Management Failure, Accounting Questions, and Market Value Collapse: 'Chainsaw Al' Gets the Ax

Now that the dust has begun to settle around the release of Al "Chainsaw Al" Dunlap, cost-cutter extraordinaire, turnaround artist, and recently now-former chief executive at Sunbeam Corporation, we might take the opportunity to see if there are lessons to be applied in the corporate finance course. Foremost among these: (1) What happens to executives who fail to maximize shareholder wealth?, and (2) How important are accounting numbers?

In its June 8th issue, Barron's published an article entitled "Dangerous Games," Jonathan R. Laing dissects the financial performance of Sunbeam, Inc. in 1997. He notes that, while Dunlap states in the firm's 1997 annual report that they "had an amazing year," the firm's "earnings . . . appear to be largely manufactured." For example, the firm completely wrote off $90 million worth of inventory in 1996, apparently to sell it in the following year, creating "about a third of [1997's] net income of $109.4 million."

Further, the firm is charged to have manipulated various liabilities, as well as depreciation and amortization expenses, allowance for doubtful accounts, and inventories in an attempt to place the firm's financials in a more favorable light. (It should be noted that Dunlap was seeking a buyer for the firm at the time.)

Exactly who blew the whistle is unclear - an article in the July 6th issue of Forbes states that "[w]ithout the gimmicks that Forbes recently uncovered (May 4, 1998), Sunbeam could very well be insolvent.") In any event, the feeling that accounting "irregularities" were present is strong.

During Mr. Dunlap's tenure, the price of the firm's stock went from $12.50 (July, 1996) to $53 (March, 1998). As this is written, (early July, 1998) the stock is at $10. Was Mr. Dunlap fired because the value created during his tenure evaporated, was because he was (allegedly) party to a process of cooking the books?

The entire mess will be cleaned up eventually; however, the sequence of events might well be used as an object lesson in your class. Ask students to consider:

To what degree were investors fooled by the accounting hocus-pocus during the stock's meteoric rise?

Was Dunlap treated fairly? (Former employees probably think so - see the June 23, 1998 "Managing Your Career" column in The Wall Street Journal, which highlights the experiences of two of them.)

And finally, is it necessary (or even desirable) to be a "nice guy" to maximize shareholder wealth? To what extent do the needs and wishes of other constituent groups enter the decision process?

Questions like these are sure to generate discussion and thought. Good luck!

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