Entrepreneur and Executive Bill McGlashan: “Bankruptcy Isn’t a Turnaround”

There are many reasons a business may need a corporate turnaround. Whether they be distressing factors such as a reduction in sales, cash flow problems, mounting debt, or challenges like rapid growth while finding appropriate means of capital formation, there are many companies that have the potential to become great but miss the mark due to a lack of strong leadership. Indeed, it takes a certain kind of leader to not only create financial results that are quantifiable, but also develop a sturdy foundation for the business that can withstand the test of time and other stressors such as a recession, or more topically, a pandemic. Corporate turnaround is an exercise in taking a company from where it currently stands to operating at its full potential.

Studying a real-world example of a successful corporate turnaround can offer invaluable insights for those seeking to embark on a similar transformative journey. Such case studies provide a comprehensive blueprint, revealing the strategic decisions, organizational changes and innovative approaches that contributed to the company's revival. By dissecting the challenges faced and the outcomes achieved, aspiring entrepreneurs and business leaders can gain a deep understanding of the intricate dynamics involved in orchestrating a corporate turnaround.

One such example can be found in Bill McGlashan’s work in the early 2000s at the software company Critical Path. He joined the company as interim CEO within three months of its reckoning with a massive accounting scandal that caused its stock to drop 75 percent over a few weeks, prompted two dozen shareholder lawsuits and resulted in criminal charges against four of its executives. McGlashan entered the position intent on preventing the company from filing for Chapter 11, saying at the time “Bankruptcy isn't a turnaround, it's a copping-out of everyone's interests.”

Focusing on corporate transparency, culture and hard truths, McGlashan was able to eliminate 87 percent of Critical Path’s debt, settle the lawsuits within three months for $17.5 million, compared to the potential claim total of $240 million and delay its NASDAQ delisting for failing to meet the minimum $15 million market capitalization requirement until shortly after his departure. By 2003 the company had turned around, and McGlashan continued to serve as chairman for the company until 2005.

Early learnings for McGlashan

While today McGlashan is most strongly associated with the private equity sector and his pioneering work in impact investing, at the time he was directing his focus toward executive work and venture capital. His first attempt at a turnaround came while he was working at Bain Capital, when he became CEO of a small troubled private company that the venture capital firm had partially funded. He has said of the time “You go in as a VC thinking you understand what it takes to run a company -- and I realized I didn't have a clue! So I learned the hard way by making a lot of mistakes.”

By 1944 he had started a venture firm of his own with two partners called Generation Ventures, and the company did business in China. He became excited about one of the companies they started called Pharmanex, and built it from the ground up to become one of the largest supplement companies in the United States. He held the President position for the company until it was acquired. In 1997 he left and joined Whitney & Co. as a venture partner in San Francisco, where he started an affiliate fund called Vectis Group that focused on helping U.S. tech firms establish companies abroad, and one of his clients was Critical Path.

A once promising company

When one looks at Critical Path, it’s easy to draw comparisons to many of the internet and tech companies that have arisen today. It came with a visionary and eccentric founder, who recognized the future of email early on and managed to raise $40 million in venture funding to fill a former chocolate factory in San Francisco with engineers. It was a press darling when it went public, and although it had no profit and less than $1 million in revenue it still managed to raise almost $600 million in one year. The company’s shares surged from $24 to $150 in a month, igniting a buying frenzy that ultimately resulted in acquisitions totaling $1.8 billion.

As the bubble expanded, Critical Path experienced rapid growth that obscured its vulnerabilities. Revenue surged to a restated $136 million by the close of 2000, and within three years the company's workforce ballooned from 42 individuals at a single location to over 1,000 employees across 77 offices. Internal budgeting was virtually absent, and unchecked spending was rampant. The company acquired ten firms in 16 months, diverting from its core business of managing email accounts and purchasing businesses such as FaxNet, which lost $25,000 a day providing businesses with a hosted service that diverted incoming faxes when lines were busy.

Then, a newly appointed chief financial officer detected a troubling discrepancy. Company executives had been inflating revenue and profit figures, altering contract dates, and fabricating fake transactions. On February 2, 2001, the company acknowledged there had potentially been accounting irregularities, and it was soon revealed that sales for the latter half of 2000 had been inaccurately reported, were 25 percent lower than initially stated, and its purported losses of $20 million were, in fact, twice as large.

Coming back from brink

Here we return to the beginning of the story. Critical Path now faced 52 shareholder lawsuits and an investigation by the Securities & Exchange Commission. With more than 1,000 employees and 77 offices around the world, Critical Path had total expenses in the first quarter of 2001 of $56 million, while its revenues were just $27 million. Plus, it carried $300 million in debt.

When the scandal broke, founder Hayden, who had been sidelined but returned after the two top executives left, asked McGlashan to help out temporarily. "I became very attached to the outcome. I have this psychosis that my life is on the line," he said in an interview with Bloomberg of his decision to become CEO.

According to McGlashan, part of the problem was the tremendous pressure on executives to hit growth targets. “That focus on growing revenues encourages people to ignore the basics of running a business. The basics that I was accustomed to -- financial controls, cash management, and earnings orientation -- just were not present in this company when I got here,” said McGlashan.

Additionally, he pointed to the market’s reaction when companies miss earning targets, even if it is by just a few cents. Wall Street desires reliability and predictability, but it is an incredibly high standard for businesses to hit without fail each quarter. Bill McGlashan heard stories about how the previous management team at Critical Path was constantly monitoring their stock price, which he said created a very unhealthy environment. “What that has done, in my view, is create far too much short-term thinking and far too much pressure on human beings to play games.”

McGlashan said that the best way to change a culture is to change people. He focused on bringing in highly talented individuals with extraordinary careers, who had a reputation and who wouldn't conceive of doing something that would jeopardize their reputation. Corporate ethics is a cultural issue, and he sought to create a company culture of integrity filled with people who want to build something important and were not looking for a quick fix or to make money quickly. On top of that, he also implemented internal controls, giving the example of the company’s sales contracts which previously were only requiring approval through the sales department. He ensured that every contract went through both the finance and legal department as well.

Focusing on creating transparency in the management team, McGlashan noted that this was extremely helpful in turning the business around. “Our executive team includes all the key functional areas, and I try to get them to interact with each other, to be critics of each other,” said McGlashan. A big part of it is information dissemination. Every week we put together what we call our management dashboard. It's a report on results from all the key areas of the company. It's only two pages and is reviewed by everybody on the executive team.” By focusing on shared responsibility of outcome, McGlashan strengthened the company’s culture considerably.

Of the fight to avoid bankruptcy, McGlashan said this: “We were valued as if we were going to die. Everyone assumed we were dead, were going bankrupt. But doing a bankruptcy of any kind means you're basically wiping out a whole class of shareholders and saying, "You lose." From a fiduciary perspective, you have to think about the customers, the employee population, and all the various debt and equity stakeholders. In a bankruptcy, they all get wiped out.”

In order to combat this, first they worked to convince their customers that they were not going anywhere. McGlashan said Critical Path asked them to sign nondisclosure agreements so they couldn’t trade the stock, and then explained that they were restructuring the debt and getting additional financing. He emphasized that reducing the company’s debt burden was a key aspect, because while there was not a lot of wiggle room they did have an extraordinary customer base that believed in the technology. This allowed them to overcome the concern the customers had about the viability of the company as a whole. “We were zipping all over the world talking to customers, while at the same time trying to put out a fire here, a fire there. The analogy is driving a car while changing the tires. That was sort of the feeling,” said McGlashan.

McGlashan said the final critical piece to the turnaround puzzle for Critical Path was the fact that they didn’t lose any senior-level engineers. In fact, he saw to it that they actually increased the budget of R&D. Just as countless articles are highlighting today, competitiveness for positions in the space was intense, and he recognized the importance of keeping around people who could recognize the exciting work they were doing in internet communication at the time.

McGlashan arrived at Critical Path in April of 2001, vowing to revive the disgraced dot-com, but with one condition: Avoid Chapter 11. He immediately dumped eight of the acquisitions, taking a $1.3 billion writeoff. "We didn't have the luxury of being sentimental,” he said at the time. He shut down 53 of the 77 offices and laid off 55 percent of the staff, trimming the total to 562 and in his first six months halved costs to $27 million.

Turning around a business requires a deft hand and a willingness to “kill your darlings.” That is why often the best person for the job is an outsider like McGlashan, who can objectively see where fat needs to be trimmed while also remaining cognizant of the company’s original vision.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes