Chainsaw Al Gets The Chop

By Daniel Kadlec

When Stetson law professor Charles Elson joined the board at Sunbeam Corp. two years ago, the company's pugnacious CEO, Albert J. Dunlap, wanted him to think like an owner. So he insisted that Elson dig deep into his own pockets and buy $100,000 worth of Sunbeam stock. Two weeks ago, with the value of that stake fast eroding, Elson said, "You bet I looked at the company as an owner." So he and his similarly staked board mates moved fast to "Dunlap" Dunlap, sacking the job slasher whose name had become a Wall Street verb.

It was a startling turnabout. Just last February, "Chainsaw Al" was so highly prized by this same board that he was given a rich new employment contract that included options on a staggering 3.75 million shares of stock--one of the 10 biggest options grants ever at any company. Now the precise terms of that contract are in dispute as the board attempts to deny severance to Dunlap and his No. 2, Russell Kersh.

The whole mess is certain to devolve into a nasty court battle that until very recently only Dunlap's fiercest critics could have imagined. Along with perhaps half a dozen shareholder suits stemming from the stock collapse, and litigation with the American Medical Association over a botched endorsement deal, Sunbeam expects a lawsuit from Dunlap seeking a going-away package.

For Dunlap, 60, recent events at Sunbeam are a true Armageddon. He remains undeniably rich. But he has lost more than $200 million on paper with his stock and stock options since Sunbeam shares began to slide last March, and his once vaunted reputation as a turnaround phenomenon is in tatters. That reputation is what landed him lucrative assignments, including previous stints as CEO at Scott Paper and Crown-Zellerbach, plus a high profile that he reveled in. It also put his book, Mean Business, on the best-seller list in 1996. That tome became a bible for those who followed Al's dictum that "the most important person in any company is the shareholder."

But he came up demonstrably short at Sunbeam. The appliance maker lost $44.6 million in the first quarter, and may post another loss this quarter. Analysts who thought the company would earn $2 a share in 1999 put the figure today just north of $1. Sunbeam suffers from an inventory glut that will take months to assess and longer to fix. It appears Dunlap had been "stuffing the channel," persuading retailers through discounts to buy more gas grills than they would normally need. This practice helped swell Sunbeam earnings in 1997 but led to this year's crash. Even Dunlap's huge success at Scott Paper is now under a cloud. Kimberly-Clark, which bought Scott for top dollar in 1995, is struggling to make the merger pay off. Profits tumbled 19% last quarter.

Dunlap's role as self-appointed messiah for shareholder value, meanwhile, is up for another casting call. Sunbeam shares were as high as $53 early this year and have fallen 79%--to $11.25, which is lower than the level at which the stock traded ($12.50) when Dunlap was hired. The collapse has crushed morale at Sunbeam, where workers who survived Dunlap's initial slashing and burning (he cut half the company's 12,000 jobs) were rewarded with a company-wide stock-option plan that for a painfully brief period was gratifying but now represents lost dreams. Said an employee on lunch break last week at Sunbeam headquarters in Delray Beach, Fla.: "I popped open a bottle of champagne when I heard the news [about Chainsaw]."

Dunlap appears to have given up on himself even before the board did. Members insist that firing Dunlap never crossed their minds until the man also known as "Rambo in pinstripes" raised the issue himself. At a fateful meeting on June 9, Dunlap said half a dozen times that he would go away quietly if the board were to buy him out of his contract. That was when the board lost confidence. "I was shocked," recalls board member Howard Kristol, a New York lawyer who represented Dunlap in his initial contract negotiation with Sunbeam. "We felt he had already left."

The board moved swiftly. Within days it discovered that business was much worse than Dunlap had let on just weeks before. What he had termed an aberration--the inventory glut--was in fact a continuing problem. Dunlap was fired June 13.

I tried repeatedly to get Dunlap or his lawyer on the phone but was unsuccessful. And I should note for the record that in the past I have written favorably of Dunlap, whose policy of fast and deep cost cutting at troubled companies, I believe, makes sense. Clearly, though, I was wrong about how far he could take Sunbeam.

It falls to another turnaround pro, Jerry Levin, 54, to pick up the pieces, and few expect fast answers. "The business is in lousy shape," says Andrew Shore, an analyst at Paine Webber. Shore, a Dunlap critic who recently baited Chainsaw Al by publicly asking him to work for $1 a year until the stock recovered, pegs any turnaround at two years.

By most accounts, Levin is the person for the job. He fixed cosmetics company Revlon in the early 1990s, and most recently was doing the same for outdoor-equipment company Coleman--both efforts on behalf of controlling shareholder Ronald Perelman. Levin's selection is no accident. On March 2, Perelman sold Coleman to Sunbeam in a stock swap, and he is now Sunbeam's second-largest investor, with a 13% stake. The largest is activist money manager Michael Price, who controls 17%. As a measure of how quickly Dunlap's career unraveled, Price only two weeks earlier had publicly, emphatically supported Dunlap. But he became as willing as anyone for the ax to fall.

In hindsight, there were warnings. A Barron's article in the June 8 edition questioned Dunlap's accounting methods, and a FORTUNE article with the same date suggested that his job was in jeopardy. Another bell ringer might have been massive selling by insiders at Coleman in March, beginning only days after the company agreed to be bought by Sunbeam. The Coleman folks had to sell, or lose, their stock options. But by moving so quickly, they bolstered the view that Dunlap had grossly overpaid. Indeed, nine Coleman insiders, including Levin, cashed out 581,000 shares, according to CDA Investnet--near the post-merger peak and just ahead of the stock's collapse along with Sunbeam.

It wasn't supposed to end like this. Coleman and two smaller deals were part of Dunlap's plan to build and to prove he was more than a one-trick pony. But the circus left town without him, and he perhaps learned that restructuring a company and restructuring consumer demand are two very different tasks.

--With reporting by Valerie Marchant/New York and Tammerlin Drummond/Delray Beach

With reporting by Valerie Marchant/New York and Tammerlin Drummond/Delray Beach