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finance & labor
MANAGEMENT
The Icarus Effect:
FMI on Why Contractors Fail
The mind of a contractor shows numbness to risk and sometimes fatal optimism
By Richard Korman

...to defy gravity,” says one industry executive. “He was saying, ‘I’m going to be a national contractor.’ ” Reality ended up taking down the company because every market has different rules, procedures and ways of doing business. For example, the work flow is “completely different on a hospital project compared to an office building,” says the executive.

Illustration: Nancy Soulliard/ENR

The old maxim, “grow or die,” can turn out to be “grow and die” when it comes through a merger or an acquisition. Resisting the temptation to make a deal sometimes can be as important to survival as resisting a potentially unprofitable project. J.A. Jones’ acquisition by Germany’s Phillip Holzmann in 1979 at first seemed like a brilliant sale of the company to a big, well-financed parent that could provide financial guarantees in place of surety bonds. But when Holzmann stumbled in 2002, its focus became preserving jobs in Germany. When the time came to sell off the pieces of its U.S. investment, several units needed protection from bankruptcy courts before being sold.

Encompass Services, a roll-up of specialty contracting and building services firms that sought bankruptcy protection from its creditors in 2002, ended up selling back many of its acquired companies to their original owners. The folly of assuming that there would be synergies and cost-savings sufficient to out-earn Encompass’ huge debt in all economic climates now seems obvious in retrospect. Many of the original owners “laughed all the way to the bank,” according to one executive.

Illustration: Nancy Soulliard/ENR

The Bitter Residue

There are other aspects of corporate collapses that aren’t funny. One is the feeling you have when you are told to pack up and go. That is what happened to about 40 employees of Guy F. Atkinson Co. at its San Francisco headquarters within a couple of years after Clark Group, Betesda, Md., picked up some Atkinson’s assets in 1997. Yale Lyman, a business development manager, understands that Clark Group did not need the expense of those employees, but “from a personal standpoint, I felt kicked in the gut and thrown away like an old shoe.” He was 49 at the time and had worked for Atkinson for 26 years since he had graduated from college with a degree in civil engineering.

Like others who lost jobs in financial collapses, Lyman now is prospering as a business development manager for large projects with Granite Construction Inc., Watsonville, Calif., where he has worked since late 1999.

But for many ex-Atkinson employees, the blow will never be forgotten. In May 1997, the company’s top executives were still bullish about its prospects despite several problem projects. By August of that year, they were seeking bankruptcy protection in court. In order to participate in the company’s retirement program that was in place through the 1980s and part of the 1990s, employees were required to have at least 3% of the plan value in Atkinson stock. So when the stock value collapsed, it was the most senior people who were hurt (employees’ 401(K) retirement plans were protected).

At J.A. Jones, employees also learned that the federal Pension Benefit Guarantee Corp. only will backstop a portion of the value of a conventional retirement plan based on time of service. But there were other ways longtime senior employees saw their savings go up in smoke. Some were owed deferred compensation that never would be paid after Jones’ various units filed for bankruptcy protection. And another cruel twist was that some long-term disability policies were provided by a company-operated insurer. That meant that when the company filed for bankruptcy protection, those disability benefits disappeared.

“When you enter into a merger or divest an asset, how do you protect the wealth and assets of individual employees as part of the deal?” asks one former Jones employee. “When you enter into a merger or divest an asset, how do you protect the wealth and assets of individual employees as part of the deal?” asks one former Jones employee. “When we were sold, nobody made any course corrections on how pension or stock might be handled….It was awful and horrendous seeing people who invested in stock or other unsecured assets over the years have it swept away in a single court judgment.”

Here We Go Again

There seems no end to the industry’s propensity for slipping on the same banana peel. Take, for example, the case of the venerable, 103-year-old George B.H. Macomber Co., Boston, which earlier this year closed its doors. Seeking greater profits and new markets, it moved into unexplored territory. “We had taken on four housing projects that, in hindsight, were out of our experience range, and we had taken them at aggressive prices to gain market entry,” said John D. Macomber, chief executive. “As it turned out, they were more difficult than we thought, and we lost a tremendous amount of capital on each one, totaling in the high seven figures, all together.” After a jobsite accident hurt the company’s ability to win more work, the company’s leaders decided it was time to throw in the towel. “We finished our jobs, paid our subs and suppliers and placed all our people,” Macomber said.

Says FMI’s Rice: “It’s easy to say those guys are stupid or there are extenuating circumstances, but the fact is that those guys and plenty of others were really very successful. They actually managed themselves right into a failure.”

 

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