Dark Days at Sunbeam

April 17 1998 3:30 AM

Dark Days at Sunbeam

CEO Al Dunlap knows how to cut costs--but not how to build a company's future.

Lifeblood hemorrhaging. Limbs lopped off. A general sense that everything is more than just a little bit out of control. All in all, not an experience you'd want to go through. But then, this is what happens when you have an accident with a chainsaw.

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In this case, the "chainsaw" is Al Dunlap, CEO of Sunbeam and the corporate executive who has become legendary for his rapid restructuring of companies seemingly plagued by slow sales, high overhead, and a lagging stock price. The accident is the sudden collapse of Dunlap's heretofore much praised turnaround effort at Sunbeam, a company that always had one of America's most enduring brand names but, before Dunlap, had very little idea of what to do with it.

Dunlap, of course, knew. He shut down half of Sunbeam's manufacturing plants, including almost all its U.S. factories; outsourced a higher percentage of the company's production; cleaned up distribution channels; refocused product lines around higher quality items; fired thousands of workers. Then he negotiated a sweet contract extension for himself that included 3.75 million stock options. Dunlap did all this to great acclaim, at least from Wall Street. Sunbeam's stock price tripled immediately after the announcement of his arrival, and in the following months it rose another 50 percent. In his inimitable fashion, Dunlap spoke joyfully of the billions of dollars in shareholder wealth he had created.

Dunlap is famous for his short attention span. He's described himself as happiest in the first year of a turnaround effort, when urgent decisions have to be made and implemented and results are immediately visible. After three years, though, he's bored and ready for a new challenge. So everyone expected that once the restructuring was done at Sunbeam, Dunlap would either leave or have Sunbeam acquire another company upon which he could work his magic. The smart money was on Dunlap's departure, probably after selling Sunbeam to a competitor, as he did with Scott Paper. But the smart money was wrong--which doesn't mean it wasn't smart. Dunlap decided to stay. And in part it seems he made that decision precisely because he wanted to show his detractors (of which Slate has been one--click here for David Plotz's assessment of Chainsaw Al) that he could build for the future as well as salvage companies from the past.

The rap on Dunlap, after all, was not simply that he's ruthless in job cutting and cavalier about the relationship between corporations and the communities in which they do business, but also that he's a one trick pony. Dunlap may be able to help companies put their short-term financial houses in order, the argument went, but he can't actually turn a company into a viable long-term enterprise--which may explain why he always seems to focus on selling a company after it's been cleaned up. And while Dunlap seems to harbor no trace of self-doubt, the impulse to quiet these critics must have been fairly strong.

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And, for a time, it looked as if Sunbeam actually was the marvelous turnaround story that Dunlap tells about all his restructuring efforts. It wasn't so much the rise in the stock price that was impressive, since Dunlap's presence alone established the kind of expectations that automatically draw money into a stock. Instead, it was the company's turn to profitability after quarter upon quarter of losses, coupled with a planned and well-executed expansion of Sunbeam's household product lines and a pretty convincing reinvigoration of the company's brand name. It appeared that Dunlap might really be able to manage.

But appearances were wrong. Sunbeam has now announced twice in three weeks that its sales and profit numbers in the latest quarter will be well below Wall Street's expectations. Also, that sales will actually be 5 percent below what they were a year ago, which is to say that the company is shrinking, not growing. In addition, Sunbeam has acquired three consumer products companies--Coleman, First Alert, and Signature Brands--and the costs of those acquisitions are going to be greater than Dunlap had previously forecast, even as the logic behind those acquisitions now looks increasingly iffy. Sunbeam's stock price has fallen by more than 40 percent.

You might say, then, that Al Dunlap has now destroyed $1.8 billion in shareholder wealth. In fact, Sunbeam's stock is just about where it was in the days immediately following Dunlap's appointment as CEO. Dunlap, though, insists that the market has overreacted to the bad news and is missing the real story. Apparently, the market is an excellent barometer when it treats Dunlap well and woefully inaccurate when it does not.

Poetic justice is always satisfying. But the real question is what, actually, is wrong with the way Dunlap does business? It isn't the job cutting per se. For the sake of employees as well as companies, workers should be adding value with their labor, and they don't get to do that if there's no market for what they're making. And while Dunlap may have cut too close to the bone, Sunbeam is not like Union Pacific or Aetna, where excessive downsizing clearly hurt their ability to function.

Still, the reliance on job cutting is symptomatic of Dunlap's real problem, which is the confusion between profits and growth. For a turnaround to be real, the company has to become not merely profitable but also positioned for steady growth. In the short term, killing slow-moving products, shuttering factories, and eliminating layers of management can cut costs so dramatically as to make a company profitable even if its sales shrink. But making that company grow in the future is a very different task.

And, in the long term, when there is nothing left to cut, the only way to increase profits is to increase sales. In this respect, it's striking that in the press release announcing the latest turmoil, Dunlap said, "I want to stress that getting the right cost structure is only the first step in the process of building a powerful global business." The fact that he felt the need to say this suggests he still doesn't fully believe it.

Of course, in some sense Dunlap must think that growth is important, because otherwise he wouldn't have spent billions of dollars to buy Coleman and First Alert and Signature Brands. But here again, it's telling that when he thinks about the long-term sustainability of Sunbeam, he thinks automatically about acquiring other companies. Acquisitions are not necessarily mistakes. General Electric and General Motors, among others, have done a brilliant job of using acquisitions to strengthen both themselves and the acquired companies. But shuffling dollars from one column to another is not the same as creating wealth. It's not the same as improving productivity. It's not the same as adding real value to the economy. And there's just not much evidence that Dunlap knows how to do any of those. In the end, it's not that Dunlap is a short-term thinker. It's that even as a long-term thinker, he's thinking about the wrong things.

James Surowiecki writes for the Motley Fool. He can be e-mailed at surowiecki@aol.com.

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