Business lessons learned from region’s largest corporate bankruptcy
Henry Dubroff
When his in-laws sent him to Thousand Oaks in 1987 to open the third office in a small enterprise called Select Staffing, Steve Sorensen brought along a truckload of ambition.
Armed with an MBA from the University of Chicago and the zeal of an entrepreneur, he built the Select Family of Staffing Cos. into a temporary staffing services giant.
He maneuvered through a string of mergers and acquisitions, creating a Santa Barbara-based company with close to $2 billion in revenue that ranks as No. 10 in the industry nationwide.
But Sorensen’s hunger for the next deal blinded him to the risks that were growing in the credit markets. In 2007, he loaded the firm’s balance sheet up with loans from BNP Paribas and his family took an $80 million cash-out from Select in the form of a loan. After Lehman Brothers collapsed in 2008, Sorensen’s dreams of owning one of the world’s largest staffing firms collapsed.
The result is that, at least in terms of revenue, Select is the largest company in the history of the Tri-Counties to seek Chapter 11 protection from creditors.
“This is all about the financial crisis,” Sorensen, chairman and CEO of Select, told me in an extended phone call on April 1, after the company announced a pre-packaged reorganization that will substantially deleverage the Select Family of Staffing Companies.
The cost to the Sorensen family will be high. The family will put back some cash and as part of the deal with creditors and will contribute all of the equity of Decca Consulting. Decca is an energy industry staffing firm that has offices in Santa Barbara, Houston and Alberta, Canada and that it previously owned separately.
Instead of being in control, the Sorensens will own a stake in the reorganized company that amounts to the “low to mid-teens” on a percent basis, according to the CEO.
Because the bankruptcy has just been filed, it’s not certain that things will play out precisely as Sorensen envisions. But the fact that 90 percent of Select’s creditors have agreed to the reorganization plan and that the firm has taken steps to put several pieces of nasty litigation behind it are a start.
Some lessons from the saga:
• In a financial crisis, high-risk borrowers get the short end of the stick. Facing stress tests, the Euro crisis and a meltdown on the Continent, BNP Paribas kept its low-risk Bank of the West branches operations intact but jettisoned borrowers such as Select.
• Restructurings tend to happen when there is something to restructure. With the economy on its heels as the Select balance sheet unraveled, my guess is that the staffing business went through quite a rough patch. But today, temporary and contract workers are in high demand as risk-adverse employers look to fill jobs with outside workers instead of making permanent hires. That 90 percent of debt holders agreed to his deal is “a pretty solid endorsement” Sorensen said.
• Every CEO has a blind spot — and sometimes it is in the area in which he or she has the greatest expertise. Sorensen is an affable, engaging guy with a gift for making complicated things sound simple, perhaps the result of his experience as a Mormon church missionary in Tokyo from 1979 to 1981. How someone with business savvy and an MBA in finance from the University of Chicago managed to misread the credit markets that badly could be explained by hubris or perhaps an inability to truly perceive risk. Significantly, the post-bankruptcy Select will have a formalized board structure with independent directors, Sorensen told me.
• Finally, there is the fact that a true entrepreneur just doesn’t quit. Sorensen talks about his passion for building companies in his official bio. When I asked him what the bankruptcy accord means to him, he said the key is that the company and staff continue to operate intact.
Is the debt workout his signature accomplishment? There was a moment of silence on the other end of the line, and then he said this: “The defining deal is still to come.”
• Contact Henry Dubroff at hdubroff@pacbiztimes.com.
