VideoPSINet, the Ashburn, Virginia-based Internetservice provider, is one of the most spectacular flameouts of the New Economy. In just six years, the company loaded up on $4 billion worth of junk-rated debt, made dozens of acquisitions around the globe, and saw its stock reach a giddy high of $60. But like so many other Internet ventures, PSINet never made a dime. Its stock collapsed, and today a share costs about 5 cents. The delisted company has defaulted on its pricey bonds and filed for protection under Chapter 11, becoming one of the largest high-tech bankruptcies ever.
Yet the outcome for PSINet could have been even worse, had CFO Larry Hyatt not prepared for the fall.
"It became obvious relatively early on that the capital markets were closed and we had to stop spending," recalls Hyatt, who joined the company in May 2000. In September, PSINet announced it had a $600 million funding gap through the end of 2001. The company halted all capital spending, laid off hundreds of employees, cut a layer of management, and started selling assets. The cash burn rate dropped from a whopping $200 million a month in mid-2000 to around $15 million a month today. Sales of real estate and operating subsidiaries have raised about $300 million.
Still, with more than $3 billion in debt, mostly unsecured bonds, PSINet ultimately realized it was headed for bankruptcy. To prepare, the company examined its subsidiaries in 27 countries "to make sure those operations could stand on their own," says Hyatt, and as a result transferred funds to subsidiaries located in major geographical markets. Then, armed with its cash hoard, it filed for bankruptcy in June. Its cash allowed it to reject offers of debtor-in-possession (DIP) loans, which carry high up-front fees. Today, the company is assessing the viability of a reorganization plan and talking to potential buyers.
Taking action early saved the company--at least so far. "Some CFOs and general counsels are the Cassandras," observes Henry Miller, vice chairman and head of global restructuring at Dresdner Kleinwort Wasserstein, which is advising PSINet. "They help companies recognize that there is a serious problem." These days, many companies besides PSINet are in dire need of such help. And acting quickly to avoid disaster is even more critical now, because restructuring is more difficult today than it was in the last workout wave.
"Turnarounds have always been complex, but today's turnarounds are more complex than ever," declares Bill Hass, CEO of TeamWork Technologies, a turnaround and strategy consultancy. A decade ago, most restructurings involved repairing companies overburdened by debt. Relatively straightforward deleveraging and cost reductions turned around the likes of Southland, News Corp., Goodyear Tire & Rubber, Holiday Corp., and Macy's. But now, more companies are suffering from operational and management problems, have fewer sources of cash, and face complications posed by global operations.
"Ten years ago, drastic cost reduction alone was considered a silver bullet," says Hass. "Today's turnarounds take a variety of silver bullets in operations like cost reduction, quality improvement, innovation, and speed."
Indeed, troubled companies often find they must engage in more fundamental change to head off the kind of downward trajectory that ends with bankruptcy and liquidation. That type of undertaking means anything from radical changes in strategy to trimming product lines, selling noncore assets or businesses, recapitalizing foreign subsidiaries, realigning management, or selling the entire company.
The good news is that if bankruptcy is necessary, it is an increasingly effective tool for restructuring. The well-developed secondary market in distressed securities has eased the way for many bankruptcy reorganizations, and an active acquisition market for distressed companies provides an ultimate way out for more businesses than ever before. Make no mistake, though: for companies that fail to take decisive action well before filing, Chapter 11 can be a slough of despond.
THE BLEEDING EDGE
Like PSINet, the most visible casualties are Internet-related and telecommunications companies. They are trying to deal with the double whammy of huge overcapacity and the sudden loss of access to capital as a result of the stock market meltdown.
"When the high-yield market shut down and there was no liquidity, telecoms couldn't build out their systems," says David Resnick, managing director and head of restructuring at investment banking firm Rothschild Inc. Observes Bill Repko, managing director of the restructuring group at JP Morgan: "In telecoms the capacity is huge, and it will be a long time before demand equals supply." In many cases, incomplete networks have so little value that, in a restructuring, bondholders would simply be wiped out. As a result, these companies have to find a strategic partner or buyer to survive.
But they're hardly alone. Both young and well-established companies in a plethora of industries--including high tech, utilities, retail, steel, textiles, health care, movie theater chains, manufactured housing, automotive, and manufacturing--are also experiencing hardship.
Blame the strength and length of the economic boom. Capital availability and economic growth allowed many companies to ignore operating deficiencies. After all, "it's relatively easy to run a company when growth is strong and the capital markets are open to everyone," says Repko. "And Wall Street loved a growth story." But the longer the recovery lasted, the more the problems festered.
Reader Comments» Post a comment