Leadership Go-Round
Business failures not necessarily a drawback for telecom CEOs out of a job
By Jeanie Stokes
from the June 18, 2001 issue of Broadband Week
A company headed for Chapter 11 bankruptcy reorganization doesn't necessarily mean a black mark in the personnel files of the top executives.
The number of top-level telecommunications executives available for hire is growing, as one telecom provider after another, facing imminent bankruptcy, opts to change its top leadership. Others are expected to enter the job market as the number of bankruptcies rise in the months ahead.
Given the number of jobs that have been eliminated in the U.S. this year, the growing number of telecom executives on the street isn't surprising. Through the first five months of 2001, 652,510 jobs cuts were announced. Cuts in telecommunications, computer, electronics and e-commerce industries accounted for 41 percent of the total. About 16 percent--or 101,996--of those jobs were in telecommunications, according to data tracked by Challenger, Gray & Christmas Inc., a Chicago-based international outplacement company.
Still, the reasons for a business' failure and the chief executive officer's departure, whether voluntary or not, can affect their future marketability.
"CEOs usually are a hot commodity--the good ones," says Paul Hammer, head of the technology and telecom group at investment banker Houlihan Lokey Howard & Zukin. Right now, "you're seeing a lot of guys who historically have done very well, who didn't mind the shop." Even if a business plan proved faulty, presumably the person at the helm looked at it and believed in it, Hammer says.
Leadership has changed recently at Rhythms NetConnections Inc., Teligent Inc., and PSINet Inc, and in each case, a veteran telecom executive went out the door with big bucks in their pocket. Former AT&T president Alex Mandl, who was lured to Teligent with an up-front $20 million cash payment, left the company in April just days before its bankruptcy filing. Mandl's settlement included $6 million in severance pay and a forgiven $12 million loan.
Rhythms founder Catherine Hapka, who formed the Englewood, Colorado-based DSL provider after leaving U S West Inc., sold $10 million of company stock with Rhythms' consent in 2000, even as the stock price was falling. She negotiated a departure date this spring that allowed her to qualify for a $500,000 retention bonus.
Internet service provider PSINet racked up more than $4 billion in debt and a $15 million a month cash burn rate while founder William Schrader reportedly rejected offers to sell the company. Still, PSINet paid the executive about $3 million following his April departure.
Hammer says it's easier for potential employers and investors to forgive an executive whose business went sour because the market for capital dried up than it is to forgive a CEO who was able to access plenty of capital, wasted it and then walked away with a huge settlement.
"I can't imagine seeing Schrader going off to another shop anytime soon. People have memories and you can't really blame the market for everything," Hammer says
John Challenger, chief executive at Challenger, Gray & Christmas, agrees, and points to the dot.com space, which is responsible for the greatest number of CEO departures. "Many of the shrewdest investors didn't see it coming. The industry turned out to be not as viable as people thought."
For companies needing a leadership change, there may be value in keeping executives on during a transition period like a bankruptcy, which provides a court-approved respite from crushing debt payments. Still, companies usually find a replacement, either internally or elsewhere, before they make a change.
"You want a strong person in there during a time of turmoil. You don't want to just get someone out. You want to get them out and replace them immediately," Hammer says. "The problem is the decisions haven't been made. You need decisions to be made."
Companies that aren't facing imminent financial disaster may have more time. Nortel Networks Corp., for example, said in May it's searching for a replacement for CEO John Roth, who retires next year. Roth's heir-apparent, chief operating officer Clarence Chandran, resigned due to health reasons.
The average search for new employment for a CEO-level client is taking 3 to 5 months. That hasn't changed much, because even with the number of job cuts, the job market remains "pretty strong," Challenger says.
Many executive jobseekers are opting for opportunities in industries outside the telecom arena. But job-hunting for a former CEO can be an especially tough experience.
"Many are young to have been at the CEO level, particularly the dot.comers under 35," Challenger says. "It's hard to go work for somebody else. It's hard to be in a subordinate role where you don't make a decision."
There's a whole range of reactions to being out of work. Some ex-CEOs are picking up and moving on to the next thing. Others are biting the bullet and going back to work for someone else. Still others are burned out and embittered, Challenger says.
"At the C level, these guys lead different lives. They don't need to get another job. They don't need the money. They do it for other reasons," Hammer says. "They're probably relaxing and waiting for the market to change."
How successful they are depends, he adds. "If the brains are real, you can recycle them. If they're not, they're a one-trick pony."
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