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|  | SEPTEMBER 27, 2004
By Steve Rosenbush The Top 5 Turnaround Busts This year has roughed up many companies. But for this select bunch, attempts to regain lost glory have fallen disastrously flat Despite a year of economic growth, it's still tough out there for Corporate America's weak and infirm. The economy and job market are growing, but not as fast as they were a few months ago. Interest rates are rising, oil prices are soaring, and geopolitical risks are off the chart. Consumers are strapped, leaving companies with little room to raise prices. Business spending on products like software and communications equipment isn't very encouraging. These are trying conditions for corporate turnarounds. Scores of companies have been fighting to regain their footing since the 2000 stock market crash. For many, the subsequent recession and the economic aftershocks of September 11 have hampered the way back. Now they're struggling in a winner-take-all business environment. From US Air (UAIRQ ) to Trump Hotels & Casino Resorts (DJT ), damaged companies that promised to rebuild themselves have come up short. But which turnarounds have been the most disappointing? BusinessWeek Online set out to identify the top five that are really keeping investors up at night. Our criteria, as you'll see, are completely subjective. We've tried to figure out what went wrong and why, and we sifted through the casebooks for clues for the future. But we came up with definite reasons for putting these five on the list. Here's what we found: • Fifth place goes to MCI (MCIP ). Given the high expectations, the telecom outfit was a legitimate candidate for the year's worst turnaround. But the fundamentals of its core long-distance business are so awful that we have to give CEO Michael Capellas extra points for this turnaround's degree of difficulty. In Olympic-diving terms, turning around the scandal-scarred telecom carrier -- which went by the WorldCom name for several years, as you'll recall -- has been the equivalent of a reverse tuck with 3½ somersaults from the 10-meter board. Some may argue that MCI shouldn't be on the list at all. It's generating cash, although still unprofitable. And it just raised its dividend, after having unloaded a ton of debt, slashed jobs, and reduced capital spending to a level that barely covers the light-bulb budget. But come on -- this company ought to be profitable. After perpetrating the biggest accounting fraud in history, MCI was given a second chance when it was allowed to emerge from bankruptcy. That was the right thing to do -- especially for the sake of employees -- even though many rivals wanted MCI liquidated. One hedge-fund analyst told us last year he expected post-bankruptcy MCI to be the best-performing stock on the Nasdaq for two years. Instead, its share price has plunged since trading began again in March. Capellas has now put the outfit up for sale, a tacit admission that it can't survive on its own. Now, if he can only find a buyer. • Coming in at No. 4 is telecom equipment maker Nortel Networks (NT ). It earned its spot for being in the midst of a decent turnaround last year, only to let it all slip away. Nortel was a star of the late-'90s telecom boom, but profits and market cap vanished as its upstart customers went bankrupt and larger, established clients cut their spending. Former CEO Frank Dunn seemed to bring the company through the down cycle in decent shape. Nortel emerged with a fairly good lineup of products, and it chose its markets well, investing in areas like voice over Internet protocol (VoIP). But Dunn and his lieutenants lost their jobs last May in an accounting scandal that has sparked criminal probes in the U.S. and Canada. Investigators are looking at how Nortel managed to return to profitability before its peers, generating big bonuses for Dunn and other executives. It had no need to rush: Nortel was headed back to profitability in due time. After Dunn was ousted, the top job went to William Owens, a Nortel board member and retired U.S. admiral. Owens has stressed to the media and investors that the gray-haired grownups are back in charge. That's fine. But Nortel still hasn't managed its finances and put the mess of the Dunn era behind it. On Sept. 16, it warned that it wouldn't meet revenue forecasts for the year. After promising that Nortel would lead the market, Owens now says it'll be a laggard. That's no way to restore credibility. Maybe Owens & Co. will manage to turn Nortel around in the coming year. Given a strong product lineup and a good customer base, it certainly has the tools it needs. But until that happens, no excuses. • No. 3? Delta Airlines (DAL ). What is it about massive, capital-intensive industries with commodity pricing and lots of competition that makes them so vulnerable in tepid economies? It has happened in telecom, and the airline-industry debacle has been awful to watch, too. United Airlines (UALAQ ) and US Airways are in bankruptcy. Looks like Delta (DAL ) may soon join them. Even its auditors recently admitted that Delta might not make it. It wasn't supposed to be this way. Gerald Grinstein, a seasoned executive with many decades of experience, has been working on a turnaround plan since he took control of Delta in January. Since then, the stock has lost about 75% of its value. And no end is in sight for Delta's woes. Grinstein's plan to slash costs and close hubs is unlikely to do the trick. With ticket prices falling, it's hard to cut costs fast enough to be competitive. Also, in a Catch-22 sort of way, it's tough to bring in more revenue by cutting costs. Like MCI's Capellas, Grinstein has been dealt a tough hand. Worries over terrorist attacks and war hurt demand, and rising oil prices hit the bottom line, giving Delta no room to raise prices. It's becoming clear that Grinstein's turnaround plan isn't working.
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