates--is a long-running one, of course. But rarely have the issues been placed in such stark relief as at Scott. Because Dunlap openly revels in his "Chainsaw" sobriquet and loudly trumpets his slashing tactics, he is helping change the norms of acceptable corporate behavior, argues Peter D. Cappelli, chairman of the management department at Wharton. "He is persuading others that shareholder value is the be-all and end-all," says Cappelli. "But Dunlap didn't create value. He redistributed income from the employees and the community to the shareholders."

There's no question that before Dunlap's arrival on Apr. 19, 1994, Scott Paper was a prime example of a moribund bureaucracy. Founded by brothers Irvin and Clarence Scott, it was the first to market rolls of tissue for use as toilet paper. Over the years, Scott became the world's largest supplier of toilet tissue, paper napkins, and paper towels: Sales grew to $5.4 billion in some 20 countries by 1990. But tough competition from rivals such as Procter & Gamble Co. began to erode profit margins as early as the 1960s. And like many old-line American companies, Scott was slow to react.

Enter Dunlap. A West Point graduate and former paratrooper, he has made a career out of being aggressive and decisive. By his count, Dunlap has turned around eight ailing companies. In the early 1980s, he worked his magic on a badly troubled Lily-Tulip Inc. by firing half of headquarters staff and 26% of salaried employees. Then he helped Sir James Goldsmith turn around his U.S. operations. Dunlap got the nickname "Chainsaw" from a Goldsmith friend who admired Dunlap's ability to cut fat from bloated companies.

When Scott's board of directors was looking for a replacement for Chairman and CEO Philip E. Lippincott, Dunlap was in retirement. He had quit a job in Australia after two years as managing director of Consolidated Press Holdings Ltd., the TV and magazine empire owned by billionaire Kerry Packer. The board's decision to hire Dunlap, Scott's first outside CEO, was made with the expectation of quick action.

The board got more than it bargained for. Dunlap brought a leveraged-buyout mind-set to Scott: slashing expenses, ditching assets, and paring debt. He showed his impatience with old-fashioned notions of corporate behavior. Touring a Scott plant, Dunlap asked an employee how long he had worked there. The worker, recalls a colleague, proudly replied that he was a 30-year veteran. "Why would you stay with a company for 30 years?" asked Dunlap incredulously.

"BEACHED WHALE." Within two months of his arrival, he wrote a brutal prescription for Scott. There would be major changes in management, a restructuring that would eliminate 35% of the employees, outright sales of units unrelated to Scott's core tissue business, and a new strategy for the future. "Scott was a beached whale," he says, noting that it had lost market share for four years in a row, lost $277 million the year before he arrived, and had seen its credit standing deteriorate. "People have to understand that I didn't create the problem."

While Dunlap's cuts went far and deep, he told employees that his goal was to reinvest in the business and fashion a clear vision for the future. But many survivors say it soon became clear he was interested in selling out. "At the employee meetings, he spoke about building the company," recalls a former marketing executive. "But by the end of 1994, it just became a volume-driven plan to pretty up the place for sale."

Dunlap bristles at the charge. "That's pure bullshit," he says, ticking off a list of achievements during his time at Scott: It introduced 107 new products last year, signed its first joint ventures in China, India, and Indonesia, and redesigned its packaging worldwide. "It has nothing to do with the short term," he says. "What I've turned over to Kimberly-Clark is a corporation with a laid-out strategy, new products, and new facilities." Kimberly-Clark's Sanders has no doubts about the deal. A spokesperson says the merger gives Kimberly far greater reach around the world in a broader range of products. "Now we have a stable of some of the best-known brands in the world," says Tina S. Barry, a Kimberly-Clark vice-president.

But of those 107 new products Dunlap points to, nearly half are accounted for by changes in packaging of a single product and the upgrading of another. Marketing chief Richard R.

Nicolosi concedes that Scott counts as 22 "new products" the repackaging of Scott Clean paper towels in 22 countries. Another 22 come from upgrading its basic Baby Fresh wet wipes to a thicker, quilted product in those same 22 countries.

Dunlap's boasts about signing joint-production agreements in China, India, and Indonesia also rankle the former executives who laid the groundwork for those initiatives years earlier. The foundation for the joint agreement to produce tissue paper with Shanghai Paper Co. in China, for example, was laid in 1988, when Scott bought a small outfit in Hong Kong, according to a former executive.

Even Dunlap's rhetoric about layoffs doesn't quite match reality. Many of the employee cuts had been approved by Scott's board under Lippincott. "The cutbacks on the hourly side had been agreed to before Dunlap ever came into the picture," says Donald L. Langham, international vice-president for the United Paperworkers Union. "He just rushed up the process."

It's also clear that Dunlap and his top aides began exploring the possibility of selling Scott within months of their arrival. Merger documents filed with the Securities & Exchange Commission show that Salomon Brothers Inc. had been retained in "late 1994" to begin shopping the company. By December and January, Salomon had already identified two dozen potential acquisitors, including Kimberly-Clark.

Beginning in late 1994, former managers say, Dunlap's team began making moves that suggested their time horizons weren't very long. Scott's R&D budget was slashed in half, to about $35 million, and 60% of the staffers in R&D were eliminated. At Nicolosi's behest, the marketing department began weekly volume forecasts, up from monthly reports. "We're talking about a whole new definition of short term," says a former Scott marketer.

The cost-cutters didn't go after just R&D. They also forbade managers from being involved in community activities because that would take away from their business duties. They banned memberships in industry organizations that allowed managers to network with competitors. They also scrapped a yearly event at which Scott met with its leading suppliers to improve relationships and get better prices for goods. Dunlap saw the meeting as a waste. "This was nonsense," he says.

HOGGING THE CREDIT. Former company officials, on the other hand, say Dunlap's take on purchasing was nonsense. The meeting was part of a major reengineering of this function begun in late 1991. Scott winnowed some 20,000 suppliers to about 1,000, knocked off more than $100 million in annual purchasing costs, and wrote up plans for a 75% reduction in the 200-employee department--all before Dunlap arrived. "The numbers were showing up just as Dunlap was coming through the door," says Theodore R. Ramstad, former director of worldwide procurement.

There were still other occasions when the Dunlap forces claimed credit for initiatives begun by their predecessors. One of the most innovative of Scott's new products is a baking-soda-laced toilet tissue, Cottonelle. "It was one of the initiatives that we created and put into the marketplace," boasts Nicolosi, a former P&G executive Dunlap had met on the clay tennis courts of the Boca Raton Hotel and recruited as marketing chieftain. But former marketing staffers say they had been working on this product since 1991. "That did not happen in two months," notes a former executive.

Another claim that doesn't stand up to scrutiny: Dunlap says he was at Scott only one week when he took his ax to the lethargic 11-person executive committee. "I got rid of 9 of the 11, and the other two I gave more responsibility," he says. How did he know so fast whom to fire? "I've done enough of these before," he says. "Each time you do one, you get a little smarter. And after a while, it's almost predictable."

In fact, Dunlap didn't fire any of the 11 in the first week. Three had already announced plans to retire before he arrived. Another three were simply taken off the committee but remained employed by Scott. Four others--including two senior vice-presidents, the general counsel, and the vice-president for human resources--were axed on May 26--five weeks after Dunlap came aboard. Another was let go a month later. "It's a fish story that gets better with each telling," laughs one former member of the committee. Retorts Dunlap: "It was pretty quick."

In their place, Dunlap installed a six-person operating committee. It included three executives he recruited: Russell A. Kersh, who had worked with him for nearly a decade at both Lily-Tulip and under Goldsmith; John P. Murtagh, a lawyer he had also met at Lily and had retained for the Goldsmith group; and Nicolosi, the marketing honcho.

Scarcely a year after they came on board, Dunlap sent senior vice-presidents Kersh and Murtagh to begin merger negotiations with Kimberly-Clark. On June 16, the pair--along with Salomon Managing Director Mark C. Davis, who had also worked with Dunlap previously and whose firm gained $28 million on the deal--worked out juicy details of the severance and noncompete payments for Dunlap and five other top members of his team. Kersh, who arrived at Scott in mid-June, 1994, is walking away with $16.4 million. Murtagh, who joined Scott on June 9, 1994, is leaving with $15.9 million. Nicolosi, who came aboard the Dunlap express that August, is getting $17.2 million for 16 months of work. Basil L. Anderson, chief financial officer, leaves with $14.9 million.

BEARING THE BRUNT. All this is salt in the wound to those who have lost their jobs. Jerry Michael Chambless, 49, had worked in Scott's paper plant in Mobile, Ala., for 29 years before being axed as a $60,000-a-year supervisor in the big bloodletting of August, 1994. He has been unable to find another job, is under increasing financial pressure, and a stroke has put him in a wheelchair. "He will never be able to do anything again," says his wife, Marty. The Chamblesses and their two children, 7 and 10, are living on Social Security payments of $12,000 a year and may have to sell their house.

Another Mobile employee, Emory Michael Cole, 58, had followed his dad's footsteps, joining Scott's labor pool at $1.72 an hour on Nov. 17, 1958. Four of the seven boys in the Cole family had worked for the company at one time or another. Over 37 years, Cole worked himself up to a supervisory job and a $72,000-a-year salary. On Aug. 16, 1994, he was called in from vacation and fired. "I wanted to work four or five more years to get my full retirement, nearly $4,000 a month," he says. Instead, he'll get a monthly pension of $2,670.

"HOLLOW CORE." Dunlap says he is not insensitive to the pain his measures have inflicted. "People say I've made a lot of money off the backs of people by cutting all these jobs," he says. "I find that personally offensive. I come from a working-class family, a father who was a union steward at the shipyards and a mother who worked in the five-and-dime. If I have to get rid of 35% of the people to save 65%, that's what I am going to do. It was me or Dr. Kevorkian."

Problem is, the 65% who survived don't feel much as if they were saved. The day after the merger's completion, Kimberly-Clark said it would cut 8,000 of the combined companies' 60,000 workforce by 1997. Among other things, Kimberly said it would shutter Scott's headquarters in Boca Raton--an announcement it made the same day that local officials received Dunlap's request for a $156,000 incentive grant for job creation.

His supporters insist that what ultimately counts is the $6.3 billion in value that Dunlap created. Some of the stock's rise, however, can be attributed to Wall Street speculation that the company would be sold. The day Dunlap's appointment was announced, a highly respected Brown Brothers Harriman & Co. analyst, Kathryn F. McAuley, ran a check on his previous experience. Recalls McAuley: "I said to myself: `Well, the board sold the company.' When you looked at his background, you realized that what he had done best was sell companies."

In any case, Dunlap's "empty" feelings on his day of celebration are probably shared by thousands of other Scott employees. "His sentence should be to run the company as it is for five years," says a former high-level Scott executive. "He would never be able to do it. Scott is just a hollow core." Kimberly-Clark Chairman Sanders may have been right when he said Dunlap had been a wake-up call to a lot of CEOs. But the lesson to be drawn from his tenure at Scott may not be quite the one Sanders had in mind.

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