Turnaround Restructuring
Platinum profits from formula of rigor, pain
Auteur : By Casey Ross and Beth Healy, Globe Staff
Mike Donnelly remembers the man only by his moniker: The Godfather.
That was how Platinum Equity referred to the executive it put in charge of Donnelly’s upstate New York software firm, Aptis Inc., in the fall of 2000. Within days of his arrival, 45 people were laid off, nearly half the company’s workforce.
“They came in here to make cuts and return us to profitability, and they didn’t sugarcoat it,’’ said Donnelly, who remains chief operating officer of the firm, now known as CommSoft. Less than six months after taking over, Platinum resold the company for $6.9 million, a 31 percent return on its original investment.
Today, the Beverly Hills, Calif., buyout firm is trying to apply its turnaround strategy to the struggling newspaper industry. Platinum is one of two bidders trying to buy The Boston Globe from The New York Times Co., which is exploring the sale of New England’s largest daily and its sister newspaper, the Worcester Telegram & Gazette. Platinum and a rival bidder, led by former Globe executive Stephen Taylor, each offered about $35 million for the papers, plus the assumption of $59 million in pension liabilities. Final bids are expected Friday. It’s possible the Times Co. could expect a higher price now, with the Globe’s finances improving, but it’s also possible the company won’t sell either paper.
Platinum broke into the news business last May, acquiring the San Diego Union-Tribune for a reported $50 million. So far, the firm’s executives have turned to a familiar playbook, laying off 28 percent of the paper’s employees, or 304 people, including seven of its top nine executives.
Most of the firm’s experience is with technology and aging industrial companies. For the media business, Platinum is working with David Black, whose British Columbia-based publishing company operates a chain of small newspapers in the United States and Canada. Black keeps his news staffs lean and focuses almost exclusively on local news.
“The impact of that strategy is already evident at the Union-Tribune,’’ said Dean Nelson, director of the journalism program at Point Loma Nazarene University in San Diego. “They’re trying to do more stories with a faster turnaround, but they’re not delving into the more nuanced complex issues people care about.’’
News executives at the Union-Tribune said that is not a complete picture of what Platinum is doing at the newspaper. They said the firm’s executives quickly invested in computerized technology to replace a long-outmoded method of assembling the paper each day, and have already put it on stronger financial footing.
“They are smart businessmen who see the value of what journalism brings,’’ said Robert York, a senior editor at the Union-Tribune. “They came in here with a plan and their ears open, and so far it seems to be working.’’
Platinum is known for buying struggling units of Fortune 500 companies and quickly cleaning house, cutting jobs, and honing the company’s product focus. Over the years, the firm has bought more than 100 companies, ranging from makers of computer modems to a commercial real estate firm, with combined annual revenues of $27.5 billion. Platinum usually sells its companies within five to seven years, although it continues to own 29 businesses it bought over the years. Platinum’s record shows it is more than a one-dimensional disassembler of companies. At Aptis, for example, Donnelly said Platinum’s hard-nosed decision-making saved his company from a financial collapse, preserving its bottom line so it could be sold to a new owner, which is now trying to grow its products and staff.
Platinum’s chief executive, Tom Gores, said in an interview with the Globe last week that he is pursuing newspapers because he believes they can be rebuilt into successful companies. He declined to discuss his interest in the Globe specifically, but he said he is intrigued by solving the challenges confronting large urban newspapers.
“It’s a very community-based product, and we want to be positive and find a way to make an impact,’’ Gores said. “The last thing we want is people thinking we’re coming in to screw up the community, make a few bucks, and then leave.’’
Since establishing Platinum in 1995, Gores (pronounced GORE-is) has become one of the world’s richest men, according to Forbes magazine. The firm has 140 employees, and while its executives are not software experts or newshounds, they are experienced business managers with a record of making the hard decisions necessary to improve their companies’ finances.
One of Platinum’s most successful deals was the 2006 acquisition of PNA Group Inc., an Atlanta steel distributor, for $18 million. Platinum resold the company two years later for $450 million, or 25 times its original investment, to Reliance Steel & Aluminum Co. of Los Angeles. Though consummated faster than most of its deals, the PNA workout followed a typical pattern: Platinum fired a top executive, cut staff, and then bought several other related firms that helped the steel company grow into a profitable business.
“They are really good acquirers,’’ said Sandy Nelson, who was tapped by Platinum to lead PNA during its restructuring. “They are not content to sit on the sidelines as a financial manager. They take an active management role, and in my experience I found that to be very positive.’’
After closing on the PNA sale, one of his most lucrative deals, Gores threw a party at the firm’s Beverly Hills offices, located in a landmark Georgian-style building fitted with marble floors, 30-square-foot skylights, a wine cellar, and dark-wood finishes throughout.
In many ways, Gores, 45, seems to embrace the image of the Hollywood mogul. He has his own Web page, www.tomgores.com, which includes a biography of his business exploits and a photo montage of Gores along with pictures of white sand beaches and a yacht club. There are also shots of him along athletic fields where he coaches youth sports.
He remains deeply involved in the firm’s investment decisions, but typically dispatches a team of executives to do the front-line work of vetting companies and reshaping them to turn a profit. While now a billionaire, Gores came from humble roots. Born to parents of Greek and Lebanese heritage, he was 4 when his family immigrated to the United States from Israel, settling in blue-collar Flint, Mich. He got his bachelor’s degree at Michigan State University and sold computer software before moving to California to go into business with his older brother, Alec.
The Gores brothers first made money at Alec’s software company, Executive Business Systems, which he started in 1978 and sold in 1986 to Contel Corp., a telephone company, for $10 million, according to published reports. (A third brother, Sam Gores, is head of Paradigm Talent Agency, which represents film stars such as Philip Seymour Hoffman and Felicity Huffman and the television show “Desperate Housewives.’’)
Tom Gores worked for Alec Gores’s computer company and then at his brother’s private equity firm, now called the Gores Group. They built their personal wealth in large part by doing deals with their own money, so they reaped all the profits when they resold investments for a gain, instead of splitting the proceeds with investors.
Even after Tom Gores broke off to start Platinum in 1995, he followed this same funding model, until 2004 when he first raised money from outsiders for a $700 million fund. The fund, which focused on investing in companies in declining markets, earned 2.7 times the money invested, or a 118 percent gross return. He is currently investing a $2.75 billion fund he raised in 2008, also focused on distressed companies.
While his firm’s reputation has grown, not everything has gone smoothly in Gores’s personal life. During the trial of Anthony Pellicano, a private detective in Los Angeles often hired by celebrities, it was revealed Gores had a personal relationship with his then-sister-in-law, Lisa Gores, Alec’s wife. Pellicano had been hired by Alec Gores to follow Lisa and Tom Gores and record their conversations.
Lisa Gores testified during the April 2008 trial in US District Court in Los Angeles. At one point during cross-examination, she blurted out, “I didn’t sleep with my brother-in-law,’’ but then admitted to having “sexual contact’’ with him, according to a court transcript of the trial.
Tom Gores declined to discuss the matter. He said he remains married to his wife and spends much of his free time coaching the youth soccer and basketball teams of his three children.
Executives at the San Diego Union-Tribune said Gores has not been involved in day-to-day decisions at the paper, leaving its operations to a chief restructuring officer.
Immediately after taking over the newspaper, Platinum carried out layoffs of 192 employees that were planned by its previous owners, and then instituted a second staff reduction of 112. Among those laid off were the paper’s editorial page editor, its reporter covering the San Diego Padres, and several of its longest-serving feature writers and investigative reporters. (The head of the paper’s investigative team is now trying to create a separate nonprofit to continue producing in-depth reports; Platinum has committed an undisclosed amount of money to help fund the enterprise.)
Even before Platinum arrived on the scene, the Union-Tribune went through several rounds of staff reductions that resulted in smaller daily news sections. Its stories are shorter, and it relies on wire services for national and international news. A year ago, the Union-Tribune shut its Washington bureau, which in 2006 helped win the newspaper a Pulitzer Prize, the most prestigious award in journalism, for its coverage of a corrupt California congressman.
Like most major metropolitan newspapers, the Globe, too, has experienced significant reductions in staff and news content over the past several years. Newsroom staff is down to 340, from a high of 552 in 2000. The Globe has closed all its foreign bureaus and reduced staff coverage of national affairs and other select news categories.
In San Diego, many former newsroom employees dismissed by Platinum said the cuts have stretched the staff thin, forcing beat reporters normally assigned to crime or the region’s large military industry to chase daily stories of any kind that their former colleagues had once covered.
“When you continue to shrink and shrink and shrink, you’re just asking people to shovel at some point,’’ said Brian Cragin, a former technology editor at the Union-Tribune who was laid off by Platinum. “You just can’t produce quality.’’
In public comments, Platinum’s executives at the Union-Tribune have said producing high-quality journalism is a top priority. Louis Samson, the Platinum executive who led its acquisition of the newspaper, said the plan is to make cuts to stabilize the business in the short term, and then pursue new print and online advertising partnerships to help the newspaper grow.
“We believe that newspapers like the Union-Tribune will continue to be very relevant in their communities as long as they are committed to delivering real value in terms of content,’’ Samson said in an interview published in the Union-Tribune in May. “A very large segment of the population has deeply entrenched readership habits that I don’t see changing for a long time, and papers who can also deliver a high-quality online product will succeed.’’
Platinum has reportedly looked at buying other media properties, including the magazine BusinessWeek and the Austin American-Statesman in Texas.
Some of the news executives in San Diego are optimistic about the newspaper’s future under Platinum. York, the managing editor for presentation, video, entertainment, and sports, said Platinum immediately decided to invest in a computerized pagination system to layout its daily pages, which will reduce the cost of physically producing the paper and allow the company to devote more resources to news gathering. (It had been among the last major papers to be laid out by hand, as most dailies, including the Globe, have used computerized pagination systems for decades.)
In a recent meeting, Platinum’s executives told Union-Tribune employees the newspaper is now expected to make a $5 million profit this year, compared with a projected $8 million loss at the time it bought the paper.
Gores acknowledged that much of the profit is due to sharp staff cuts and said he does not yet know how he will balance the sometimes competing goals of making money and producing quality journalism.
“I can’t say I have a magic answer,’’ he said. “But we’ve definitely made progress in establishing a healthier company.’’
Last articles from : Turnaround Restructuring section
[28/05/2009] PEI Asia, July/August 2009, Mapping the turnaround market
[17/05/2009] AIG sells Japan headquarters for $1.2 billion
[17/05/2009] American International Group's restructuring could take years
Browse all articles for the section Turnaround Restructuring