How Hawaiian Telcom, Hilo Hattie and Central Pacific Bank Rebounded from the Brink
Turning around three of Hawaii’s biggest companies
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It's much the same with businesses. When they're thriving, their income statements all look alike – tidy family portraits of profits and tranquility. It's when companies fail that all their neuroses and idiosyncrasies come into view. That's when you discover dysfunctional capital structures, crazy expenses in the attic, crackpot expansion theories. By then, though, it's often too late. It takes a special leader – a combination of analyst, mother hen and disciplinarian – to save a failing company. It also takes the right team, rigorous planning and a measure of luck. Here's a look at three Top 250 companies that (maybe) made it through the turnaround, and the perspectives of the men who led them there.
No. 19 on the Top 250
"You can't pretend something's not broken if it's broken," says Eric Yeaman, CEO of Hawaiian Telcom.
Under Yeaman's leadership, the company successfully emerged from Chapter 11 bankruptcy last November, but, when he arrived in 2008, it was clearly broken. "When I came on board," he says, "company morale was pretty low. We were in the papers; we were losing customers; and the company was losing $150 million a year." For a company with as many problems as Hawaiian Telcom had, bankruptcy is often the only answer. But bankruptcy comes with its own set of problems.
Some of the company's difficulties were technical, related to the change of ownership from Verizon to a local hui partnered with The Carlyle Group, the private equity firm that orchestrated the buyout. For example, many of the company's back-office functions, like customer-service, billing and product development – all systems that Verizon had handled on the Mainland – had to be recreated here from scratch. That process didn't go well. Other problems had to do with Hawaiian Telcom's management and corporate structure. All these problems affected the bottom line.
The first step was to quantify the problems. "There are some real basic things you've got to look at," Yeaman says. "Revenue, cost structure, profitability or lack thereof, and cash flow – where is the money coming from and where is it going? What is the productivity of your business? What can you do to increase revenue, decrease costs and better allocate your capital? And how do you compare to your peers?" That last point is critical for a company in a capital-intensive industry like telecommunications. "After all," Yeaman says, "to attract capital, you need investors, and investors are going to compare you to your peers."
But the heart of Hawaiian Telcom's problems was that the company was simply over-leveraged. It couldn't generate enough revenue to cover the enormous debt racked up by The Carlyle Group when it bought the company. "We needed to restructure the balance sheet," Yeaman says. "There was no way this company was going to survive with its current debt structure. We needed to do something to stabilize the company, which was losing $10 million a quarter in revenue. You can only cut costs so much before you run out of levers to pull."
Of course, Chapter 11 is largely a process to figure out what a company is actually worth. Working backward from that figure, you can calculate how much debt the company can really afford. "That's the cornerstone of the restructuring process," Yeaman says. "You have to come up with what you believe the value of the company is, based on a plan that you think makes the most sense for your business. Once you come up with a plan, you have to defend that plan during the restructuring process. There are going to be people on both sides. Some try to drive the value down; some try to drive the value up. Our responsibility is to come up with a fair valuation."
That backward calculation is a powerful tool. Indeed, for companies in bankruptcy, it's often the main ingredient of the turnaround. "Do it once, and do it right," Yeaman says. "Otherwise you end up in Chapter 22." Hawaiian Telcom seems to have done it right. Entering bankruptcy, the company had about $1.2 billion in debt, including both secured and unsecured creditors. When it emerged from bankruptcy two years later, the calculated value of the company was just $460 million – $300 million in debt and $160 million in equity for the secured creditors. The rest of the company's liabilities – and all the existing shareholder equity – were wiped out.
"We drew a line in the sand," Yeaman says. "We felt our debt level needed to be at $300 million because that was the right capital structure." In other words, he says, given the revenue the company expected to generate, that was the most debt the company could afford to service. Ultimately, the company's creditors and the court agreed. The effect on expenses was dramatic. "It reduced our interest costs by over $60 million a year," Yeaman says. In addition, he points out, the company stabilized revenues. "We were losing $10 million a quarter – $40 million a year, approximately – in revenues. For the last seven quarters, though, we've stabilized revenue at about $100 million a quarter, give or take a million or a million and a half."
Hawaiian Telcom's plan also looked forward. "The other thing we wanted to do was position the company for growth," Yeaman says. To that end, the company invested millions of scarce dollars to develop new products and services: VOIP for business; an Ethernet-based product; several new managed-services options; and IP VPN, or virtual private networks that can run over the Internet. Moreover, in June, the company finally received permission from the state Department of Commerce and Consumer Affairs to launch its long-awaited digital cable TV service. "Those were all products we wanted to launch while we were in reorganization," Yeaman says. "That way, when we did emerge, we would be well-positioned to grow."
For now, Yeaman's tenure with the company looks like a success. In the first quarter of 2011, Hawaiian Telcom actually turned a modest profit. Just as important, the market has smiled on the company since it emerged from bankruptcy in November 2010. "Since the stocks first began trading again," Yeaman points out, "the value of the shares went from $16 to today's value of about $28 a share. That's about a 75 percent increase. In the same time, the S&P didn't go up that much, and our peers actually went down 9 percent in that period."
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