Huge Restructuring Cycle Predicted

Economic downturns tend to cycle around every seven to ten years, said Michael Heisley, founder, The Heico Companies LLC, and principal, Stony Lane Partners. Today’s tremendous debt coupled with leverage “like you’ve never seen before” leads Heisley to believe turnaround companies will be in big demand.

“I think there’s going to be a huge restructuring cycle,” Heisley told the Turaround & Restructuring Conference January 18 at the Chicago Cultural Center, sponsored by Turnaround & Restructuring Group. “It’s coming in 2008, 2009. Quite frankly, that’s what we’ve been saying in our strategic planning sessions. It’s going to be a very, very interesting time for knowledgeable people to really be of help.”

In the early years of this decade, Heisley said, distressed debt stood at about $1 trillion and the default rate, at 10 percent to 12 percent. In 2007, distressed debt has grown to $2.5 trillion, but the default rate is between 1 percent and 2 percent. “If you don’t think there’s something coming, you’re in for a big shock,” Heisley said.

Heisley is raising his first fund through Stony Lane Partners, which he cofounded. He aims to raise $750,000 for future turnarounds.

Turnaround business holds several advantages, Heisley said: businesses may be purchased at low price with little equity, and the sellers always participate in the process.

Heisley started out by turning around a small, ailing manufacturing company. He then literally banked on that success to form a turnaround company, which has grown into an international business generating $2 billion a year in sales and employing 11,000 people.

Perhaps Heisley’s success all comes down to following his mother’s advice, given when he was a “poor” child living in Alexandria, Virginia: “Son, dream big, work hard, and never quit,” she told him.

For Heisley, one success has led to another. After becoming president of one small manufacturing company in eastern Pennsylvania, “I successfully turned that company around.” That led a bank in Illinois to approach Heisley about straightening out a small manufacturing company tucked away in the cornfields of Mendota, Illinois. He left his wife and five children behind to sell their home. Before that could be done, six months later, the bank asked him to buy the company. Heisley only had $150,000, but he put it down toward purchasing the company, which “hadn’t made money in seven years.”

“When I work up [the next day,] I didn’t have the nerve to tell my wife,” he said, drawing laughter from the crowd. That $150,000 was all Heisley had to put down on a house, and now it was gone.

In St. Charles, Heisley passed a housing development with a bankruptcy sign on it. He convinced the bank to let him live in the model home to provide on-site security to save money on insurance. The bank agreed, and Heisley’s family moved in.

Within 18 months, Heisley had turned the manufacturing business around, he said. A Swedish conglomerate bought three of its six divisions.

“I was suddenly wealthy,” Heisley said. “It seemed so simple to do that I thought, what I really want to do is go and do another one.”

He formed Heico and then Heico Acquisitions, gathering a team around him to help him analyze businesses. He chose people who had experience in the types of manufacturing work he was evaluating.

“When we go do due diligence, the people who show up is the guy who runs steel purchasing or the man who runs the machining center at a certain company or the guy who does quality control,” Heisley said.

He also brought in people to assist or replace management of the ailing company.

Heico also was unique in that it didn’t raise a fund for turnaround operations, with Heisley having no background or access to the turnaround industry, he said. Instead, Heisley borrowed money against the cash flows of operating companies he had just turned around to raise equity for the leveraged buyout of the next company he planned on turning around.

“That’s how we built the company,” Heisley said. “Over the last 28 years, we’ve built, it depends how you break it up, anywhere from 25 to 40 companies.”

During that time span, he’s generated a 58 percent return on investment.

His advice for those entering the turnaround business: learn how to run a business first. That’s what Heisley did, after leaving an executive position with a computer company. He took that first job with a small manufacturing company, because he said he eventually wanted to “run my own show.”

Part-time weekend student Thomas Kiesau said he was most interested in Heisley’s opinions about “a lot of forthcoming opportunity” in recessionary times. He also was interested that Heisley spoke about such issues taught in class as business cycles. “People think we’ll never see the same stuff happen again, but year after year, cycle after cycle, it tends to repeat itself.”

- Mary Sue Penn