HOW AL DUNLAP SELF-DESTRUCTEDThe inside story of what drove Sunbeam's board to act
On June 9, Sunbeam (SOC) Chairman and CEO Albert J. Dunlap stormed out of a board meeting in Rockefeller Center, leaving a conference room filled with puzzled and incredulous directors. Most of them thought the once celebrated champion of downsizing, under mounting pressure, was becoming unglued. One director, say three participants, openly expressed concerns about Dunlap's emotional state.
Demanding their support, Dunlap, 60, had just told his board that billionaire financier Ronald O. Perelman and others were engaged in a conspiracy to drive the small-appliance maker's already slumping stock down further so they could buy Sunbeam Corp. on the cheap. He suggested that if Michael Price, an influential mutual-fund manager who had recruited Dunlap nearly two years earlier, really backed him, he would buy out Perelman's $280 million stake.
Why Perelman, one of Sunbeam's largest investors, who owns 14% of the company, would do anything to diminish his investment, he could not explain. ''We can't fight a battle on two fronts,'' said Dunlap, according to several directors. ''Either we get the support we should have or [chief financial officer] Russ and I are prepared to go.... Just pay us.''
NEAR TEARS. ''Al, we don't know what you're talking about,'' retorted Director William T. Rutter, a banker patched into the meeting by phone from Florida, according to several participants. ''We're supportive of both of you.''
So were all the other four outside directors. Again and again they assured Dunlap and his close ally, Russell A. Kersh, of their support. Kersh, say several directors, seemed near tears. ''I don't know what Al thought or what was going through his head,'' says Peter A. Langerman, Price's board representative. ''But I didn't hear anything from Perelman, and Price was still behind him.''
In four days, however, the directors voted to fire the man who has made a phenomenal business career out of firing others. Rarely does anyone express joy at another's misfortune, but Dunlap's ouster elicited unrestrained glee from many quarters. Former employees who had been victims of his legendary chainsaw nearly danced in the streets of Coshatta, La., where Dunlap shuttered a plant. Says David M. Friedson, CEO of Windmere-Durable Holdings Inc.(WND), a competitor of Sunbeam: ''He is the logical extreme of an executive who has no values, no honor, no loyalty, and no ethics. And yet he was held up as a corporate god in our culture. It greatly bothered me.'' Other chief executives, many of whom considered him an extremist, agreed that Dunlap's demise was a welcome relief.
Even members of his own family--long estranged from the man--seemed ebullient. Upon hearing the news of his father's sacking on CNBC at 6:20 a.m. in Seattle, Troy Dunlap chortled. ''I laughed like hell,'' says Dunlap's 35-year-old son and only child. ''I'm glad he fell on his ass. I told him Sunbeam would be his Dunkirk.'' Dunlap's sister, Denise, his only sibling, heard the news from a friend in New Jersey. Her only thought: ''He got exactly what he deserved.''
Sunbeam's stock, meanwhile, has plummeted from a high of 52 in early March to a low of 8 13/16 on June 22, below the level it traded when Sunbeam announced Dunlap's hiring in mid-1996. One analyst, Nicholas P. Heymann of Prudential Securities Inc., said the stock was trading ''more on vindictive emotions than rational analysis.''
How could a single businessman arouse such emotions? In little more than four years, Al Dunlap made more than $100 million, ran two well-known public corporations, wrote a best-selling, vainglorious autobiography, and axed some 18,000 employees. Dunlap, of course, was hardly the only chieftain to order hefty workforce cuts or to say that the only stakeholders in a public corporation are its investors. But by eagerly seeking publicity to expound his simple philosophy, he emerged as the poster boy for ''shareholder wealth.'' Since his departure from Sunbeam, Dunlap has been uncharacteristically silent. Along with his attorney, Christopher J. Sues, and CFO Kersh, he has not responded to repeated requests to be interviewed for this story.
To investors who made millions by following him, Dunlap was, if not a god, certainly a savior. He parachuted into poorly performing companies and made tough decisions that quickly brought shareholders sizable profits. ''We're all seduced by the possibility of big wins,'' says PaineWebber Inc. analyst Andrew Shore, who follows Sunbeam. After meeting Dunlap in mid-1996, Shore immediately put out a buy on the stock. ''I didn't necessarily like him or trust him,'' he recalls, ''but I thought my clients could make money on him. I knew they just had to get out at the right time.''
But if Chainsaw Al's rise to prominence was a '90s version of Barbarians at the Gate, his sudden demise may signal the beginnings of a more tempered era. With much of Corporate America considerably leaner and labor markets tight, taking a two-by-four to a problem is no longer perceived as a viable solution. ''The need to do major downsizing is over. The opportunities to pick that kind of low-hanging fruit aren't as prevalent, and the second picking often requires different skills and methods than a Dunlap is known for,'' says Edward E. Lawler, a management professor at the University of Southern California. ''Clearly, his era has come and is going.''
DEMOLITION EXPERT. It was a supremely confident and triumphant Dunlap who arrived at the troubled appliance maker in July, 1996. Six months earlier, he had successfully completed the sale of Scott Paper Co. Wall Street lustily cheered his arrival at the $1.2 billion maker of electric blankets and outdoor grills. Sunbeam's stock surged nearly 50%, to 18 5/8, the day after his July 18 appointment. Less than four months later, Dunlap lived up to his reputation as a corporate demolition expert. He announced the shutdown or sale of two-thirds of Sunbeam's 18 plants and the elimination of half its 12,000 employees.
Predictably, Wall Street applauded Dunlap's actions, reporters wrote favorably of his exploits, and the stock zoomed up. It traveled so far in that direction, in fact, that it foiled Dunlap's initial strategy to sell the company. Although he hired investment banker Morgan Stanley Dean Witter & Co.(MWD) to seek a buyer last October, no one would pay that large a premium (the stock had risen by 284% since July, 1996, to over 48). That forced Dunlap to consider another alternative: to scour the market for companies to buy. In early March, Dunlap bought not one but three companies in one fell swoop: Coleman, the camping-gear maker, from Perelman in a stock-and-cash deal; First Alert smoke alarms, and Signature Brands, the maker of Mr. Coffee.
Dunlap's most devoted fans, of course, resided on Wall Street. But Shore of PaineWebber wasn't one of them. Trained by the legendary Perrin Long, who made him come to work by 7 a.m. and labor over weekends, Shore, 37, had been following the household products and cosmetics industries for a decade when Dunlap arrived at Sunbeam.
When the stock spiked when Dunlap was appointed, Shore thought the reaction irrational and said so. His candor hardly pleased Dunlap, who would claim that Shore was biased against him because PaineWebber didn't get Sunbeam's investment banking business. (Shore denies that charge.) Still, the analyst jumped on the bandwagon himself, knowing Chainsaw Al could make his clients money. With each new earnings report, however, he carefully dissected Sunbeam's ever-improving results.
It didn't take long for alarm bells to sound. After the company reported its results in the second quarter of 1997, Shore says he began ''getting pangs in my stomach.'' The numbers showed that Dunlap was building what Shore considered abnormally high inventory levels and accounts receivable. His trade contacts confirmed his suspicions that Sunbeam was giving lucrative terms to dealers to ship products aggressively.
''BILL AND HOLD.'' ''I said to myself: 'Let's play the game a little longer,''' remembers Shore. ''No one [had] soured on him yet. Very few picked it up, only the smart shorts at the hedge funds. I thought it would take several more quarters to play out.'' Shore alerted his clients to the warning signs but continued to recommend the stock because he thought investors would keep bidding it up.
He was right. Sunbeam's shares kept climbing, even though the company's third-quarter results created even greater cause for concern. Shore noted in one of his reports that there were massive increases in sales of electric blankets, usually a fourth-quarter phenomenon. Then, in the fourth quarter of 1997, he was alarmed by enormous increases in sales of grills, at a time when virtually no one buys those products. Still, Shore says, ''I didn't think the story was over just yet. The market hadn't caught it.''
Although unknown at the time, Dunlap was aggressively trying to push out more and more product. As the company later acknowledged, he began to engage in so-called ''bill and hold'' deals with retailers in which Sunbeam products were purchased at large discounts and then held at third-party warehouses for delivery later. By booking these sales before the goods were delivered, Dunlap helped boost Sunbeam's revenues by 18% in 1997 alone. In effect, he was shifting sales from future quarters to current ones. The approach was not illegal, but the extraordinary volume made it unusual. Dunlap defended the practice, saying that it was an effort to extend the selling season and better meet surges in demand. Sunbeam's auditors, Arthur Andersen & Co., later insisted it met accounting standards.
On Mar. 19, Sunbeam acknowledged that first-quarter results would be below analysts' estimates. Two weeks later, on Apr. 2, Shore heard more disturbing news: Donald R. Uzzi, Sunbeam's well-regarded executive vice-president for worldwide consumer products, had been fired by Dunlap. Not able to reach Uzzi or Dunlap for confirmation, Shore sought out investor-relations chief Richard Goudis, only to discover that he had quit. Finally, the analyst thought, it was time to advise his clients to get out of the stock. He frantically downgraded the stock on Apr. 3 at 9:00 a.m., and it quickly fell by 4 points. Some two hours later, Sunbeam disclosed that it would post a first-quarter loss. By day's end, the stock fell 25%, to 34 3/8, and shareholders soon filed lawsuits charging deception, an accusation that Sunbeam dismisses as ''meritless.''
Undaunted, Dunlap swiftly hatched a plan for a comeback. On May 11, before 200 major investors and Wall Street analysts--including Shore--he promised that the company would rebound from its dismal first-quarter loss of $44.6 million. Dunlap conceded that he had taken his ''eye off the ball'' to focus on the trio of acquisitions he made in March and had allowed underlings to offer ''stupid, low-margin deals'' on outdoor cooking grills. But he insisted that it would ''never happen again,'' and that Sunbeam would post earnings of 5 cents to 10 cents a share in the second quarter and $1 a share for the full year.
Not everyone felt reassured, least of all Shore, who had several contentious exchanges with Dunlap at the meeting. Afterward, as Shore was heading out the door, Dunlap made a beeline for him. ''I saw this wild man coming forward,'' recalls Shore. ''He grabbed me by my left shoulder, put his hand over his mouth and near my left ear and said: 'You son of a bitch. If you want to come after me, I'll come after you twice as hard.''' One Sunbeam adviser corroborates Shore's account.
Dunlap's performance at that meeting--including his announcement of another 5,100 layoffs at Sunbeam and the newly acquired companies--didn't prevent the stock from dropping further. Nor did Dunlap's speech stop news reports about what Shore had discovered nearly nine months earlier: that Sunbeam was engaged in highly aggressive sales tactics and accounting practices that inflated revenues and profits. The most scathing analysis, in Barron's, alleged that Dunlap employed $120 million of ''artificial profit boosters'' last year when the company reported $109.4 million in net income.
Dunlap was so concerned about the effects of the story that he called an impromptu board meeting for June 9 to rebut the charges. He arrived for the session at 4 p.m. Besides the five outside board members, there was a bevy of external advisers, including lawyers, public relations consultants, and the company's accountant from Arthur Andersen. Dunlap, recalls one participant, ''seemed strangely subdued and quiet.''
Kersh and Controller Robert J. Gluck led the board through the charges, denying virtually all of them. The Arthur Andersen partner assured the board that the company's 1997 numbers were in compliance with accounting standards and firmly stood by the firm's audit of Sunbeam's books. The directors discussed a range of alternatives to deal with the story, from the filing of a libel suit to issuing a detailed letter of corrections to its shareholders.
The discussion was drifting when it was decided simply to draft a point-by-point rebuttal for the company's bankers and directors. Suddenly, Director Charles M. Elson, a Stetson University law professor and friend of Dunlap's, asked how the company's second quarter was shaping up. The following exchange then occurred, according to four of those who were present.
''Sales are a little soft,'' said Kersh.
''Well, do you think you're going to make the numbers?'' asked Elson.
''It's going to be tough,'' replied Kersh.
''This is a transition year,'' Dunlap responded. ''You've got to stop worrying about specific numbers. We're trying to prepare for 1999.''
Dunlap then said he wanted to discuss something privately with the board. All the outside advisers departed, leaving only Dunlap, Kersh, and the five directors. Over the next 20 minutes, Dunlap told the board that either he needed the right level of support or he was prepared to go.
''If you really want me and Russ to go, then let's settle up the contract and we'll go,'' Dunlap said, according to several board members. ''I have a document in my briefcase that we can go over and get it done.''
The board was stunned. Dunlap told them he believed that Perelman was orchestrating a torrent of bad media coverage so he could buy the company at a bargain. Some of the directors said later that they thought Dunlap was becoming emotionally distraught. They did not believe that Perelman, who declined comment, would undermine himself that way. His ownership stake enabled him to affect change more directly.
SUSPICIONS. Shortly after the exchange, Dunlap and Kersh got up and marched out of the room. After allowing the pair enough time to reach the elevator bank, Howard G. Kristol broke the silence. Of all of them, he had known Dunlap the longest. For more than 20 years, Kristol had been his personal attorney. He had drafted Dunlap's employment pacts at Scott Paper and Sunbeam.
''That is complete bullshit,'' Kristol blurted out, according to several directors. ''Just bullshit.''
Everyone in the room agreed. No one had uttered any doubt about Dunlap's ability to lead the company. No one thought he had cooked the books. So why would he bring up the possibility of resigning?
''I don't know about you, but what I'm clearly hearing is that Al and Russ want out,'' Kristol recalls saying. The others concurred. The timing could not have been worse. Although the company was in crisis, Dunlap was about to go to London to give a speech and promote his book, while Kersh was going off on vacation in Ohio. They were concerned that Dunlap lacked the resolve to continue in the job, was unaware of the deteriorating results, or worst of all, was being less than candid. ''We all sat there feeling like we were going to throw up,'' says Elson. ''It was horrible.''
Dunlap's strange behavior led director Faith Whittlesey to openly suggest that perhaps the CEO was suffering from emotional distress, say three directors. She was not the first to wonder if he had lost perspective in the wake of the barrage of hostile media coverage. Some of his closest associates thought he had become oddly subdued and introspective--quite a departure from the volatile and voluble man they knew.
Before leaving the conference room, the directors exchanged personal phone numbers so they could stay in close touch. Several, particularly Langerman, agreed to dig more deeply into the company and question other Sunbeam executives over the next few days. When the session finally broke up around 8 p.m., Elson was so distraught that he spent the next three hours wandering the streets of Manhattan.
Over the following two days, Langer-man did considerable homework. Unbeknownst to Dunlap, he called several Sunbeam insiders, including three top operating executives, Lee Griffith, Frank J. Feraco, and Franz Schmid. But the most important break came when he spoke with Sunbeam's Executive Vice-President David C. Fannin.
Fannin, 52, didn't fit the Dunlap mold. Unlike his tempestuous, self-promoting boss, Fannin is unassuming and mild-mannered. The Kentucky-born lawyer had worked at a blue-chip law firm in Louisville for nearly 20 years when a client recruited him to Sunbeam in 1993 as interim general counsel. Of Sunbeam's top dozen senior executives, he would be the only survivor, someone who viewed himself as a moderating influence on his mercurial boss.
IN CRISIS. Dunlap not only brought Fannin into his inner circle, he handsomely rewarded the lawyer for his loyalty and commitment. In February, for example, Dunlap handed him a new three-year contract that raised his base salary by 90%, to $595,000, along with a huge stock option grant on 750,000 shares, now underwater. What Dunlap failed to notice, however, was that Fannin had become demoralized by what he saw at Sunbeam. It was hard to really like Dunlap, with his hair-trigger temper. Many times Fannin considered quitting. ''But it was like being in an abusive relationship,'' he says. ''You just didn't know how to get out of it.''
Fannin, however, had now reached the breaking point. Although Kersh told the board the second quarter would be soft, a week earlier Fannin had been at a Sunbeam meeting at which considerable concern was raised that the results would be far below Dunlap's May 11th forecast. At that session, the numbers coming in showed that revenues were falling by as much as $60 million in the quarter. In last year's second quarter, Sunbeam's sales were $287.6 million.
When Langerman called Fannin on Wednesday morning at his office, Fannin was ready to reveal what he knew. ''I was totally disillusioned,'' he said. ''I felt this was not something I wanted to be involved in any further.'' Later that night, while at home, he told Langerman that the numbers were much worse than soft, and that the company was in crisis.
Meanwhile, Fannin did some interviewing of his own from Wednesday to Friday of that week. He met with Gluck, the controller, a finance analyst who had been a pre-Dunlap holdover, and asked pointed questions about the quality of the 1997 earnings. ''I didn't like the answers I got,'' recalls Fannin. ''He said: 'Look, as much as possible, we tried to do things in accordance with GAAP, (generally accepted accounting principles), but everything has been pushed to the limit.' There was no smoking gun, but taken as a whole, this was not a sustainable situation.'' Gluck did not respond to requests to be interviewed.
Langerman called his fellow directors and asked them to come to an emergency meeting in Kristol's Rockefeller Center offices on Saturday morning. Fannin agreed to come to report on what he had found. ''Had he not come forward,'' says Elson, ''it would have been extraordinarily difficult for us to act. He was the quiet hero. He really put his neck out.''
On Saturday morning, June 13, Sunbeam's outside directors solemnly gathered around the same rectangular conference room table where only four days earlier they had had their odd meeting with Dunlap and Kersh. A box of Krispy Kreme doughnuts served as breakfast. Four of the directors were there, along with Fannin and a pair of lawyers from Skadden Arps, Slate, Meagher & Flom. Director Rutter was on the telephone from Captiva Island, Fla., where he was on vacation with his family.
The directors all agreed Dunlap had to go. With the exception of Langerman, the directors were Dunlap's friends. But they also felt betrayed by him, misled about the company's financial condition, its second-quarter earnings, and its yearly numbers as well, they later said. ''We lost our confidence in him and the ability to sustain things was questionable,'' says Rutter.
By noon, Skadden Arps lawyer Blaine V. ''Finn'' Fogg carefully scripted the words that Langerman would say to Dunlap when they placed the conference call. ''All the outside directors have considered the options you presented to us last Tuesday and have decided that your departure from the company is necessary,'' Langerman read aloud.
Elson then made the motion to dump Dunlap, but he couldn't bring himself to read it. ''It felt too cruel,'' he recalls. ''We had gone back a long way, and I just couldn't do it.''
So after Elson put forth the motion, it was quickly seconded by Kristol and dryly read by Fannin. The outside directors passed it unanimously.
NO EXPLANATION. ''I think I'm entitled to an explanation,'' Dunlap said finally, according to several participants in the meeting.
He wouldn't get one. Instead, Langerman told him to contact the board's lawyer. Kristol adjourned the meeting shortly after. Three days later, during a telephone session, Kersh was fired as well.
The day after Dunlap was axed, the board met again in Skadden Arps' offices. It named as the new chief executive Jerry W. Levin, a longtime aide to Perelman and former CEO of Coleman, which now comprises about 40% of Sunbeam's revenues. Langerman, who agreed to serve as nonexecutive chairman, had called Perelman on Saturday afternoon to ask for help. Levin was on his way to see a movie that evening when Perelman asked if he would be interested in taking over.
Now, Levin has to sort out the mess. Not only is Sunbeam expected to report another loss in the second quarter and possibly for the year, but the company is also under an informal probe by the Securities & Exchange Commission. It is also expected to be in technical default on a $1.7 billion bank loan by June 30. Already, Levin is expected to win a reprieve from the banks, but it will take some time to turn Sunbeam around.
Dunlap still has followers who predict a comeback, though headhunters say it's unlikely he'll ever get another chance to run a major company. In the end, Al Dunlap, the kid from Hoboken, N.J., the son of a union steward, fell on his own weapon, the sword of shareholder value. ''Dunlap got thrown out not because the board said his way was the wrong way to run a company,'' notes Peter D. Cappelli, chairman of the Wharton School's management department. ''He was fired because he couldn't make his own numbers.''
By John A. Byrne in New York
Updated June 25, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.