UK: Corrective surgery.

UK: Corrective surgery. - For a business on the verge of collapse, any solution has to be swift and ruthless. That's when the skills of the company doctor are needed.

by Martin Vander Weyer.
Last Updated: 31 Aug 2010

For a business on the verge of collapse, any solution has to be swift and ruthless. That's when the skills of the company doctor are needed.

Even with Britain's economy enjoying the best of health, demand for the services of company doctors shows no signs of abating. The appointment in the early summer of the doyen of the profession, David James, to rescue Sears-owned British Shoe Corporation is just one high-profile example. Meanwhile a recent survey conducted by the Society of Practitioners in Insolvency (SPI) revealed that some 2,000 British businesses, including 130 listed companies, had to resort to calling in company doctors in 1995-96.

Over-optimism, over-gearing and failures of management information are the commonest causes of trouble, according to the SPI report. The remedies have to be swift and ruthless, and require the skills of a special type of manager. As John Standen, a seasoned corporate financier who is now director of special projects at Barclays Bank, explains: 'The closer to disaster a company is, the more frozen its directors become about the options available to them and the more personal the outcome is for their own futures. The vital role of the company doctor is to make an objective assessment of how far the company has got to fall before it can stabilise.'

So what makes a company doctor, and what distinguishes a good one from a quack? Unlike the medical profession, there is no institution or equivalent of the Royal College to set standards. Some veteran exponents, like James (whose track record of involvement in more than 70 companies extends from Cedar Holdings in the 1974 crash to Dan-Air, Eagle Trust and LEP) and the Edinburgh-based Sir Lewis Robertson (Grampian Holdings, Lilley, Triplex and Stakis hotels) have impeccable reputations for finding cures for troubled businesses. Others, like Roger Leverton, who recently departed from the chief executive's seat at Pilkington, and Jim Maxmin, formerly of Laura Ashley, are perhaps better known for the size of their pay-offs.

Confusingly, there are some high-profile cases - like Roy Barber's work at Astra Holdings, the firm at the centre of the Iraqi supergun inquiry - in which the business concerned has finally gone under, yet the company doctor has been almost universally praised. The truth is that anyone who has ever tried to rescue a business can call themselves a company doctor, although James, for one, dislikes the term because it implies that the aim is always to restore the company to health. 'Many of the companies I have dealt with have been absolute basket cases so that it is not always the aim to restore the company to the state in which it was originally created,' he says.

Indeed defining what constitutes a successful operation is not easy, as Standen points out: 'Does it mean stopping the company from going bust by slashing costs and turning it into a smaller business, or is it about making the company flower again? Most company doctors succeed at the first level, but the ones who reach the second level are few and far between, and often they're venture capitalists, rather than pure consultants.'

The reason for this, he suggests, may be that venture capitalists are attracted towards companies which have more potential for recovery in the first place. 'Or it may be that consultants sometimes lack the fire in the belly to really make them jump in and get the company moving again.

Either way, it's rare to find people who are cutters and growers at the same time.'

Doug Rogers is an experienced company doctor who makes the same distinction: in his words, between 'maintainers' and 'implementers'. Rogers spent 10 years as chief executive of Newman Tonks, during which its profits increased twentyfold. Since leaving the company in 1990, he has taken on six or seven assignments, including, most recently, Barcom (a plant hire business hit by a poor acquisition, now showing a 44% improvement in its most recent half-year profit figures) and United Carriers, a transport group which went public in 1994 and reported losses in 1995, but is now back in the black after extensive management changes.

Rogers is in many ways the classic company doctor: a qualified engineer with an established track record and an independent, intuitive modus operandi.

'There's no such thing as a standard approach,' he says. 'It's like stock control systems, if there was one system that was universal, everyone would use it. Of course, there are some common mistakes that companies make - in my experience it's usually to do with not reacting to change: change in technology, change in distribution patterns or in legislation, or just change in the economy.'

Rogers likes to appoint his own people to make certain that the work that's been done is carried on and declares himself a strong believer in 'balanced teamwork'. He is not, on the other hand, an advocate of the kind of team consultancy approach which has been developed by his old friend Trevor Swete at Postern Executive Group, a venture which has brought together some of Britain's best-known company doctors. A former corporate finance director at Hill Samuel (where he handled the rescue of Dunlop) and Drexel Burnham Lambert, Swete founded Postern in 1991 with Robertson and Archie Coulson, another senior troubleshooter who worked with James on Eagle Trust and who more recently took the chairmanship of Prestwick Holdings. Robertson has since retired but the group has been joined by Stan Carslake, a famously tough 'intensive care' banker at Barclays in the 1980s.

The Postern approach is novel in several respects, not just for the form of its teamwork. Whereas the arrival in a troubled company of a well-known solo operator like James or Barber invariably makes headlines in the City pages, Postern keeps its assignments strictly confidential. Crucially the group acts for shareholders rather than banks: 'we are seeking to persuade secured lenders that this is the proper route,' says Swete.

Postern has also decided that the approach to corporate rescue can indeed be standardised and replicated. 'We have a very tight operating manual: what to do in week one and so on,' says Swete. 'All our directors have been solo operators in the past but now we sit down together as an executive committee and review every case weekly or fortnightly: the team approach is more stimulating, and you can move much faster. We have a no torpedoes rule which says that no rescue idea, however silly, can be rejected out of hand. When we go in as an executive team, we work on a fixed contract with a transparent system of charging for our time, paid weekly by standing order, and we take a success fee on the improvement in shareholder value by the time we leave. We go when the company is rebankable if it's private or back on the dividend list if it's public.'

Alternatively, Postern may go in, right from the beginning of the assignment, as an investor rather than as a pure consultant: the Postern Fund was launched in 1996 specifically to invest in corporate turnarounds where Postern's experts are involved. The fund itself can invest up to £3 million in a company, with other investors coming in alongside.

Rogers is not alone in casting doubt on the team consultancy approach.

'In many cases there just isn't time to put in a big team and do an exhaustive analysis,' says Barber, whose past credits include Raine and Bimec Industries.

'You have to take executive responsibility from day one, and rely on intuition and experience. If you don't get on with it quickly, the banks may do something nasty.' He also takes the traditional view that it is the banks, rather than the shareholders, to whom company doctors should address their attention from the start. 'It's very disappointing if you can't save anything for the shareholders, but you've got to attack the banking problems first.'

All company doctors have their failures, but in aggregate their performance clearly shows the benefits of corrective surgery over receivership. The SPI survey found that 57% of companies put into company doctors' care had made some form of recovery, compared with 42% which fell into the receiver's hands; it also showed that in companies which did recover, 85% of jobs were saved by company doctors, compared with only 43% in companies which were in receivership.

Insolvency carries a stigma which may in itself contribute to the final demise of a business, whereas the appointment of a respected company doctor gives a firm six months' grace with its bankers, however deep its problems may be.

James is adamant that receivership is not an option - it is 'a very destructive means of rescuing a company', and particularly so for unsecured creditors.

Swete makes the point that although company doctors don't act within the protection of insolvency law 'on the other hand we avoid the blight of insolvency. In an insolvent construction company, say, all its contracts become null and void. At Postern, we go in to run businesses in the interests of their shareholders, but the first question is: is there still a company there which can serve those interests?'

Ironically, the recovery has actually been good news for company doctors.

Not only are there more venture capital funds prepared to look at turnaround risks but as Barber explains: 'During the recession it was very difficult to sell under-performing assets for cash. Now, with the recovery, the market's getting a bit easier.'

That is not to say, however, that the market isn't changing though this has less to do with the state of the economy than the question of where the work is coming from. Traditionally the prime movers in most company rescues and in the appointment of company doctors have been the banks.

Although limited by law in the extent to which they can impose management changes directly on a company, few could ever have been in much doubt that it was the banks who were calling the shots. But at least with the banks in the driving seat, there was some sort of stability. Particularly in the very big lending syndicates, the Bank of England has traditionally played a key role by getting all the banks to agree not to pull out - thus leaving the others exposed - until a rescue attempt has had a chance to work.This rather cosy arrangement, underpinned by a kind of gentleman's agreement known as the 'London approach' is, however, beginning to break down. And without it, says James, there is little to stop the banks breaking ranks thus undermining any concerted attempt at a company rescue.

So who will step into the bank's shoes? James believes there are already clear signs that the institutional shareholders are becoming more active in company rescues - he cites Sears as an example and he predicts a 'shift from the banks to shareholders as the dynamic for creating work for company doctors'.

Swete, however, has his doubts. True, he says, several of the institutions have set up special units to monitor poorly performing companies - Hermes, M&G and Prudential are examples - but 'they may be reluctant to put in a lot of effort once the value of their shareholding has fallen beyond a certain level. In this case it is up to the non-executive directors to act.'

Whoever it is, of one thing we can be certain: that there will always be entrepreneurs who overstretch themselves or fail to see the dangers of change and that for the moment at least the first response to a crisis will always be 'is there a doctor in the house?'


'The most complex and difficult exercise in cash management I have ever had to perform,' is how David James describes Dan-Air. In October 1990 the charter airline (together with its parent company, Davies & Newman) was on the verge of collapse.

Charter demand was weak, financial controls were inadequate and losses were mounting. James (who signed an 18-month contract to run the business at a fee of £30,000 per month) flew back from Los Angeles and negotiated $40 million of extended credit overnight. He also negotiated the exit of founder-chairman Fred Newman and other managers.

The Gulf War in early 1991 caused further havoc for Dan-Air: revenues were down at one stage by almost 60%. But James had reduced the charter fleet from 27 to 18 aircraft, the airline's engineering unit had been sold at a profit and a new treasury control system was in place. By April that year the company was cash-positive again. Trade creditors were paid in full, and the banks kept at bay.

James's rescue package was described as 'inspired'. But not even he could work the miracle of keeping Dan-Air alive and preserving value for ordinary shareholders. At the end of his term of office, the group's assets were sold to BA for a nominal £1.

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