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WANTED: Financially Distressed Companies
Manchester Turns Around Troubled Firms

By Jason Wolf
from Profits Journal, October 1998, Vol. II, No. 1

Most people search for rising stars. Mark Sheffert seeks turnarounds. In the last seven years, the chairman and chief executive of Manchester Companies in Minneapolis has helped more than 50 troubled companies through a turnaround or, in a few cases, a liquidation. All were considered success stories for investors who otherwise would have ended up with nothing.

Most recently is his impressive turnaround of Minneapolis-based Telident Inc. (TLDT), which makes systems used to pinpoint the location of a 911-call in a large building. That company’s losses have been curbed from $2.9 million during the first half of 1997 to a loss of $573,679 during the first half of this year. Revenues have increased, costs have dropped and orders are picking up.

Results like that have given Sheffert a reputation as the "Mr. Turnaround" in the Upper Midwest – so much so that he’s now setting up a $500,000 to $1 million turnaround fund to infuse equity into troubled companies beginning in early 1999.

But Sheffert modestly attributes his success to the staff and resources at Manchester.

With five operating divisions ranging from consulting to investment banking, the firm uses a blitzkrieg strategy in its turnarounds. "What we try to do is bring in a team of people. It’s a disciplined approach," Sheffert says.

Manchester has lawyers, CPAs, investment bankers, money managers and communications professionals on its staff, and everyone down to the office manager gets involved in assessing the turnaround candidate’s problems.

While there are dozens of people with turnaround experience, not everyone has the diverse range of skills necessary to succeed, since a turnaround involves much more than simply raising money.

To redirect a company, the turnaround specialist has to be able to develop a business plan; negotiate and structure a financing package; restructure trade debt; use accounting skills to understand the company’s cash flow problems, and make cost cutting decisions that often involve firing people.

"You’re a combination of a general manager, a lawyer, an accountant and probably Attila the Hun," Sheffert says. "When you go into them, most organizations are paralyzed. They’ve made the wrong decisions and are afraid to make more. You start shaking the tree really hard and start making decisions that haven’t been made in the past."

Anyone who has ever turned around a company – or tried to do so – could be considered one of Manchester’s competitors. Often these turnaround agents are one-man firms or they work at banks, accounting companies or law firms.

Some prominent turnaround specialists in the Twin Cities area that work with clients in the middle of the small-cap range include Business Growth Alliance Inc., Coy and Associates, Northland Financial Group, Burt Merical and Wayne Waldera. In Iowa,
Cedar Rapids-based Dominion & Co. Inc. mergers and acquisitions specialist Steve Michalicek performs a couple of turnarounds annually. But out-of-state players do many of that state’s turnarounds, he says.

Manchester decides to perform a turnaround if there’s some way to improve a company’s value to its owners. Sheffert claims there are no defining factors or screens used to determine which company Manchester might turn around next. "To be honest, it doesn’t make that much difference, because either we’re going to turn it around, we’re going to sell it, merge it or liquidate it," he says. The only companies Manchester won’t touch are those that have "cooked the books," he adds.

Liquidation is, of course, the option of last resort. Prominent firms liquidated with Manchester’s guidance over the years included Minneapolis-based Formac Corp., Minnesota Wood Specialties of Burnsville, Minn., and Centech of Gomer, Iowa.

Sheffert won’t disclose all of Manchester’s previous customers, thus making it impossible to determine whether or not all of the firm’s clients were left satisfied.

A key component of Manchester’s turnaround strategy is to replace upper management. At Telident, a Manchester client for the past two years, it brought in W. Edward McConaghay in early 1997 as CEO. And at St. Paul-based Medical Graphics Corp. (MGCC), a client for several years, it helped install Rick Jenke as CEO this August. Medical Graphics makes non-invasive respiratory diagnostic systems.

Other parts of Manchester’s strategy show up in its actions at these companies. It required that general and administrative costs be cut by 33 percent at Telident and by 59 percent at Medical Graphics; research and development funding reduced by 32 percent at Medical Graphics and by 45 percent at Telident; and work forces cut by 28 percent at Medical Graphics and about 50 percent at Telident. Manchester also required the closings of outside sales offices, raised significant capital and dramatically improved
the balance sheets for both companies through private placements.

Since Sheffert was recently named to the board of directors of Bloomington, Minn.-based Fourth Shift Corp. (FSFT), some observers have speculated that the upper management could be in danger of being fired there, too. But Sheffert denies the rumors. Fourth Shift makes industrial planning software.

Telident, Medical Graphics and Fourth Shift are all signs of the times. Small public companies such as these increasingly are seeking turnaround experts for help after more than two years of sinking stock prices.

Since May 1996, most small publicly held companies have lost stock analyst coverage and the interest of large institutional investors such as mutual fund companies. Further deterioration in the prices of these stocks in recent months should cause even more public firms to seek the help of turnaround professionals, says Michael Knight, president of Business Growth Alliance Inc. and president of the Upper Midwest chapter of the Turnaround Management Association.

Sheffert agrees: "As stocks begin to fall below a dollar, if their suppliers such as overseas companies struggle, credit appears to be tightening up a little bit, more companies are going to find themselves in financial difficulties."

Sheffert won’t say which companies Manchester is looking to get involved with next, but explained that as of the last week in August, it was in discussions with three publicly held Twin Cities companies that are suffering.
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