BULL STREET - The art of the Con

Chainsaw Al

Sunbeam, which was founded in 1897 by two partners, John Stewart and Thomas Clark under the name Chicago Flexible Shaft Company, was the industry innovator in many areas and enjoyed a well-earned reputation for superior products. Originally, the company started up as a manufacturer of agricultural tools, the brilliant partners soon saw that a market existed for superior kitchen utensils. Soon innovations like the first automatic coffee maker, first pop-up toaster and the first Mixmaster started rolling off the assembly lines to the delight of upscale housewives.

Chicago Flexible became Sunbeam in 1946, a move that management felt more adequately reflected the non-agricultural business that for some time had been the company's main business. The Sunbeam acquisition of Oster gave the company a full product line and made it appear very attractive to companies that wanted the creditability of name brand products along with top-flight management. Sunbeam was favorably compared to General Electric, which held the top spot in the industry.

Sunbeam, in reality, shone out above the crowd and it didn't take long for another Chicago based company, IC Industries, the old Illinois Central Railroad who had been on an acquisition kick to take a serious interest. In 1980, they made an unfriendly tender offer and in the middle of series negotiations between the two companies, Alleghany International headed by Robert Buckley, toped the bid and the company was now a division of Alleghany.

Buckley had a thirst for high living at company expense along with an ego that required a constant flow of acquisitions. Not all of Buckley's deals were profitable and his style of living represented an enormous drain on corporate profits, soon Sunbeam became nothing short of a cash cow for Alleghany. Funds were up-streamed into the parent at an alarming rate and the infrastructure along with new product development seemed to die on the vine.

Buckley made one bad decision after another and was relieved of his position in 1986. Management went into divestiture frenzy and sold divisions while laying off thousands. When the smoke had cleared, things had gone from bad to worse and in 1987, the company filed for reorganization under Chapter 11 of the bankruptcy code. Paul B. Kazarian, an ex-Goldman Sachs official with the backing of two large hedge fund shareholders took charge of the company after several years of a heated proxy battle. Kazarian turned out to be made of the right stuff and quickly turned the company around. On the other hand, many considered Kazarian's management style bizarre and another palace coup was strung together by the hedge funds.

This time a former high-ranking official from General Electric, Roger Schipke was given the mantel at Sunbeam to see what he could do to turn things around. Schipke had created a great name for himself in the corporate culture of GE by working long hours and bringing home the bottom line. Ultimately, Schipke had to take leave from GE because he had worked himself right into the ground. On the other hand, apparently Schipke just didn't have the background to work for a company that what trying to dig itself out of hole. In addition, Schipke was a high-grade individual that may not have had the necessary tools to be in the top job required trench warfare and probably a complete a reorganization.

Enter, stage left, Al Dunlap who had made quite a name himself on Wall Street as a no-nonsense guy who could turn a company around under the most difficult of conditions. Al never took any prisoners and seemingly had no friends. Turning a company around was war and in the heart of battle, the motto was win or perish. Perhaps that is how he got the nickname Chainsaw Al and it certainly showed where he came from. On the other hand, the real origin of the nickname according to Dunlap was that it was given to him by "John Aspinall, a British Naturalist who had said that he was like a chainsaw that cuts away the fat and leaves a great sculpture. Dunlap joked that the epithet made him sound like a serial killer. He much preferred the designation given to him by his mentor, Sir James Goldsmith, who dubbed his American friend, "Rambo in Pinstripes." ([53])

Al was a graduate of West Point where he apparently received his early instructions on trench warfare and fought the good battle everyday of his life. On the other hand, he graduated near the bottom of his class. Al got out of the military as soon as he served the time he had committed for. He determined that there were not going to be any big wars coming up that could enhance his chance of promotion. In the meantime, at home, Al was totally miserable to his wife and child and in spite of her firm Catholic roots, she despised Al so thoroughly that she received a divorce that only granted her $15 a month in alimony. His family received no better treatment. In order to make himself appear more a self-made man than he really was, Al made up the story that he came from extremely poor parents and had to fight for everything he ever got.

According to family members, Al was delusional and none of that ever occurred but it didn't really matter because Al had determined that he wanted nothing more to do with his family. In spite of Dunlap's quick temper and inability to get along with anyone close to him, he needed to bring in his troops to do the dirty work when it came to firing people. He talked a good game but when the chips were down, he left the dirty work to his lieutenants to carry out. On the other hand, by this time, Sunbeam was hardly a prize, its factories were old and out-of-date, its products were uncompetitive having been last designed over a decade before, and new and fierce competition had entered the marketplace such as Black & Decker. Sunbeam's warranties were costing the company a fortune because there was little quality control within the company and the old name recognition was becoming history as non-homogeneous logos replaced the consistency of recognition that the company had once known.

Too some degree Al’s epitaph has had to be revised a bit since recent information has been released and the original title, which was to be, “If you want a turnaround, Al’s your guy.” The revisionists have changed the title to, “When it comes to pillaging a company, Chainsaw has never had an equal.” What original appeared to be good management in retrospect now appears to have been an act of, working a bonus pool out for himself relative to reducing costs at any price and just as Sherman did to Atlanta, burn it to the ground, gut it and line up at the pay window to collect the proffered bonus. Interesting enough, as it related to Chainsaw Al, the second he left the pay window he socked his loot away in government securities so that he could not be taken in by anyone else’s claim at restoring a company to its historic profitability. Chainsaw Al knew better.

In retrospect, Chainsaw’s only real success was Scott Paper where he did his usual quadruple amputation on management and personnel. Somehow, not only did Wall Street buy his act and the stock skyrocketed when a purchase of the company was arranged buy Kimberly-Clark, whose management was reading material released by Hacksaw’s public relations people and they thought that indeed he had performed a miracle. This bailed out all of the pathetic souls that had this not happened would have seen the real result of Al’s handiwork in the price of their shares. On he other hand, Kimberly-Clark was left holding one enormous bag. Chainsaw Al had left them with so much excess inventory that what was supposed to be a $100 million fourth quarter profit for Scott mystically turned into a $60 million loss. By that time though, Al was gone and $100 million richer in Kimberly stock.

Al cashed in and moved on to Sunbeam Corporation and was originally looked upon as the second coming. At first, no one really caught on to the fact that Sunbeam was all hype and no substance.

While Al was sending employees to the unemployment lines with his glib comments about the fact that it was either him or Doctor Kevorkian, his dogs, Cadet III & Brit, were doing in up in style at a suite in a posh hotel near the Sunbeam plant. Some said, maybe he should have treated his employees as dogs and then they would have been better off. Dunlap's will called for his bodyguard to get custody of the dogs, with $1 million for each mutt to maintain the lifestyle to which it had become accustomed. By comparison, Dunlap did not attend the funerals of his mother or father. He had virtually no contact with his first son, Troy. Dunlap did call his son after the boy talked to a reporter about the old man. ([54])

"You may get your five minutes of fame," Dunlap told his son. "But I guarantee you and your mother a lifetime of aggravation." ([55]) These and other pleasant stories about Al tell us a little about the man himself. The Chainsaw man had so many threats against his life that he walked around wearing a bulletproof vest not to speak of the omnipresent bodyguards that followed him everywhere he went.

The Business Week story of September 24, 1998, Where are the Accountants?, quick makes a most interesting point:

“To take just one of the headline screamers, how did auditor Andersen miss the red flags at Sunbeam Corp. last year, when inventories began piling up and accounts receivables soared? Chief Executive Albert Dunlap had never been exactly reticent about his desire to do all he could to keep his high-octane stock levitating. So shouldn’t someone have noticed when the company reported surging sales of heating blankets in the summer and barbecue grills in the late fall? Yet at a board meeting on June 9, a partner at Anderson assured Sunbeam directors that the 1997 number complied with standard accounting procedures. Four days later, the scheme unraveling, Dunlap was fired. Sunbeam later acknowledged it was booking sales before the goods were actually delivered to stores.”

Naturally, the Securities and Exchange Commission’s interest was peaked by this strange story and when this was announced, shareholders ran for the hills. Al was terrific with the books, he turned operating expenses in restructuring charges and then capitalized them, a most bizarre accounting maneuver and having done that for an encore he booked sales before the goods had been shipped making earnings soar and the stock rise. If that hadn’t been enough, in order to bring in short term earnings he guaranteed merchants discounts but only after sales had been made a retail. In other words, when he sold the goods to merchants he had dramatically higher immediate net but no accounting hit because the goods had to be sold in order for the rebate kicked in. When it kicked in, Al was kicked out. Al, in typical Chainsaw fashion indicated that he was unaware of any accounting irregularities that had occurred at Sunbeam.

His creative accounting forced an earning restatement and all of 1997 dropped into the toilet from $1.41 that had been reported to $.60. In addition, the first quarter loss was raised by about 20% on readjustment. The Inventory losses are still to come. With all of that, I guess you would tend to believe that Sunbeam and Al Dunlap are friendly. Well, tough times make strange bedfellows is the only way we see it. Both Al and the company are facing massive litigation from shareholders, investigations from the SEC and are both on opposing sides with their former accountants, Arthur Anderson. A commonality of interest has been agreed up with mutual decision being that the accountants did it all. Deloite & Touch are doing a review of Anderson’s work and will probably testify as witnesses against their cohorts in the coming court battles.

The real problem that occurred while Al was at Sunbeam was the fact that the accountants at Anderson were awed by his reputation. They sat idly by when Al said he was going to do this or that even though they knew or should have known that this would have come back to haunt. Now, of course that part of Al’s mission was to not only fire as many people as possible but also to cook the books in sterling fashion in order to goose the stock. Pathetically, Anderson went along with the game without a whimper.

Today Al lives in Florida in a multimillion-dollar home, not to far from where he used to work at Scott. There are a lot of people out there that would still like to get a piece of Chainsaw Al. Turns out that almost everything in his resume was untrue and all the jobs he said he had were an illusion.

 

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