The Profits Of Doom

As ailing U.S. companies collapse beneath the debt they assumed in the Roaring Eighties, a new breed of vultures has begun to swoop down on the corporate carcasses. The predators include sharp-eyed lawyers, investment bankers and bargain hunters who have parlayed the business of profiting from failure into Wall Street's hottest growth industry. Ironically, many of the same financiers who loaded companies down with debt are now cashing in on the overleveraged firms' troubles. Not since merger madness first hit corporate America in the mid-'80s has so lucrative a financial field opened up so swiftly. Says Robert Miller, a Manhattan attorney who advises failing companies: "The buyout business of the 1980s has become the turnaround business of the 1990s." Concurs bankruptcy adviser Jay Alix: "To us, LBO means large bankruptcy opportunity."

The switch reflects the growing peril of runaway borrowing. Last year 68,112 U.S. firms filed for bankruptcy vs. 10,622 in 1981. And the failures are getting larger. The assets of bankrupt companies totaled $67 billion in 1989, up 52% from the previous year. The 1990 pace could be even quicker. Since January the Wall Street firm Drexel Burnham Lambert (assets: $3.6 billion) and , the U.S. retailing arm of Canada's Campeau Corp. ($9 billion) have sought protection from creditors. They joined such major companies as Eastern Air Lines and LTV Corp., the third largest U.S. steel company, which had earlier taken refuge in bankruptcy proceedings.

But companies do not have to file for Chapter 11 to lure the new vultures. "There are many shades of failure," says Sanford Sigoloff, a turnaround specialist who runs the bankrupt U.S. operations of Australia-based Hooker Corp., which owns the B. Altman and Bonwit Teller department-store chains. Such troubled but solvent corporations as Wang Laboratories, the Lowell, Mass., computer maker that laid off more than 1,500 workers last year, have hired "workout" advisers to help pare down their debt. By pursuing a workout instead of bankruptcy, management can maintain control of the company and generally reorganize faster. "There's more room to maneuver outside of court," says Richard Feintuch, a partner in Wachtell, Lipton, a leading Wall Street law firm.

Turnaround experts can rake in hefty fees by representing ailing companies or disgruntled creditors -- or sometimes both. Lawyers and accountants earned nearly $4 million for preparing Campeau's 6,000-page bankruptcy petition in January, and currently share fees that total about $2 million a month for advising the company. The legal and financial specialists who guided Manville Corp. out of bankruptcy in 1988 received $100 million from the asbestos maker. "Every profession in the business of fixing and restructuring troubled companies is going through a sudden growth spurt," says Christopher Beard, publisher of Turnarounds & Workouts, an industry newsletter.