The art of the turnaround Featured

7:00pm EDT December 16, 2003
For more than two decades, Michael Heisley quietly went about building Heico Cos. LLC into a successful but low-key turnaround firm.

A small manufacturer here. A telecom company there. Heisley eventually amassed 40 companies with $1.5 billion in annual sales, yet few people knew much about the former computer industry executive.

Then he had to go buy a basketball team.

The decision in January 2000 to buy the struggling Vancouver Grizzlies thrust Heisley into the national spotlight. He vowed that he would strive to keep the professional basketball team north of the border, but a year later announced he would move the team to Memphis.

What followed was fan outrage, frivolous class action lawsuits and media criticism -- par for the course whenever a professional sports team is uprooted from its home turf. The unfortunate reality, however, is that professional sports is a business, and outside of a few major markets, basketball is one of the least profitable ventures.

Heisley, as well as the team's previous owners, knew Vancouver could not financially support the team.

"The Canadian dollar had dropped substantially," Heisley recalls. "You're paying your players in American dollars and collecting from your fans in Canadian dollars. The franchise was losing substantial amounts of money. It became obvious to the NBA, after I had lost quite a bit the first year, that it could not make it in Vancouver."

Heisley is used to making the hard decisions, though. That's his job. Through Loop-based Heico, he acquires smaller companies that are often either distressed or in bankruptcy. He then makes them profitable by selling off the underperforming parts, eliminating waste or creating a new management team.

None of these steps is easy or popular. If they were, every company would be doing them.

"People always say to me, 'How do you find out what to do?'" Heisley says. "I just ask the people in the company, they know. It isn't a secret. It's just that nobody has the will to do it."

Unlike most turnaround artists, Heisley doesn't sell his acquisitions as soon as he fixes them, when the potential sale price is at its peak. Rather, once the companies are part of Heico, the revenue generated helps finance future acquisitions.

Today, Heisley owns more than 40 companies within a diverse set of industries, including steel wire products, pre-engineered metal buildings, heavy equipment, telecommunications, plastics and food production.

"Most of everything we've touched has turned out to be successful," Heisley says. "I don't mean to be arrogant about that, but most of them at one point have been very successful."

You can thank the Grizzlies for bringing his special talent to light.

Computers to concrete

Heisley didn't start out his career as an turnaround specialist. After graduating from Georgetown University in 1960, the Alexandria, Va. native spent 13 years in the computer business, first with IBM, then RCA, and finally at Sperry Univac, where he rose to executive vice president.

"When I started back in 1960, some people were predicting that a few hundred computers would do all the data processing for the whole industry," Heisley says. "There were less than 100 computers installed at that time."

By 1973, Heisley tired of the big corporate environment and accepted a position as president of a financially struggling manufacturing firm in Pennsylvania. After turning that company around, he learned of another distressed manufacturer, Diversified Products Groups of Conco Inc., in Mendota, about 55 miles south of Rockford.

Intrigued by the opportunity to revitalize another company, Heisley took the $150,000 equity he had in his home and borrowed more than $10 million from banks to purchase the manufacturer -- which hadn't made a dime in eight years.

"The company had really lost its way," he says. "It had been around since the early 1900s and had built up a lot of baggage over time. They needed someone to come in and straighten out the product offerings, get rid of a lot of bad business practices."

In the first six months, Heisley sold four of the manufacturer's six divisions and eliminated $6 million of inventory. The remaining divisions, Spartan Tool Co. and Field Controls Co., became the first companies under Heico when it was created in 1979. Those businesses are still part of Heico today.

From the money generated in the first turnaround, Heisley set out to acquire more companies, but he found the only ones he could afford were distressed businesses, in or near bankruptcy.

"I never had the financial contacts in the early days, when people were doing mezzanine financing with junk bonds," Heisley says. "This wasn't a grand strategy. It was just my target of opportunity."

Heisley never heard of business acquisition practices, which were coming into vogue in the early 1980s, like issuing high-yield bonds to finance leveraged buyouts. The practice, popularized by financier Michael Milken, who later served two years in prison for securities fraud, is blamed for causing the savings and loan scandal of the 1980s.

Although he never used them, Heisley believes that using junk bonds to acquire small to mid-sized companies prevented the collapse of many companies.

"Because of junk bonds, companies exploded because they had access to the financial markets," he says. "(The markets) were denied to any company other than one of great size because the only way you could get any financing would be if you were an investment-grade company. I don't think that's truly appreciated."

It's the management

With more than 40 businesses under his umbrella, many of which were purchased out of bankruptcy, Heisley knows what kills a company -- management.

"If the company had no problems, you wouldn't need any management," Heisley says. "Management is there to look out in the future, see problems developing and steer the ship around those rocks and problems.

"What happens many times is management, over a number of years, has a tendency to say, 'This has worked for us in the past, this is what we do.' They lose their ability to be flexible enough to handle changes, and if you really look at it in five years, 75 percent of what you're selling is going to change. In effect, over a five- to seven-year period, you're recreating your company. If you're not, then you're more than likely on your way to going out of business."

Often, though, in the smaller companies Heisley acquires, everyone in the company knows the problems reside with inflexible management, but no one is willing to do anything because of a personal relationship with the employer.

"Generally, the problems in the company revolve around people," Heisley says. "You have to bring in new people with new ideas, and some of your best friends are the guys that are going to have to be replaced. It's just human nature to not want to make that decision.

"A guy like me coming in, who has no relationships with people, it's easier for me to do it."

 

Grizzly situation

By far, Heico's highest-profile acquisition was the Memphis Grizzlies. The NBA team, which was purchased for a reported $160 million, came to Heisley's attention through former NBA coach Dick Versace, whose late brother Rocky was Heisley's childhood friend.

Versace asked Heisley to invest in the Grizzlies. The longtime Bulls fan was intrigued by the idea of turning around a struggling basketball team the same way he had turned around so many struggling manufacturers.

When he purchased the team, then in Vancouver, he quickly learned that it would not last north of the border. After spending an estimated $47 million in the first year to help the team survive in Ca nada, Heisley asked NBA Commissioner David Stern for permission to move the team to a more financially viable location.

Cities like Louisville, New Orleans, Anaheim and even suburban Dixmoor tried to lure Heisley, but Memphis' civic and business community made an offer too good to refuse. In March 2001, Memphis-based FedEx announced that if Heisley brought the team to town, it would buy arena-naming rights, estimated at $100 million. For its part, the city offered to issue $226 million in bonds to pay for the new arena.

"It was one of the largest cities that did not have a major professional sports franchise in any sport, and we felt that that was a key criterion because you'd have 100 percent of the attention of the business community and everything else," Heisley says. "FedEx was very anxious to get a major sport down there, and they were willing to make some significant commitments. The city and the state of Tennessee were very anxious to get a professional basketball team in Memphis.

"The end result (is that) we put together an attractive package that is going to totally revitalize the franchise."

As with his other acquisitions, Heisley revitalized the management team, this time in bold fashion. He stunned the basketball world by luring Los Angeles Lakers legend Jerry West to Memphis as the franchise's president of basketball operations, just eight months after West retired as executive vice president of one of the NBA's premier franchises. Like Heisley, West liked the challenge of a turnaround.

"I want to help make a difference," he said at the time.

The same day West came on board, the Grizzlies announced the hiring of Gary Colson -- one of the most successful coaches in NCAA Division I history, with more than 500 career wins at four different schools -- as assistant to the president.

West and Colson joined a basketball operations team that already included Versace, who had just been named general manager.

"Who you work for makes a huge difference in enjoying your job," West says. "I have been so impressed with Mike. He wants to win so much and is committed to creating a winner for Memphis."

And that has been the standard operating procedure for Heisley throughout his career -- do what it takes to create a winning operation.

How to reach:
The Heico Cos. LLC, (312) 419-8220