Case Study

When John Stewart and Thomas Clark founded the Chicago Flexible Shaft Company in Dundee, Illinois, in 1897, they probably never expected that their fledgling company would grow into a huge conglomerate and face ethical and financial dilemmas more than a hundred years later. 1Like many corporations, the firm has changed and faced many crises. It has changed its name several times, acquired rival companies, added totally new product lines, gone through bankruptcy, rebounded, restructured, relocated, and hired and fired many CEOs, including “Chainsaw Al” Dunlap. Today, Sunbeam has grown into a well-known designer, manufacturer, and marketer of consumer products used for cooking, health care, and personal care. A few of the most recognized brand names owned by Sunbeam include Coleman, First Alert, Grillmaster, Health o meter, Mixmaster, Mr. Coffee, Oster, Osterizer, Powermate, and Campingaz.

More than One Hundred Years of Change

The first products that Sunbeam manufactured and sold were agricultural tools. In 1910 the company began manufacturing electrical appliances, one of the first being a clothes iron. At that time, Stewart and Clark began using the name Sunbeam in advertising campaigns although the company would not officially change its name to the Sunbeam Corporation until 1946. Sunbeam’s electric products sold well even during the Great Depression of the 1930s when homemakers throughout the country quickly accepted the Sunbeam Mixmaster, automatic coffee maker, and pop-up toaster. The years following the Great Depression were times of growth and innovation for Sunbeam. The next major development came in 1960 when Sunbeam acquired rival appliance maker John Oster Manufacturing Company, which helped make Sunbeam the leading manufacturer of electric appliances.

During the 1980s, a period of relatively high inflation and interest rates, corporations were going through acquisitions, mergers, restructurings, and closings—doing whatever they could to continue operating profitably. In 1981 Allegheny International, an industrial conglomerate, acquired Sunbeam. Allegheny retained the Sunbeam name and added John Zink (air pollution–control devices) and Hanson Scale (bathroom scales) to the Sunbeam product line. After sales of other divisions of Allegheny International declined, the company was forced into bankruptcy in 1988.

In 1990 investors Michael Price, Michael Steinhardt, and Paul Kazarian bought the Sunbeam division from Allegheny International’s creditors. They renamed the division the Sunbeam-Oster Company and took it public two years later. The following year, Kazarian was forced out of his chairman position and out of the company. Sunbeam-Oster also relocated to Florida and purchased the consumer products unit of DeVilbiss Health Care. In 1994 Sunbeam-Oster acquired Rubbermaid’s outdoor—furniture business. The company changed its name back to Sunbeam Corporation in 1995.

By the time Albert Dunlap took over the company in 1996, Sunbeam had more than twelve thousand stock-keeping units (SKUs), or individual variations of its product lines. The company also had twelve thousand employees, as well as twenty-six factories worldwide, sixty-one warehouses, and six headquarters. Its earnings had been declining since December 1994; by 1996 the stock was down 52 percent, and its earnings had declined by 83 percent. The company needed help.

Albert Dunlap, AKA “Chainsaw Al”

Before taking the reins at Sunbeam, Dunlap had acquired a reputation as one of the country’s toughest executives—as well as nicknames like “Chainsaw Al,” “Rambo in Pinstripes,” and “The Shredder”—because he eliminated thousands of jobs while restructuring and turning around financially troubled companies. His reputation and business philosophy were recognized throughout the world. His operating philosophy was to make extreme cuts in all areas of operations, including extensive layoffs, so as to streamline a business and return it to profitability. He even authored a book, entitled Mean Business, in which he stressed that the most important goal of any business is making money for shareholders. To achieve this goal, Dunlap developed four simple rules of business: (1) Get the right management team, (2) cut back to the lowest costs, (3) focus on the core business, and (4) get a real strategy. By following those four rules, Dunlap helped turn around companies in seventeen states and across three continents, including—according to Dunlap—Sterling Pulp & Paper, American Can, Lily-Tulip, Diamond International, Canenham Forest Industries (formerly Crown-Zellerback), Australian National Industries, Consolidated Press Holdings, and Scott Paper Company.

Michael Price and Michael Steinhardt hired Dunlap as the CEO and chairman of the board for Sunbeam Corporation in July 1996. Price and Steinhardt, two of the original investors who had bought Sunbeam from bankrupt Allegheny International and together owned 42 percent of the stock, had originally tried to sell Sunbeam. Unsuccessful in that effort, they decided to see if “Chainsaw Al” could save their company, although they well knew Dunlap’s reputation for extensive layoffs and huge operating cuts. They believed, however, that such drastic efforts were necessary to turn Sunbeam around and increase stock prices and profits. In fact, Sunbeam’s stock price did increase, almost instantly, vaulting 49 percent on July 19, 1996, the day Dunlap was named chairman and CEO. The rise from $1212 to $1858 added $500 million to Sunbeam’s market value. The stock continued to increase, reaching a record high of $52 per share in March 1998. Although Dunlap’s acceptance of the helm at Sunbeam helped boost the company’s stock, he realized that his reputation alone would not hold the stock price up and that he needed to start the process of turning Sunbeam around.

Dunlap’s First Step at Sunbeam

In accordance with his management rules, Dunlap’s first move at Sunbeam was to get the right management team. His very first hire was Russ Kersh, a former employee of Dunlap, as executive vice president of finance and administration. The new management team also included twenty-five people who had previously worked for Dunlap at various companies. Dunlap saw logic in hiring these people because they had all worked with him and had been successful in past turnarounds. He retained only one senior executive from Sunbeam’s old management team. Once this first step had been accomplished, Dunlap and his “Dream Team for Sunbeam” quickly went into action implementing his second rule: Cut back to the lowest costs.

Second Step: Cut Back

In his book Mean Business, Dunlap had written, “Sunbeam’s employees wanted a leader and knew things had to change. Employees want stability. Restructuring actually brings stability, because the future is more clear.” Sunbeam’s employees certainly knew of Dunlap’s reputation for slashing jobs. Some would argue, however, that what people want and need is job security, and knowing Dunlap’s reputation did not make Sunbeam’s employees feel secure. The need for security relates to psychologist Abraham Maslow’s hierarchy of needs, which can be applied to employee motivation. According to Maslow, people strive to satisfy five basic needs—physiological, security, social, esteem, and self-actualization—in a hierarchical order. Security needs—second in the hierarchy of needs—relate to protecting oneself from physical and economic harm. At Sunbeam, Dunlap’s reputation for layoffs left many employees feeling threatened and insecure.

As expected, after less than four months as chairman and CEO of Sunbeam, Dunlap announced plans to eliminate half of Sunbeam’s twelve thousand employees worldwide. The layoffs affected all levels at Sunbeam. Management and clerical staff positions were cut from 1529 to 697, and headquarters staff was cut by 60 percent, from 308 to 123 employees. On hearing of Dunlap’s layoff plans, U.S. Labor Secretary Robert Reich reportedly remarked, “There is no excuse for treating employees as if they are disposable pieces of equipment.” Around the same time, the company’s share prices rose to the mid-$20 range, and one of the original investors, Michael Steinhardt, sold his shares and divested himself of his Sunbeam connection altogether.

Another method used by Dunlap to cut back to the lowest costs was to reduce the number of SKUs from twelve thousand to fifteen hundred. When Dunlap took over, Sunbeam had thirty-six variations of styles and colors for one clothes iron. Such variation allows for product differentiation, a common business strategy, but some argued that thirty-six variations of a consumer product such as an iron were unnecessary and costly to maintain. Instead of many product variations, Dunlap pursued service as the area to differentiate Sunbeam from competitors in the appliance business.

Eliminating 10,500 SKUs also enabled Dunlap to close a number of factories and warehouses—another cost-saving method. He disposed of eighteen factories worldwide, reducing their number from twenty-six to eight, and reduced the number of warehouses from sixty-one to eighteen. The layoff of thousands of employees, coupled with the reduction of SKUs, factories, and warehouses meant that fewer headquarter locations would be needed. Thus, Dunlap consolidated Sunbeam’s six headquarters into one facility in Delray Beach, Florida—Dunlap’s primary residence.

Steps Three and Four

Once the cost-cutting strategies had been implemented, Dunlap began to practice his third rule—that is, to focus on Sunbeam’s core business, which first needed to be defined. Dunlap and his Dream Team defined Sunbeam’s core business as electric appliances and appliance-related businesses. They identified five categories surrounding the core business as vital to Sunbeam’s success: kitchen appliances, health and home, outdoor cooking, personal care and comfort, and professional products. Any product that did not fit into one of the five categories was sold. Dunlap applied a simple criterion to decide whether to keep or divest a product line. Because he believed firmly that consumers recalled the Sunbeam brand name fondly, he retained any product that related to the Sunbeam brand name. Identifying Sunbeam’s core business and paring down to it was the goal in implementing the third rule.

The final of Dunlap’s four rules of business called for developing and implementing a real strategy. Dunlap and his team defined Sunbeam’s strategy as driving the growth of the company through core business expansions by further differentiating Sunbeam’s products from competitors’, moving into new geographic areas around the globe, and introducing new products that were linked directly to emerging customer trends as lifestyles evolved around the world. As the first step in implementing this strategy, the company reengineered electrical appliances to 220 volts so they could be marketed and used internationally. Another step was reclaiming the differentiation between the Oster and Sunbeam lines. Each was designed, packaged, and advertised to target different markets. Oster products were positioned as upscale, higher-end brands and sold at completely different retailers than the Sunbeam lines. The Sunbeam line of products was positioned as an affordable, middle-class brand. Early in 1997, Sunbeam opened ten factory-outlet stores to increase brand awareness, sales, and ultimately shareholder wealth. Dunlap made all these changes within seven months of taking up the challenge to turn around Sunbeam. The stock rose to more than $48 per share, a 284 percent increase since July 1996.

The Turnaround of Sunbeam

Just fifteen months after accepting the position as chairman and CEO, Dunlap issued a press release in October 1997 announcing that the turnaround of Sunbeam was complete and that Morgan Stanley of Stanley Dean Witter & Co. had been hired to find a buyer for Sunbeam. However, according to John A. Byrne in his book Chainsaw, “No one was the least bit interested.” Byrne also reported that Dunlap misled a journalist into reporting that Philips, a Dutch electronics giant, was interested in purchasing Sunbeam for $50+ per share but that Dunlap wanted $70.

On March 2, 1998, Dunlap announced plans to buy three consumer products companies. Sunbeam acquired 82 percent of Coleman (camping gear) from Ronald Perelman for $2.2 billion. Perelman received a combination of cash and stock, which gave him 14 percent ownership of Sunbeam. Sunbeam also acquired 98.5 percent of Signature Brands (Mr. Coffee) and 95.7 percent of First Alert (smoke and gas alarms) from Thomas Lee for $425 million in cash. Two days after announcing the purchase of the three companies, Sunbeam’s stock closed at a record high of $52 a share. With the stock price at an all-time high and 1997 net income reported at $109.4 million, Sunbeam truly seemed to have been turned around—at least on paper.

Dunlap publicly praised himself and his “Dream Team for Sunbeam” for turning around the failing corporation within seven months of taking over. He was so confident in the success of their mission at Sunbeam that he added a complete chapter to his book Mean Business titled, “Now There’s a Bright Idea. Lesson: Everything You’ve Read So Far About Restructuring Works. This Chapter Proves It—Again.” Dunlap stated that Kersh and a dozen other people tried to dissuade him from taking the Sunbeam job because they were convinced that even he could not save the troubled company. Dunlap had disagreed with them, pointing out that he saw opportunity where others saw the impossible. He mentioned that he did not need to take the position at Sunbeam or with any other company because of his wealth. Dunlap also wrote that the tremendous media attention given to the first edition of his book made it an unofficial handbook for Sunbeam employees and also provided free publicity for the company. A whole section of the chapter recalled how the media arrived in full force to cover the promotional tour and signing of his book. Dunlap also mentioned how strangers, including a Greek Orthodox cleric, praised him and his book, and pointed out that he was at the top of the most admired CEOs list in a survey of business students at U.S. colleges and universities. In the concluding paragraph of the chapter, Dunlap suggested that all CEOs and boards of directors should read his book and use him as a role model in running their companies.

At the time, Dunlap’s management philosophy seemed to underlie his success at Sunbeam. He streamlined the company and attained what he considered the most important goal of any business: to make money for shareholders. In February 1998, Sunbeam’s board of directors expressed satisfaction with Dunlap’s leadership and signed a three-year employment contract with him that included 3.75 million shares of stock.

Sunbeam’s Accounting Practices Raise Questions

Although Dunlap accomplished what he had set out to do at Sunbeam, the shareholder wealth did not last. Nor did the board’s satisfaction. Sunbeam again faced tough times—and not because of excessive costs or lack of a strategy. The three purchases that more than doubled Sunbeam’s size and helped push the company’s stock price to $52 also helped cause a second upheaval and restructuring of Sunbeam. Rumors began surfacing that these purchases had been made to disguise losses through write-offs.

Paine Webber, Inc. analyst Andrew Shore had been following Sunbeam since the day Dunlap was hired. As an analyst, Shore’s job was to make educated guesses about investing clients’ money in stocks. Thus, he had been scrutinizing Sunbeam’s financial statements every quarter and considered Sunbeam’s reported levels of inventory for certain items to be unusual for the time of year. For example, he noted massive increases in the sales of electric blankets in the third quarter although they usually sell well in the fourth quarter. He also observed that sales of grills were high in the fourth quarter, which is an unusual time of year for grills to be sold, and noted that accounts receivable were high. On April 3, 1998, just hours before Sunbeam announced a first-quarter loss of $44.6 million, Shore downgraded his assessment of the stock. By the end of the day Sunbeam’s stock prices had fallen 25 percent.

Shore’s observations were indeed cause for concern. In fact, Dunlap had been using a bill-and-hold strategy with retailers, which boosted Sunbeam’s revenue, at least on the balance sheet. A bill-and-hold strategy entails selling products at large discounts to retailers and holding them in third-party warehouses to be delivered at a later date. By booking sales months ahead of the actual shipment or billing, Sunbeam was able to report higher revenues in the form of accounts receivable, which inflated its quarterly earnings. The strategy essentially shifted sales from future quarters to the current one, and in 1997 the strategy helped Dunlap boost Sunbeam’s revenues by 18 percent.

The bill-and-hold strategy is not illegal and follows the generally accepted accounting principles (GAAP) of financial reporting. Nevertheless, Sunbeam’s shareholders filed lawsuits, alleging that the company had made misleading statements about its finances and deceived them so they would buy Sunbeam’s artificially inflated stock. A class-action lawsuit was filed on April 23, 1998, naming both Sunbeam Corporation and CEO Albert Dunlap as defendants. The lawsuit alleged that Sunbeam and Dunlap had violated the Securities and Exchange Act of 1934 by misrepresenting and/or omitting material information concerning the business operations, sales, and sales trends of the company. The lawsuit also alleged that the motivation for artificially inflating the price of the common stock was to enable Sunbeam to complete millions of dollars of debt financing in order to acquire Coleman, First Alert, and Signature Brands. Sunbeam’s subsequent reporting of earnings significantly below the original estimate caused a huge drop in its stock.

Dunlap continued to run Sunbeam and the newly purchased companies as if nothing had happened. On May 11, 1998, he tried to reassure two hundred major investors and Wall Street analysts that the first-quarter loss would not be repeated and that Sunbeam would post increased earnings in the second quarter. That same day he announced another fifty-one hundred layoffs at Sunbeam and the acquired companies, possibly to gain back investor confidence and divert attention away from the losses and lawsuits. The tactic failed. The press continued to report on Sunbeam’s bill-and-hold strategy and the accounting practices that Dunlap had allegedly used to artificially inflate revenues and profits.

Dunlap’s Reputation Backfires

Dunlap called an impromptu board meeting on June 9, 1998, to address and rebut the reported charges. A partner from Sunbeam’s outside auditors, Arthur Andersen LLP, assured the board that the company’s 1997 numbers were in compliance with accounting standards and firmly stood by Arthur Andersen’s audit of Sunbeam’s financial statements. Robert J. Gluck, the controller at Sunbeam, who was also present at the board meeting, did not counter the auditor’s statement. The meeting seemed to be going well until Dunlap was asked if the company would make its projected second-quarter earnings. His response that sales were soft was not what the board expected to hear. Nor was his statement that he had a document in his briefcase outlining a settlement of his contract for his departure from Sunbeam. The document was never reviewed. However, Dunlap’s behavior made board members suspicious, which led to an in-depth review of Dunlap’s practices.

The review took place during the next four days in the form of personal phone calls and interviews between board members and select employees—without Dunlap’s knowledge. A personal conversation with Sunbeam’s executive vice president, David Fannin, reportedly revealed that the 1998 second-quarter sales were considerably below Dunlap’s forecast and that the company was in crisis. Dunlap had forecast a small increase, but the numbers provided by Fannin indicated that Sunbeam could lose as much as $60 million that quarter. Outside the boardroom and away from Dunlap, Gluck (the controller) revealed that the company had tried to do things in accordance with GAAP, but allegedly everything had been pushed to the limit.

These revelations led the board of directors to call an emergency meeting. On Saturday, June 13, 1998, the board of directors, along with Fannin, and a pair of lawyers, discussed the informal findings. They agreed that they had lost confidence in Dunlap and his ability to turn Sunbeam around. The board of directors unanimously agreed that Dunlap had to go and drafted a letter calling for his immediate departure. “Chainsaw Al” was told that same day, in a one-minute conference call, that he was the next person to be cut at Sunbeam.

Sunbeam Looks Forward

Once again, Sunbeam faced the need to revitalize itself. It was again looking for a new CEO; its stock price had dropped to as low as $10 per share; shareholder lawsuits had been filed; legal action regarding Dunlap’s firing was under way; the Securities and Exchange Commission (SEC) was scrutinizing Sunbeam’s accounting practices; the audit committee of the board of directors was requiring Sunbeam to restate its audited financial statements of 1997, possibly for 1996, as well as for the first quarter of 1998; and creditors were demanding payment in full. Additionally, on August 24, 1998, Sunbeam announced that it would discontinue a quarterly dividend of 1 cent per share. Shareholder confidence was at an all-time low.

Less than two years after Dunlap was hired, Sunbeam again reorganized and brought in a new senior management team. Jerry W. Levin accepted the position of president and CEO. He outlined a new strategy for Sunbeam, focusing on growth through increased product quality and customer service. The plan was to decentralize operations while maintaining centralized support and organizing into three operating groups. Four of the eight plants that were scheduled to be closed under Dunlap’s management remained open to ensure consistency of supply. In a press release, Levin outlined his strategy for revitalizing Sunbeam: “Our goal is to increase accountability at the business unit level, and to give our employees the tools they need to build their businesses. We are shifting Sunbeam’s focus to increasing quality in products and customer service.”

On October 21, 1998, Sunbeam announced that it had signed a memorandum of understanding to settle, subject to court approval, the class-action lawsuit brought by public shareholders of Coleman Company, Inc. The court approved, and on January 6, 2000, Sunbeam completed the acquisition of the publicly held shares of Coleman. The terms of the merger allowed all public stockholders of Coleman to receive $6.44 in cash, 0.5677 of a share of Sunbeam common stock, and 0.381 of a warrant to purchase one share of Sunbeam common stock for each of their shares of Coleman stock.

There were legal ramifications from Dunlap’s firing. In an interview on July 9, 1998, Dunlap stated that he intended to challenge Sunbeam’s efforts to deny him severance under his contract, although both Dunlap and Sunbeam agreed not to take legal action against each other for a period of six months. Dunlap claimed that his mission was aborted prematurely and that three days after receiving the board of director’s support he was fired without being given a reason. On March 15, 1999, Dunlap filed an arbitration claim against Sunbeam to recover $5.5 million in unpaid salary, $58,000 worth of accrued vacation, and $150,000 in benefits as well as to have his stock options repriced at $7 a share. Additionally, he sued the company for dragging its feet in reimbursing him for more than $1.4 million in legal and accounting fees he had racked up defending himself in lawsuits that alleged securities fraud. Although the board made it clear that they had no intention of paying Dunlap any more money, a judge ruled in his favor in June 1999.

In a letter to the shareholders at the beginning of 1999, Levin stated that Sunbeam had gone back to basics and intensified its focus on its powerful family of brands. He also wrote that the lending banks had extended covenant relief and waivers of past defaults until April 10, 2000. The $1.7 billion credit agreement was extended until April 14, 2000, at which time Sunbeam hoped to have a definitive agreement extending the covenant relief and waivers for an additional year. Sunbeam was required to restate its audited accounting reports. It took auditors four months to unravel the accounting statements from Dunlap’s tenure, which were confirmed to be legal—just inaccurate. The 1997 net income was restated from $109.4 million to $38.3 million.

In the meantime, Sunbeam moved forward, creating a new company—Thalia Products, Inc. (thinking and linking intelligent appliances)—to produce smart appliances and services and to license home-linking technology to other manufacturers. At the International Housewares show in January 2000, Sunbeam and Thalia introduced nine new products that automatically network when plugged in and “talk” to each other to coordinate tasks. Such tasks include an alarm clock turning on the coffee pot ten minutes before the alarm goes off—no matter what time it is set for—and an alarm that will ring if water has not been added to the coffee pot. Sunbeam announced on March 23, 2000, that its Thalia Products division had an agreement with Microsoft Corporation to join the Universal Plug and Play (UPnP) Forum, which would further the companies’ shared objective of establishing industry-leading standards for home appliance networking.

At this point, CEO Levin still had confidence in Sunbeam’s ability to recover. A press release on May 10, 2000, stated that the first-quarter results showed that net sales had increased 3 percent to $539 million and that operating results had narrowed to a loss of $3 million. Levin stated,

These results, though improved, are not indicative of the value we have created, and will continue to create for Sunbeam’s shareholders. Looking forward, we expect operating results to further improve as we execute our long-range strategy that focuses on consumer-oriented new products.

However, on January 25, 2001, Sunbeam announced that it had been notified by the New York Stock Exchange (NYSE) that the company was not in compliance with minimum listing criteria. As a result, the NYSE “delisted” the company’s common stock. This meant that the stock ceased to be traded. The bad news continued when Sunbeam announced on February 6, 2001, that it planned to reorganize under Chapter 11 of the U.S. Bankruptcy Code due to its $3.2 billion in debt, some of which accrued from Dunlap’s acquisitions. The company expected no interruption in production or distribution. Senior management committed themselves to remaining in place and leading Sunbeam throughout the bankruptcy process and beyond.

In September 2002, Dunlap agreed to pay $500,000 to settle the SEC’s charges that he defrauded investors by inflating sales at Sunbeam so as to make the company more attractive to a prospective buyer. According to the SEC, Sunbeam’s accounting practices inflated the company’s income by $60 million in 1997, “contributing to the false picture of a rapid turnaround in Sunbeam’s financial performance.” In settling the charges, Dunlap did not admit or deny any wrongdoing and agreed never to work as an executive or director of a public corporation again. Dunlap’s chief financial officer, Russell Kersh, agreed to the same ban and paid $200,000 to settle the SEC’s suit. The month before, Dunlap paid $15 million to settle a class-action lawsuit brought by shareholders with similar allegations.

Sunbeam emerged from Chapter 11 bankruptcy proceedings in December 2002 and changed its name to American Household, Inc. Its former household products division became the subsidiary Sunbeam Products, Inc. In September 2004, the Jarden Corporation purchased American Household, Inc., of which it is now a subsidiary.

Jarden Consumer Solutions is a wholly owned subsidiary of Jarden Corporation. They have many brands including Bionaire®, BRK®, Crock-Pot®, First Alert®, FoodSaver®, Health o meter®, Holmes®, Mr. Coffee®, Oster®, Patton®, Rival®, Seal-a-Meal®, Sunbeam®, and VillaWare®. They are a company whose employees—nearly thirteen thousand strong in ten countries—are committed to a set of core values that emphasize integrity, community service, and entrepreneurship. They are always looking for solutions to help make consumers’ lives easier, safer, and fun. Jarden Consumer Solutions operates in approximately twenty-five offices and manufacturing facilities in ten countries. Although Sunbeam-Oster no longer exists as a company, the brands can still be found in many major stores.