! Credit Skills Academy ! ! ! ! ! ! Executive Briefing Unit 9: Corporate Recovery in Action ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! 2 ! Case Study: ERF ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Senior authors: Keith Checkley FCIB, FCIBS, Chartered Banker and Keith Dickinson FCIB The authors have taken all reasonable measures to ensure the accuracy of the information contained in this topic and cannot accept responsibility or liability for errors or omissions from any information given or for any consequences arising. ! ! ! © Keith Checkley & Associates, November 2013 No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means – electronic, electrostatic, magnetic tape, mechanical, photocopying, recording or otherwise, without permission in writing from The Chartered Institute of Bankers in Scotland. ! 3 ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Welcome to the Credit Skills Academy There have been previous financial crises but this time it is the severity and global impacts that are very different from what we have seen before. Never have banks and lending bankers received greater criticism over the quality of their lending than at the present time. Media comment suggests that prudent lending principles have been disregarded in the quest in recent years for increased lending volumes and enhanced short term profitability. Analysts suggest that many of the prudential canons of lending have been overlooked and many lending bankers would benefit from a reconsideration and review of well tested and accredited lending principles. It is against this background that the Credit Skills Academy has been developed. The modules in this Academy have been prepared to allow you and your colleagues instant access via e-learning and may be accessed as individual topics in which you are interested. We believe that they will also make an excellent basis for discussion with colleagues for mutual benefit. We do hope that the extensive range will help you in your everyday job and also as someone interested in self development in the important area of Credit Skills. Keith Checkley and Keith Dickinson Senior authors ! 4 ! Case Study: ERF ! ! Before studying this Unit it is recommended that you undertake the following activities:! ! ! ! ! CSA Member Activity 1 Review Unit 2 Business Risk and focus on the Porter 5 forces for competitive positioning and also 3 generic strategies for product strategies; relative to markets. CSA Member Activity 2 Review Units 5 and 8 for spotting deterioration and warning signals. ! 5 ! Corporate Recovery The last unit of our advanced course is the most difficult in practice for the Lender. Corporate recovery is about the management of businesses facing problems. There will be many different situations to be faced and many issues, which can involve a complexity of business strategies and operations. Corporate and debt restructuring can be necessary for a variety of reasons and can be driven by the bank, company directors, shareholders or external creditors; or any combination of stakeholders involved in the corporate structure. Problem turnaround situations are very varied, for example: • Low return on Capital for type of business • Cash crisis • Stagnant business-often in mature industries • Growth orientated, but growing too fast! • Extraordinary write off or extraordinary loss • Several years of successively lower profits A turnaround can be defines as “a positive change that is sustained in the performance of the business’. Sustained being a key emphasis; as you can often see temporary improvements but they may not continue. The issue is to find efficient and effective ways to operate the business. The Immediate requirement is to find the problems and implement solutions. As Lenders we wish to avoid a business default/liquidation and therefore we could focus as a starting point on the following diagram: WORKOUT V DEFAULT Default v Workout Model: Generic Time-scales for Action Workout Issues Diagnostic checks and Techniques • financial • non-financial • risk position The Options Default : Symptoms and • loss of capital Causes of Decline • loss of jobs / product Turnaround Strategies/ Action Plan/Budgets 6 ! ! Case Study: ERF Turnaround stages In general there are five stages in a turnaround: 1 Evaluation of the situation 2 Creating a plan 3 Implementation of the plan 4 Stabilisation of the business 5 Return to growth of the business ! ! Essential skills of the turnaround consultant The least methodological aspect of a turnaround is psychological in nature. The turnaround manager has to be an autocrat, one whose instincts and skills guide the business through its difficulties. Though autocracy could have been part of the problem, the turnaround manager’s autocracy is necessary, albeit temporary. ! The ability to deal with many problems and people simultaneously and under pressure is a skill developed by the turnaround consultant over a long period of time. Rapidly developing an understanding of the abilities of the employees and being able to mould them into a team is essential. Knowing how to negotiate with bankers, lawyers, vendors and other stakeholders is one of the key elements of success, whereby, in effect, needed bridge capital is obtained. ! It must be remembered that the normal employment of a turnaround consultant is to deal only with failing business and with crisis situations. The rendering of general business advice and consulting assistance is left to other management consulting specialists Working with management In a turnaround, analysis and action are almost simultaneous for the consultant. The immediate requirement is to find the major problems, analyse them and implement solutions. To help accomplish this the turnaround consultant relies on the management remaining after whatever initial purge of incompetent managers has occurred. Both groups are identified during initial analysis of a company, which may take anywhere from three days to four weeks, depending on the size of the company and the extent of its problems. ! The turnaround consultant usually works with the CEO, provided that the CEO can become part of a permanent solution. A CEO unable to assist in resolving the problems must be replaced and, in that event, the replacement is the turnaround consultant. Afterwards, a permanent CEO can be sought. ! The new CEO should be made part of the turnaround team as quickly as possible, providing the turnaround consultant with the opportunity to educate the CEO regarding the causes of the business’s difficulties and the implementation of the turnaround plan. The other remaining management people round out the turnaround team. Utilising existing management and focusing their energies and talents is less expensive than bringing in a crisis or turnaround team or hiring entirely new management. Furthermore, salvaging existing management leaves an experienced, ! 7 ! competent team in place to manage the business when the turnaround is over and it is time for the turnaround manager to leave. ! Important as it is, profitability is not really the primary mission of a business – survival is. Once survival is assured, a business’s mission is to create something of value that is desired in the marketplace – it is creation of value that generates profits. Thus, preservation of the market during turnaround is essential. So now given all this preliminary work we can now undertake a case study ERF. This business faced such a severe threat to survival; and therefore we trace back to it’s early foundation to establish what created value. ! ! ! ! ! ! ! 8 ! ! Case Study: ERF ! ! ! ! ! ! ! ! ! Case Study: ERF ! ! ! ! ! ! ! ! ! ! ! ! ! ! Key learning outcomes ! ■ Analyse the financial performance of the case study company. ■ Propose a turnaround plan for the business. ■ Analyse the trading results, product quality and corporate strategy of the business in order to assess the viability of an acquisition of the business by another company. ! 9 ! ! Part 1 ! You have been called in as a turnaround consultant to ERF, a trucking company. ■ As you are reading the text, please look out for key success factors from the history of the business. ■ Analyse the financial performance over the period 1981-82. ■ What suggestions can you make as regards a turnaround plan for ERF? Origins ! ERF was born in the terrible shadow of the great depression of 1930. Convinced that steam power was obsolete and that Foden – the family firm – was already behind the times, Edwin Richard Foden and his son Dennis branched out on their own. They had decided that diesel-engined lorries, and not Foden’s clanking steam dinosaurs, would pave the way forward. It took courage and conviction to leave the business he had inherited from his father, but Edwin Richard had a vision. He had foreseen the death knell of the steam lorry in the closing days of World War One and the 1930 Traffic Act with its restrictive practices merely reinforced his suspicions. Also, the insurance companies were baulking at the idea of underwriting welded steam boilers. He knew that times were changing. Foden’s management did not share his forward thinking, however, and a boardroom wrangle ended with Edwin Richard “retiring” in 1932. Little did they know that by 1933 he would be back with a vengeance, fronting E R Foden and Son Diesel with his son Dennis. It was not long after his departure from Foden that neighbours began to notice lights burning through the night at Hilary House, the family home in Elworth. The ERF diesel lorry was being born in secret. Edwin Richard, at the age of 62, was fighting back with Dennis and two former colleagues: Ernest Sherratt, later to be chief designer and technical boss, and George Faulkner, who became works manager. “We worked in a lean-to conservatory,” says Sherratt. “It was very comfortable, and not at all ramshackle” and by Easter 1933 the first ERF prototype was at the design stage. The company made its debut at The Motor Show in Olympia later the same year. “People didn’t take us seriously. They said ‘what can they do, just three men and a boy?’ But we didn’t worry,” Sherratt recalls.