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Published Sunday, April 8, 2001

Cleaning up after dot-com crash

  • Steven Gerbsman is an expert in selling off assets from dying dot-coms to recover money for creditors and shareholders


    PROFILE
  • NAME: Steven Gerbsman
  • AGE: 55
  • TITLE: Principal
  • COMPANY and LOCATION: Internet Recovery Group, an operating entity of Gerbsman Partners in Kentfield
  • TYPE OF BUSINESS: Crisis management for Internet companies
  • BIO: Gerbsman says he has been involved in various business and investment ventures as an officer, director, consultant and investor. Prior to forming Gersbman Partners in 1980, he was president of four operating divisions of ITEL Corp. between 1971 and 1979 and worked for IBM from 1967 to 1971, He received a bachelor's degree in accounting from Hunter College in 1967.

    The New Economy crash is a boon for an Old Economy business: crisis management. Since June 1999 when he formed the Internet Recovery Group, Steven Gerbsman has been lending his more than 20 years of experience in salvaging or scrapping ailing companies to the dot-com meltdown.

    Gerbsman is called in at the eleventh hour by creditors or shareholders to strip as much money as he can from failed Internet ventures. As a result, he has become an expert in what a dot-com is worth in the only currency that matters anymore: Old Economy dollars.

    So far he has worked with 10 dot-coms, including Emeryville-based Utility.com whose assets this week he sold off to Myutility Inc. Gerbsman finds customers or competitors interested in buying what remains of the heady days of Herman Miller Aeron chairs and pie-in-the-sky business plans.

    Gerbsman, who has liquidated plenty of Old Economy companies including Ortho Mattress Inc., once the nation's largest factory-direct bedding company, knows a lot about operating in an economic downdraft. Trouble is, he says, few dot-coms did. He deposits blame for their demise squarely on the shoulders of young and inexperienced managers. He says what these managers didn't lack in dollars from private and public investors, they lacked in business sense.

    "Bottom line, from observing the warning signs early on, it was inevitable that when the capital markets and cash dried up, these companies would be in trouble," he said. "As quickly as they went up, they would go down a lot quicker."

    Gerbsman spoke with Times staff writer Jessica Guynn about the Internet workout business.

    Q: How did you get into crisis management?

    A: In the early 1980s, I was doing some private investment banking, helping middle-market companies raise money. An investment bank called me about a company in trouble because I had CEO operating experience. This company was in the sports business. I stabilized it, turned it around and sold it in six months. Stakeholders, the senior lender, recovered 85 percent of the loan and shareholders received 30 percent of their investment.

    Q: Were you hooked after that first experience?

    A: Most crisis guys are sort of junkies. Once you do one of these, you get involved in the immediacy of the crisis and the creativity to stabilize the company. Most crisis guys like the rush. We're what you would call the green berets of the corporate structure.

    Q: When did the dot-com shakeout become a part of your turnaround business?

    A: In mid-1999. We observed the irrational exuberance of a gold rush. Having lived through some of the ups and downs (of such a market), I knew we would get to the point that there would be some challenges. The symptoms were very clear. These were business models that didn't focus on making money or generating cash. Management was young and inexperienced and in need of adult supervision and had no finance, marketing or operating experience. Most of these companies had intellectual property but no hard assets and therefore when the money dried up or when they ran out of cash, they would not have a senior lender to lend them money against hard assets. But because of the public markets fueling all of this capital, new cash was able to come in and mask these problems.

    Q: When did you work with your first dot-com?

    A: The third quarter of 1999.

    Q: Can you describe the company generically?

    A: The company had raised $10 million and was the first to market in their space. Because at that time the market was still young, a number of competitors came in and took advantage of their knowledge base and were significantly better funded. The company was not able to raise additional capital because of the young and inexperienced management and because they blew through $10 million. We stabilized the company and sold the intellectual property to one of their competitors.

    Q: What is the key to Internet workouts?

    A: Internet and workout is an oxymoron. Most Internet workouts don't become turnarounds because of the lack of experienced management. Companies invest in management, management, management. So you have to take the intellectual property and the associated intellectual capital of people who developed (the intellectual property) and go into the market and see if somebody cares.

    Q: Who are you looking for in the market?

    A: There are only two people who care: customers or competitors. The value of most Internet companies will be determined by the market. If there are no bidders, the market has spoken. If there is one bidder, you are at the mercy of that bidder in terms of value and price. If there are two bidders, that creates a bidding war.

    Q: How many dot-coms have you worked with?

    A: We have done 10 workouts and assisted two companies in creating and developing an Internet strategy and raising money for them.

    Q: When you are called in to work with an Internet company, who typically makes that call?

    A: You never want to talk to the CEO. The CEO is part of the problem. You need to talk to the stakeholder, either (on the) equity or debt (side). Our business is to maximize stakeholder value, that includes creditors and debt, then shareholders. You have to get in early enough that there is still some cash to maintain the viability of the entity and to protect the intellectual property and the people who developed it in order to find a potential acquirer.

    The company also needs to be able to afford and pay us. In most crisis management deals, we are typically the last ones in. Because companies run out of cash quickly, we have to make sure there is enough cash to maintain the company for 60 to 90 days, otherwise the job isn't worth taking.

    Q: How are your fees structured?

    A: We get paid a monthly retainer and then a success fee.

    Q: Is selling off the assets typically the only option for an Internet company?

    A: There are always options. One has to go in and determine the value and quality of the intellectual property, market niche, business model, customer base, vendor relationships and, most important in order to do a turnaround, there has to be value in the quality of the management. And most Internet companies have young and inexperienced managers.

    Q: What is your approach when you start working with an Internet company?

    A: In all situations, stabilization is always the first approach. I focus first and foremost on control, forecasting and preservation of cash. Cash is the most important asset. Second, I want to provide leadership motivation and morale to employees. In most cases, these employees, although nobody has directly told them, know what's going on. The third thing is I want to immediately communicate with all parties. These include stakeholders, vendors, customers and employees. Fourth, I want to determine the company's viability and how to get to cash break even as quickly as possible. Fifth, I want to determine both the quality and accuracy of the financial information as well as the business model and the quality of the management. Sixth, I make a determination whether we can restart the company or have to sell.

    Q: Do you have difficulty getting cooperation from management or staff when you come in?

    A: When I come in, I am empowered by the board of directors and the stakeholders. My credibility is immediately established. I tell the truth. I am not burdened by the stories or the ills of the past. I work as expeditiously as possible to earn the respect and control of the employees.

    Q: What about the cooperation of management?

    A: Assuming that I am empowered by the board and stakeholders, either I earn their cooperation and respect or they won't be there.

    Q: What are the most important qualities in your line of work?

    A: Ethics and integrity.

    Q: Have any of the Internet companies you have worked with had any instincts whatsoever about operating in a down cycle?

    A: None. Some of their board members and investors have functioned in a down cycle and should have known better.

    Q: On what basis do you judge your own success?

    A: I don't create problems. I fix (them). My success is directly related to any improvement of the present condition.

    Q: What is the most difficult part of your job?

    A: The most difficult part of my job is getting in there early enough to effect positive change and maximize stakeholder value.

    Q: How often are you called in too late?

    A: That's always the case. That's the nature of the beast. People don't want to admit they have problems.

    Q: How would you describe your crisis management style?

    A: I tell the truth. I bring a sense of urgency. I hold people responsible and accountable. I want to ensure that everybody has the highest ethics and integrity.

    Q: Anything else you would like to add?

    A: Just basically that all senior managers have a moral and ethical responsibility to their employees and their stakeholders to tell the truth and do the best they can. And in certain situations, these (senior managers) have failed to live up to their obligations.

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