Question

Question 1(a) “Chain Saw”AL and Sunbeam (1995-1998)AL Dunlop was proud of the fact that he was at the bottom of his West Point class (he did graduate). Afrightening thought worthy of Dr.Strangelove is that as an officer he was assigned to a missile silo and the missiles were armed with nuclear weapons.He was chosen to turn around Scott Paper company. Within six months he had dismissed 11,200 employees including 50 percent of all managers and 70 percent of all corporate staff and paid off a significant amount of Scott’s long term debt. He then sold the company to Kimberly-Clark making over $100 million from his stock options.In the spring of 1995 AL Dunlop gave a talk at the Johnson School in Professor Bierman’s finance course. He received a standing ovation for his talk which stressed that managers should increase shareholder value.That night there was a dinner in his honour at Renees attended by Charles Elson (law school professor and friend of AL), Bob Gibbons, Jerry Hass and Hal Bierman(the last three wereJohnson School professors). It was a dinner from hell. Dunlop insisted on using profanity continuously and incorrectly and insulting each of the professors in sequence. Attempts at peace making were turned into profane tirades. He was actually an unintelligent, dislikeable and uninformed man. The next day a group of students came to Professor Bierman’s office and advocatedALDunlop for Dean of the School. Bierman suggested that they approach the tenth person they met incollegetown and offer the job to that person since he would perform better.July 18, 1996 Dunlop (now 59) was made Chairman of the Board of the Sunbeam Corporation, a company in need of help. On July 17, the stock price was $12.25. By July 19, the stock reached a price of $19.50. This wasthe biggest gain prompted by a chief executive announcement in the history of theNew York Stock Exchange. Professor Bierman took it as a matter of honour to sell the stock short.

Sunbeam paid Dunlop a salary of $1 million a year,2.5 million options to buy at $12.25 and one million shares of restricted stock(worth $18 million). The total package has a value in excess of $38 million.By August 8, he had dismissed the president of Sunbeam’s household products group, the chief financial officer, the chief operating officer North America, and the vice president of strategic planning for North America. Sunbeam had 60 staff people at its Fort Lauderdale headquarters. The market expected headcount reductions. Dunlop sent the following press release “I set as an initial goal the quick appointment of a highly focused management team to provide leadership in the transition to the Sunbeam Corporation”. He also stated “if you can’t rum a company around in a year, you can’t do it at all”.In November 1996, Dunlop announced a major restructuring.Headcount will be reduced by 50% to 6,000. Some of the reductions willbe the result of divestitures. In January 1997, Sunbeam sold its clock, timers, and thermometer units to CIT Group Holdings for $8 million (the units generated $20 million in annual revenues). By the first quarter of 1997, Sunbeam had a positive (but small) profit, Sales were almost as high as in 1995 but not as high as the first halfof 1996.But some critics pointed out that there were last minute sales drives in the first quarter of 1997, including deliveries when the orders had been cancelled because of failure to deliver in time.Dunlop said “we are definitely on schedule and we will probably deliver better results than we expected “.The stock price broke through $30.Professor Bierman sold short more shares.By December 1997,the stock price reached $41.Professor Biermancovered his short position having lost all faith in the efficiency of the stock market.by the end of 1997,the stock reacheda high of $50 7/16 and the company reported net earnings of $109.4 million ($1.41 per share) for the year.In the fall of 1997, Dunlop hired Morgan Stanley to sell Sunbeam. The $50 stock price precluded any bids. Dunlop decided if he could not sell then he would buy. In March1998, Sunbeam purchased Coleman Corporation for $2.2 billion and Signature Brands and First Alert for $425 million. Now Sunbeam had over $2 billion of in debt and itsnet worth was a negative $600 million.

By June 8, 1998, the business press wondered whether Dunlop had manufactured Sunbeam’s 1997 earnings by accelerating the bookings of sales and various accounting tricks .one author estimated the inflation in profits to be $120 million. This estimate was probably too low.On Saturday, June 13, 1998, AlbertJ. Dunlop was fired by Sunbeam. The motion to remove Dunlop was made by Charles Elson, Dunlop’s good friend and staunch alley in the pursuit of shareholders rights. Elson was an honourable person who voted on behalf of Sunbeam’s shareholders and against his friend. Sunbeam’s stock had fallen to $18.0625 on Friday, June 12. The stock continued to fall to $11.25 by June 29. The stock price decline continued with the stock price falling below ten in July (Biermann was right, if poorer).On April 22, 1999, Sunbeam reported a loss of $898 million for 1998. Its warehouses were full of finished goods inventories. The stock sold for $5.375. Finally, AL Dunlop announced that he was ready to another corporation.Required:(i)ALDunlop was a great success at Scott Paper selling out to Kimberly-Clark at a fine profit. Why was he a failure at Sunbeam?(ii)With hindsight we know AL at Sunbeam was a disaster. What hints were there that maybe he was not going to be a success at Sunbeam?(iii)What generalizationsare there?(iv)Sunbeam reported $109.4 million of income for the year 1997. What accounting related actions could Sunbeam have taken that would inflate 1997 income?(v)What real actions in 1996 and 1997 would tend to increase income? Which of these actions are desirable?(vi)As a consultant hired in 1996 would you doas Dunlop wants you to do or would you do what you think is best for Sunbeam? Assume Dunlop’s actions will harm Sunbeam’s stockholders and employees.

Answer 1

1. Dunlops actions were very aggressive.He removed the entire core management team within a month, who drived the Sunbeam corporation for years.He sold the unit which generates a sales revenue of $20 million a year for bare $8 million.

Though he has shown profits initially, Those were because of last minute sales and overlooked the cancelled and undelivered orders. Objective was to sell the company but instead he bought other companies and Increased more debt and piling inventory. Which eventually caused the company to make enormous losses.

2.Hints:

a. Agrresive actions - Removing a core management group with in a month

b. Over reporting sales

c.Unplanned Acquisitions

d. Diversion from Objectives- Hired Morgan stanley to sell sunbeam instead bought another company.

e. Grave Mistake: Sold a unit which generates 20 Million dollars revenue a year for Bare 8 Million dollars.

3. Generalizations:

a. Cost cutting helps when company is in loss but we cannot remove the core team within a month without knowing the deliverables.

b.f you can’t rum a company around in a year, you can’t do it at all”. This may not be true all the times.

c. Never sell a company without proper valuation.

4. Sunbeam had a positive (but small) profit, Sales were almost as high as in 1995 but not as high as the first halfof 1996.But some critics pointed out that there were last minute sales drives in the first quarter of 1997, including deliveries when the orders had been cancelled because of failure to deliver in time.

5. Real actions which tend to increase income

a.Sunbeam sold its clock, timers, and thermometer units to CIT Group Holdings for $8 million (the units generated $20 million in annual revenues).

b. Fraud accounting Methods.

c. Agressive cost cutting by laying of the employees

6. Desirable actions

1. Proper accounting standard- Reporting the cancelled and undelivered orders

2. Keeping the revenue generating units and selling of the units in losses

7.If i was hired as a consultant, I would do what is best for the company and its stakeholders.

I would keep the accounting records fair and transparent.

I would look for the cost efficient solutions and Introduce Offers for Consumers to increase sales but limitting them for margins.

Note: A thorough background check of Dunlop Career would have helped Sunbeam. They went with the over enthusiastic approach and hired Dunlop.