As Smith’s World Caved In, a Trouble-Shooter Dug It Out : Loren Carroll Is Smiling; So Are Shareholders and Creditors of Revived Firm
Loren Carroll knew he would be in for a rough ride when he joined Smith International as chief financial officer in 1984, but he had no idea just how bad things would get. He found out soon enough.
In rapid-fire succession, it seemed that everything that could possibly go wrong for the Newport Beach oil-field equipment manufacturer did go wrong.
There was Smith’s misguided attempt to acquire Gearhart Industries in June, 1985. “That disastrous takeover strategy cost the company $88 million,” Carroll said.
There was the plunge in oil prices in early 1986. The unexpected decline caused oil producers to shut down their drilling rigs, a disaster for drill-bit manufacturers such as Smith.
Then there was what Carroll likes to call the Valentine’s Day massacre. On Feb. 14, 1986, a court entered a $205-million judgment against Smith in a 14-year patent infringement suit filed by competitor Hughes Tool Co.
The judgment exceeded Smith’s net worth by “a wide margin,” Carroll said, and forced the company to file for protection from its creditors under Chapter 11 of the federal bankruptcy code--or face involuntary liquidation.
A ‘Company Doctor’
But Carroll had known trouble before. Trained as an accountant, he worked for 19 years with the large accounting firm of Arthur Andersen & Co. as a “company doctor,” tending to a number of publicly held Orange County companies that he prefers not to name.
Smith had been one of the companies on Carroll’s consulting rounds for 10 years, and when the opportunity presented itself to help restructure Smith following the Gearhart debacle, Carroll was eager to take on the challenge.
“It was time for me to see what I could do from the other side,” he said. “In a consulting capacity, you can always walk away. But when you run a business, you have to live with your decisions--you’re around to see the outcome.”
As Smith’s top financial executive, Carroll’s performance in negotiating with legions of creditors and shareholders--not to mention their lawyers, accountants and various consultants--would prove key to the company’s survival.
Ten weeks after emerging from bankruptcy proceedings, Carroll is being given credit by industry peers and analysts for orchestrating a textbook reorganization.
“This is the largest bankruptcy to ever come through and go out with such positive results,” said Jeff Chanin, who served as chairman of Smith’s shareholders committee. Chanin is a managing director at Drexel Burnham Lambert Inc. and a veteran of several major bankruptcy proceedings, including Wickes Cos.
Scrambling to Meet Payroll
Carroll has a lot to smile about today. Nearly two years to the day after he had to scramble to find a bank willing to issue cashier’s checks so the company’s employees could be paid (Carroll said he called nearly every major bank in Southern California before finding one willing to do it), Smith has just paid off the last of its creditors. And it has issued new common and preferred stock to raise funds for the reorganization. Since the new issue hit the market about a month ago, Smith stock has traded above $8 per share, an increase of about $2.
Smith’s shareholders and creditors are also smiling. “A lot of people tripled their money in a matter of a year or two (by purchasing Smith debt securities at steep discounts), and you can attribute a lot of that to Loren’s efforts,” said Doug Rock, president and chief operating officer of the reorganized company.
Chanin said shareholders are happy with Carroll’s work because the company’s stock was only diluted by 19% in the restructuring. That is considered a significant accomplishment considering the heavy losses shareholders have had to a shoulder in some bankruptcy proceedings. For example, Storage Technology stock was diluted by 80% and Manville Corp. by 98% as a result of bankruptcy reorganizations.
Smith’s creditors are happy since they received all the money they were owed and then some, counting the stock and warrants to purchase additional stock they received as part of the deal. Some speculators who purchased Smith debt securities during the reorganization made tremendous gains.
Smith’s other executives are smiling, too. With the notable exception of former chairman Jerry Neely, the company’s top management has emerged from the bankruptcy intact.
“Loren did a superb job of holding together the financial resources of the company and bringing those resources into a liquidation position so that the obligation to our creditors could be met, while at the same time providing the capital necessary for the operation of our business,” said Moak Rollins, Smith’s new chairman.
“He bore the brunt of anything that had to do with the bankruptcy, and that was absolutely crucial,” Rock said. “It freed us up to run the business and get the message out to our customers that we were not going to liquidate.”
Granted, the reorganized Smith is only a fraction of its original size. In 1982, company sales peaked at $1.2 billion, and earnings were nearly $200 million. Smith had 13 divisions and 14,400 workers.
This year, sales should hit about $300 million, and the company is expected to break even at best or suffer a slight loss. The 13 divisions are gone, and Smith now relies primarily on its three original businesses: Smith Tool, Dyna-Drill and Drilco. Only 2,700 people work for Smith today.
Still, what is left of the company isn’t exactly paltry. Smith has operations in 37 states and 27 foreign countries. “We still maintain a worldwide market share in our products--and we are still the world’s largest down-hole tool manufacturer,” Carroll said.
And if recent increases in the price of crude oil continue, the company could return to profitability perhaps as early as this year.
Navigating Smith through bankruptcy reorganization has been the most satisfying experience in Carroll’s professional life, he said, although one he wouldn’t want to repeat anytime soon.
“This isn’t the sort of thing you go out and look for,” Carroll said, “but when you have the opportunity to go out and successfully deal with a major crisis, it can’t help but be a boon for your career.”
A Frustrating Time
It was also the most harrowing, and at times, the most frustrating period of his life. “The peak experience for me in all this has been accomplishing our goals. We were really able to get done what we said we’d do--preserve the company and its management, while satisfying our shareholders and creditors,” he said.
“The low point came when I had to lay people off. Whether it’s one person or 10 or 20, those are always the toughest decisions.”
Carroll stressed that Smith’s improved fortunes are the result of a team effort on the part of both his financial staff and the operations side of the company, which maintained sales at respectable levels through the bankruptcy.
And he regrets that Neely, whom Carroll described as a good friend, was forced to step down as chairman.
“It’s unfortunate that he had to be the fall guy,” Carroll said. “On the other hand, that was our only casualty in management.”
But if Carroll is reluctant to give himself most of the credit for Smith’s rise from the ashes, others are not.
“My impression is that Loren was the sole architect of the financial restructuring. It was really Loren’s show,” said Matthew Simmons, who runs a financial consulting business for energy companies and who testified on behalf of Smith in the bankruptcy proceedings.
Getting the Sales Quickly
“It was very impressive to see the way Loren orchestrated the whole thing--there was an army ready to spring into action letting customers know that they hadn’t shut their doors,” said Simmons.
“Had they not addressed sales very quickly,” he said, “they could have seen a huge amount of business dry up very quickly. The campaign to let customers know that they’d still be around may sound minor, but it may have been the single biggest factor in their successfully handling the bankruptcy.”
Carroll said the most frustrating aspect of his duties during the bankruptcy proceedings was dealing with the emotional and, in his eyes at least, the irrational demands made by Hughes as part of the lengthy patent infringement suit.
Hughes eventually merged with competitor Baker International, and Baker’s management wound up in charge of the new company. The merger was the catalyst that allowed Smith to hammer out a settlement, reduce the $205-million judgment to $85 million and emerge from bankruptcy on New Year’s Eve.
“The scuttlebutt is that as long as the Hughes management was in control, there could never be a deal. After 14 years of litigation, they considered Smith and Jerry Neely as their bitter enemies,” Simmons said.
“There was a lot of emotion on both sides,” recalled Carroll. “Hughes was not willing to have a reasonable settlement. They simply wanted us out of business. We saw the merger as an opportunity to impress upon the Baker people that this ought to be a financial decision, not an emotional decision. Their philosophy was to maximize what they felt they could get in as short a time as possible and get on with business.”
Litigation a Major Hurdle
The Hughes litigation was a major hurdle to getting Smith back on track, but not the only one. During three weeks of seemingly endless negotiations with shareholders and creditors last July, Smith managed to persuade everyone to compromise.
The reorganization plan allowed the company to erase $485 million in debt by resolving the lawsuit and by making $212 million in cash payments, selling $134 million in long-term notes and issuing $35 million in stock and warrants.
“In retrospect, the deal was a very big success all around,” said Richard Wynn, a partner with the law firm of Levene & Eisenberg which served as legal counsel to the equity committee. “Creditors got repaid $1.10 on the dollar, and shareholders came out with stock trading at close to $7 a share.” Smith stock had traded as low as $1.25 a share during the reorganization.
Now that Smith has emerged from bankruptcy, it is a lot more tranquil at corporate headquarters. And that is fine with Carroll, who said he is looking forward to sticking around and, for a change, helping a healthy company grow.
