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Fisker Automotive: A Beautiful Mess

This article originally appeared in Business Insider

How can anybody learn anything from an artwork when the piece of art only reflects the vanity of the artist and not reality?

― Lou Reed

Fisker Automotive recently filed for chapter 11 bankruptcy protection and announced plans to sell itself to recently formed holding company Hybrid Technology, following that company’s purchase of a defaulted Fisker loan from the U.S. Energy Department.  Of the startup automakers granted loans by the Energy Department, Fisker Automotive was approved for the largest amount ($529 million).  Tesla Automotive has repaid the $465 million in loans it received.  Though it received approval for a $529 million loan, Fisker received only $192 million (the company repaid only $53 million of that total).

Co-founded by Ashton Martin designer Henrik Fisker, Fisker Automotive set out to create something beautiful and lucrative.  By all accounts the company was wildly successful at the former, and shockingly unsuccessful at the latter.

Privco Chief Executive Sam Hamadeh summed up the challenges of an aesthetically driven company with too much capital and too little discipline when he noted the Fisker was at one point spending $900,000 per vehicle produced, and then selling those vehicles for $70,000.

Hamadeh went on to note:

Fisker Automotive may well go down as the most tragic venture capital-backed debacle in recent history,” Hamadeh said in a statement. “The sheer scale of investment capital and government loan money — over $1.3 billion in all — was squandered so rapidly and with so little to show for it that the wreckage is breathtaking. Bankruptcy will be the end of Fisker, but for the taxpayers, venture capital firms, individual investors, and Fisker’s suppliers, it will all be too little too late.

The writing has been on the wall for some time regarding Fisker.  The company laid off 75% of its staff in April as it sought to preserve its dwindling cash and assess its options.  At the time of its announcement, Fisker, which had raised an estimated $1.3 billion from investors, had cash on hand of less than $30 million.

In the end, the company failed to produce the most beautiful of all outcomes for investors: a return.

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

Eike Batista

This article originally appeared in Business Insider

How flattering to the pride of man to think that the stars on their courses watch over him, and typify, by their movements and aspects, the joys or the sorrows that await him! He, in less proportion to the universe than the all-but invisible insects that feed in myriads on a summer’s leaf are to this great globe itself, fondly imagines that eternal worlds were chiefly created to prognosticate his fate.

–          Extraordinary Popular Delusions and the Madness of Crowds

Eike Battista is not having a good year.  In fact, it might be fair to say that the Brazilian entrepreneur is having perhaps one of the most horrendous years of wealth destruction on record.  In little more than a year Batista’s fortune has plummeted by over $30 billion, his support among Brazilian politicians has evaporated, and his creditors have gone from enthusiastically backing his endeavors to nervously eyeing their collateral.

For those unfamiliar with the new poster boy for emerging markets euphoria gone horribly wrong, look no further than the recent Bloomberg Businessweek article by authors Juan Pablo Spinetto, Peter Millard, and Ken Wells.  Their reporting details all the usual elements in these situations, with a few interesting wrinkles:

  • The Batista empire benefited from a compelling story that investors desperately wanted to believe.  With a network of companies focused on natural resources and based in Brazil, Batista had a need for capital at exactly the point in time when institutional investors were looking for investment opportunities emerging markets.
  • OGX, an energy exploration and production company founded by Batista in 2007, bid aggressively (in some cases offering bids double that of its competitors) for offshore oil leases.
  • Batitsa had the dangerous combination of being a famously hands-off manager who was nevertheless relentlessly optimistic about his ventures.  Over time his direct reports came to avoid bringing him bad news, which may have only speeded the decline of Batista’s empire.

The focus of Eike Batista these days is on preserving some value, as he struggles to restructure the debt of his various companies.  News that mining company MMX had reached an agreement to sell a controlling stake in a Brazilian iron-ore port sent the stock up 8 percent for the day, though investors have still suffered a 76 percent decline in 2013.  This marks only the latest in a series of transactions aimed at preserving something of the Batista empire, though the heavy debt burden of these companies suggests that preserving any equity value may be a lost cause (see articles here and here).

 

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

 

Against Corporate “Hero Ball”

This article also appeared in Business Insider

Your plan should foresee and provide for a next step in case of success or failure, or partial success.  Your dispositions should be such as to allow this exploitation or adaption in the shortest possible time.

– B.H. Liddell Hart, Strategy

My partner and I speak with the owners of dozens of small and mid-sized companies every year, and work very closely with some of them, often during the most challenging periods of their professional lives.

The common theme that we see with those companies struggling with under-performance is the lack of a defined yet versatile strategy to return to success.  Too often we find companies that have burdened themselves with some combination of the following:

  • An incomplete or erroneous assessment of the original causes of distress.  Without an understanding of where a company went wrong, we often see management teams and stakeholders struggle to find an appropriate redemptive course.
  • Lack of consideration of the resources of the company in executing a turnaround.  An understanding of the limitations imposed by cash flow, credit availability, supplier confidence (or lack thereof) and the threat of staff defections, among other factors, is key to developing an actionable turnaround plan.
  • Fixation on easy, “feel good” solutions (land a new customer, sell a building, secure an emergency refinancing or asset sale, etc.).  Solutions to difficult problems are often difficult, and even when the right solutions have been identified, a preconception of simplicity can prove to be toxic as struggling companies and their stakeholders face inevitable complications.

Putting Down the Safety Blanket

Change is frightening, and there is a natural tendency in many groups to defer to stars in order to lead organizations out of trouble.  Sadly, this tendency is as flawed as it is natural.

Relying on a wealth of data that had not previously been available, this fallacy has been exposed and derided in professional basketball with the moniker “Hero Ball”.  Hero Ball, in short, is the unsupported assumption (which inevitably influences strategy and tactics) that the most comforting approach (i.e., putting the ball in the hands of the biggest star) is invariably the approach most likely to ensure success.  It is not.

In basketball, stars are sometimes poorly placed to take a winning shot.  With companies, the same is often true.  The safety blanket of perceived strengths keeps many companies from doing what they need to do as they instead continue to do what is most comfortable.  The corollary to this is that some of the most impressive turnarounds of the past 30 years had their roots in a willingness to address and bolster areas of weakness.

  • In 1979, the moment faltering automaker Chrysler began to turn the corner was the moment that it forced its lenders to consider the dire consequences of the bankruptcy filing it was working so hard to avoid.  Had management failed to acknowledge its precarious situation, the salesmanship of Chairman Lee Iacocca would have been associated with a massive fire sale, rather than one of the preeminent industrial turnarounds in U.S. business history.
  • The successful revitalization of Disney in the 1980s and 1990s came on the back of the financial discipline that Michael Eisner and Frank Wells brought to the listing company, which then allowed it to successfully grow and monetize its library of childhood classics.
  • The turnaround of IBM in the 1990s relied on exiting lines of business deemed no longer strategic (for example the sale of the printing division, in 1991), a forthright assessment of the growth prospects of mature business lines (especially the mainframes business), and layoffs of 75,000 employees before the development of ancillary services that allowed the company to return to a growth footing took off.

Conclusion

Under-performance, and in more advanced cases outright distress, befalls companies in spite of their strengths.  Because of this, it is rarely the case that a sales-oriented company that finds itself struggling will return to health by redoubling efforts in sales, a serial innovator will succeed by bringing to market a transformative product, or that a perpetual acquirer will find a new acquisition to address endemic ills.  Distress is the market’s signal that a company has tilted too far out of balance, and while restoring balance is often painful, it is also the high probability route to long-term success.

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

Becoming a Data-Driven Organization

This article originally appeared in the Loftis Consulting Blog

The unrelenting pace of 21st century commerce has resulted in a flood of data that threatens to overwhelm small businesses.  Every company generates a vast quantity of data on sales, marketing, production, ordering, and every aspect of operations.  Most companies are doing nothing with this data, and the failure to make use of it is expanding what is for many small businesses their biggest competitive disadvantage.

Today it is essential for companies to know themselves better than they ever have before.  Management should identify a limited number of key performance indicators (KPIs) that capture the performance of the company, and focus on rigorously tracking those KPIs.  This data-driven approach can initially seem onerous, but the superior insight it provides makes it well worth any initial inconvenience.

Our clients have reaped significant benefits from efforts to shift their organizations to a data-driven mode.  Those benefits include:

  • Early Warning Capability: Poor financial performance is often not the first but the last sign of a problem.  Regular reporting of KPIs can highlight trouble before it impacts the bottom line.
  • Opportunities: Nothing bolsters the case for growth opportunities like data.  Website traffic and keyword search data is valuable market intelligence and analysis of that information has helped our clients identify unvoiced client needs and allowed them to reap the sales benefits of meeting those needs.
  • Profitability: Analysis of raw sales data has permitted Gross margin analyses by customer, region and salesperson in order to identify unattractive customers, unprofitable regions and under-performing salespeople.

We are in a new world, a world driven by data.  With every aspect of a company’s operations producing data, the insights that can be gleaned from capturing, analyzing and acting on that data are increasingly becoming a valuable asset.  Conversely, failure to make use of the data your company generates will hinder profitability, inhibit your ability to react to changes as quickly as competitors and increase the likelihood that growth opportunities will be missed.

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

 

The Least Bad Outcome

This article originally appeared in Business Insider

The range of options available for addressing a problem is directly correlated to the amount of time available.  As the amount of time available to address a problem shrinks, so does the universe of options.  Eventually, the options all start to look painful.  Followers of Eastman Kodak are currently learning this lesson in corporate turnaround dynamics.

News that Kodak is looking to shop a portfolio of 1,100 patents (with the help of Lazard) had excited investors.  The $2.4 – $3 billion an IP sale would fetch would be a welcome cash infusion for a company with cumulative operating losses of $1.2 billion over the last three years.

But the market is fickle, and when Kodak drew down its $160 million revolving line of credit earlier this week, sentiment turned strongly negative.  Moody’s downgraded the company’s bond ratings to Caa2 from Caa1 (way to be ahead of the curve, guys).  Alarmed at Kodak’s cash burn, Scott Dinsdale of KDP Investment Advisors noted: “They could run out of cash in early 2012”.

Taking a look at Kodak’s financials, I think that analysis is fair.  It does not take much of a leap, given a continuation of the company’s recent poor performance, to see Kodak having burned through its current cash balance of $957 million by this time next year, if not sooner.

Given this situation, Bloomberg notes that Kodak may need to file a chapter 11 bankruptcy in order to ensure that bidders for its intellectual property are not liable for a fraudulent conveyance claim.  With the patents now for sale expected to yield several times the current market cap of the company, and additional patents that may offer further opportunities to reap some return on years of R&D (Kodak holds a total of 7,600 patents), any roadblocks to the sale of intellectual property clearly must be dealt with.

This is a sad development for a company that has seen change coming for a long time, but has been unable to make the necessary adjustments.  A 1995 Fortune article highlighted issues facing Kodak that are depressingly familiar today: managing a mature business in decline, building a business around digital imaging, right-sizing the cost structure.  The difference is that in 1995 Kodak had many more options than it does today.  After spending so much time searching for the optimal strategy, it may be that Kodak will have to settle for the least bad option of a chapter 11 filing and the sale of IP that it was never able to fully utilize.

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.