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When Turnarounds Take Center Stage

Emerging from the recession often means a carefully implemented turnaround strategy

When Turnarounds Take Center Stage

Most people in the gaming industry know that, beginning in 2008, the good economic times of the previous two decades were winding to a close, and the very real specter of fiscal insolvency became a looming presence. Companies and managers that once were weaned on easily obtainable loans, rising demand and hotel expansion projects now had to face shrinking revenues, a sharp drop-off in operating performance and crushing debt-service obligations.

In short, many of these enterprises that find themselves in the midst of a recession are now struggling to survive, and they now must modify their operational assumptions and execution standards, while positioning the organization to achieve returns above the risk-adjusted cost of capital.

Companies that recognize the changed landscape and respond proactively are more likely to prevail; others will not. The sad fact remains that their survival probably requires a turnaround.

When revenues start deteriorating and costs rise, and/or financial covenants and other negative factors threaten, immediate action is called for. Management must arrest the organization’s faltering performance and implement a turnaround. But how does one decide on the best course of action?  When the board of directors is confronted with the harsh reality that the company may not survive unless it can conceive and execute a successful turnaround strategy under difficult circumstances and with very little time, where does one begin?

Redirecting a company headed down the wrong path is a matter of judgment and skill, and often only a matter of degree rather than kind. Sometimes only a light touch is needed to correct a company that has headed off course; however, in many cases, a complete reversal of course is necessary.

Replacing the Team
Understanding the economic and marketing forces and risk factors that are putting the company under stress is obviously the first order of business. Equally important, once the decision to institute a turnaround has been made, the question of whether to continue with the present management team or to seek outside help becomes critical.

In most cases, the present team has already responded to the current conditions to stabilize the company. But if their efforts have not already reset the course, the company will likely continue to drift in the wrong direction.

Choosing to bring in new leadership with a turnaround consulting team (whether to supplement or replace), or to retain present management, is often very difficult. Incumbents are not easily disentangled from current dynamics and personnel, and personal friendships and loyalties can get in the way of making clear and sound decisions. In addition, incumbent management is generally ingrained and interwoven into the cultural fabric of the organization, presenting obstacles to changing direction.

Those in charge ultimately must answer these fundamental questions:

Is a meaningful turnaround possible under any circumstance, and if so, can it be achieved in a timely manner through better management of the existing business plan strategies? Further, can existing assets be utilized differently and/or is significant capitalization required?

The increased investment alternative requires both greater risk and revenues for justifiable returns. But business theorists agree that the correct response to these issues is what distinguishes those companies that are more likely to succeed. They are often unable, however, to agree on the proportion each requires.

Bringing in the Professionals
What attributes should a strong turnaround consulting team possess? They would first need significant access to resources in all disciplines of the gaming and hospitality industry, along with proven operational experience and financial advisory expertise in dealing with the various internal and external audiences.

A professional turnaround operational team would take immediate steps to repair the balance sheet and restore stability to the company’s financial outlook. This would include an initial assessment of operations by conducting interviews with all stakeholders, such as owners, boards of directors, executive management and gaming regulators. All aspects of current gaming operations—slots, table games, marketing, food & beverage and hotel management—would be canvassed for specific measurables to determine what has been working and what has not.

Other areas that would be analyzed include property holdings, financial liquidity and the debt capacity of the organization, while at the same time evaluating various capital structures and alternatives to improve liquidity and still support long-term growth.

The next steps entail the development of a detailed, optimal strategy for a financial restructuring, creating value and preserving capital. Along with re-establishing credibility and communications between the company and its constituencies, a new marketing plan to improve cash flow and restore earnings must be developed and implemented. Negotiating with stakeholders and advisers to restructure existing debt, equity and other corporate liabilities might be necessary, as well as arranging DIP financing, exit financing or other capital-raising solutions.

After stakeholders’ approval of the plan, the new direction of the organization must be made clear to the staff and management to avoid any alienation or anxiety that could lead to retaliation, sabotage or a decline in customer service.

Once the new plan has been implemented, a frequent and periodic evaluation/performance monitoring must be undertaken using operation metrics like revenue per FTE, EBITDA per FTE, etc. These analyses assure the financial health of the organization, allow mid-course corrections to the business plan, and assist in the overall evaluation of the new management direction.

Dealing With Change
After a turnaround operation, the management and staff must recognize that things cannot be the same as before. The new organization will bring new performance standards, operational procedures and policies that mean letting go of the old ways of doing things.

The changes involved in a transition can be understandably unsettling for many, but setting short-term, achievable targets can help discouraged team members regain their footing and restore confidence more quickly. However, this might possibly involve realizing further declines, albeit decreased and short-term, until the financial performance actually improves.

Effective turnarounds offer a mix of both internal and external strategies, often referred to as “defensive” and “offensive.” Defensive moves primarily involve cost-cutting throughout the organization in an attempt to streamline operations by increasing productivity while decreasing overhead. At the same time, offensive maneuvers try to reduce competitor inroads with successful advertising and marketing campaigns designed to gain market share.

Each organization subject to a turnaround presents a particular case in which both defensive and offensive strategies have to be uniquely formulated. Finely tuned management skills are important, too, since even a good turnaround strategy might possibly miss the mark if it is not executed with precision—one that addresses the specific needs of the situation efficiently and effectively.

Major moves designed to cut costs by reducing payouts or levels of service could possibly alienate customers and send them scurrying to competitive establishments. A careful balance must be struck between turnaround imperatives and anticipated revenues, and customer expectations and player loyalty.

Thus, implementing a turnaround is usually quite delicate: there is an extraordinary need for clarity and objectivity in understanding the critical components, in determining the right strategy, and in executing it with the precision required for any complex operation.

But before you begin the procedure, it’s critical to know exactly how much force you will be applying—whether surgically trimming with a scalpel, or hacking away with a meat cleaver.

A minor flaw in the overall strategy or a botched execution could result in further misdirection of the company and possibly lead to an unnecessary failure. On the other hand, careful and competent guidance could mean much more than simply survival—it just might result in an outstanding success: a thriving organization on the road to recovery!

David Schugar, owner of Equity Gaming LLC, has worked in gaming for over 30 years, including operations in Nevada, Michigan, Mississippi and Indiana. His career includes 10 years with Mandalay Resort Group as vice president and general manager.

Craig Ghelfi, senior director of Conway Mackenzie, began in the family-owned Golden Gate Hotel Casino in Las Vegas. After earning a B.S. in business administration at Arizona State, Ghelfi operated casinos in Nevada, Mississippi, West Virginia, California and Michigan, where he was the CEO of Detroit’s Greektown Casino.

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