<font color=red>Indianapolis Star:Back to basics
Back to basics
Though CEO clears first hurdles in retooling Conseco, rebound remains a work
in progress.
starnews.com
By Christopher Carey
Indianapolis Star
November 26, 2000
'The Aerospatiale helicopter that once shuttled Stephen C. Hilbert between his Carmel
mansion and Conseco Inc.'s headquarters is grounded, awaiting a new owner.
The 18th-century oil paintings, ornate furniture and gilt-edged antiques in Conseco's
richly appointed executive suite soon will be on the sale block as well.
Gary C. Wendt, who took over as chairman and chief executive in June, is even
dismantling his own palatial office and moving to more modest digs elsewhere on the
company's 180-acre campus.
The cash generated by the redecorating project will scarcely make a dent in the $2
billion in debt that Conseco hopes to retire through asset sales.
But to Wendt and his team of "restoration activists," the money is less important than
the message.
Conseco, Wendt says, must transform itself from a highflying acquisition company to a
solid, Midwest-rooted operating company. That means a return to the basics and a
renewed emphasis on quality, productivity and service.
"Right now this company needs to operate more efficiently,'' Wendt said. "It has very
good distribution. It has the right array of products, and it's aimed at the right market --
aging middle America.''
Wendt already has accomplished his first three objectives at Conseco -- renegotiating
its bank loans, restructuring its finance unit and raising the all-important A.M. Best ratings
for its insurance units.
"We had to do all three of those, or nothing else made any sense,'' he said.
Now comes the next step, realigning Conseco's work force and reinvigorating its
businesses.
Wendt's plan calls for shifting people and functions from the company's headquarters
staff to its individual operating units. Moving actuaries and accountants to the subsidiaries
will ensure that they have the information they need to make quick and effective decisions,
he says.
Hilbert, who resigned under pressure in April, built Conseco into one of Indiana's
biggest businesses by snapping up insurer after insurer, then diversifying into consumer
finance.
To consolidate those operations, he relied on centralized control.
Over time, that approach had some unintended consequences, Wendt said.
"What happened was that all the staff people got together and kept all the information,''
he said. "So the power was in the staff organization and not the revenue-producing
operations.''
The decentralization is designed to spur growth and boost earnings at Conseco's
insurance businesses -- one of the main items on Wendt's agenda for 2001.
Cashing out of several lucrative venture-capital investments is another. Conseco is
counting on the proceeds to cover a big chunk of the $1.3 billion in debt that comes due
next year, half in June.
The financial-services company wants to unload its 29 percent interest in Argosy
Gaming Co.'s highly successful riverboat casino in Lawrenceburg, Ind.
Conseco is required to offer that stake to Argosy first. But the two companies are
deeply divided on the value of that stake and have taken each other to court.
Conseco's appraiser said the company's interest in the casino is worth $356.2 million.
Argosy's appraiser put the figure at $229.5 million.
The litigation has raised the possibility that Conseco might not see any money until
2002, complicating its debt repayment program.
Conseco also is looking for a way to sell its stock in TeleCorp PCS Inc., a wireless
communications company. It wound up with 16.1 million shares of TeleCorp through an
earlier investment in Tritel Inc.
The two companies merged Nov. 13. Conseco's new shares in TeleCorp had a market
value of about $320 million on Friday.
The ups and downs in the value of the investment have played havoc with Conseco's
quarterly earnings. Conseco took a $107.6 million charge in the third quarter to reflect a
decline in Tritel's share price from June 30 to Sept. 30.
Conseco took a total of $488.5 million in charges in that quarter, largely to clear away
what it called "legacy practices'' from the Hilbert era. The charges left Conseco with a loss
of $487.3 million for the quarter, and a loss of $814.6 million for the first nine months of the
year.
Wendt says those numbers are irrelevant to Conseco's future. He says the turnaround
story this year will give way to an "earnings-per-share" story next year.
Investors, however, have yet to match Wendt's enthusiasm for Conseco's prospects.
"I think it will take a while for the market to understand,'' he said.
Although Conseco's stock price has risen since Wendt signed on, the relatively modest
increase suggests many investors think the company continues to face long odds.
"They've got a first-class CEO, but they're still fragile,'' said Colin Devine, who follows
Conseco for Salomon Smith Barney in New York.
Conseco's heavy debt load and limited cash mean Wendt will have to keep making all
the right moves.
Even with the third-quarter housecleaning, the company might have to take additional
write-offs, especially if the economy weakens and its finance unit suffers.
"We remain cautious that there is still more to come,'' Devine said.
Other analysts participating in Conseco's quarterly conference call last month were
surprised to learn that the company's debt level rose in the third quarter, even though it
paid off $650 million in bank loans as part of the restructuring deal.
Executives acknowledged that a good chunk of $1.3 billion the company reported it had
raised by selling noncore assets actually had come from leveraging certain assets instead of
liquidating them.
In addition to raising cash, Conseco also is finding ways to conserve and redirect it.
Conseco Finance Corp. has greatly slowed loan production, allowing it to be more
selective in the loans in approves. Executives say the new approach should lower default
rates, lift profit margins and enable the subsidiary to send cash to the parent company
instead of requiring regular infusions.
Wendt, who previously built General Electric Co.'s financial-services unit into a
dynamo, remains confident that Conseco and its people will meet any challenges.
"I don't think this is rocket science,'' he said. "This is blocking and tackling.''
The problems that Wendt inherited at Conseco are fundamental as well, Devine said.
"They grossly overpaid for several insurance companies, and they grossly overpaid for
Green Tree,'' Devine said. "Those are pretty big holes to fill up.''
Green Tree is the former name of Conseco Finance. Hilbert bought the business in
1998 for $6 billion in stock.
Conseco's shares fell 15 percent on the day that deal was announced and have been
declining slowly since. The company's stock closed Friday at $7.33 a share, down 59
percent for the year.
The stock was trading for about $6 a share before Wendt took over on June 29.
Conseco gave Wendt a $45 million signing bonus, before taxes, to lead its turnaround.
The company said the payment compensated Wendt for future income he gave up at GE.
Critics said it was a measure of the company's desperation.
Wendt will profit handsomely if his efforts succeed. He has warrants to buy 10 million
shares of Conseco stock at $6.19 a share, and is eligible for a bonus of up to $50 million,
depending on the increase in the company's share price during the next couple of years.
When Wendt arrived, analysts and even company insiders predicted he would move
quickly to slash expenses. At the finance unit, he did, shutting down more than 50 field
offices and laying off 2,000 workers.
On the insurance side of the business, the process will be more deliberative, he said.
Conseco is taking a hard look at all of its products to see which ones might be sapping
resources.
"This is a very crowded marketplace,'' Wendt said. "We'd like to be able to play where
we know we can provide real value to customers and win by doing it.''
Wendt has managed to break away from Conseco's problems long enough to attend two
Indianapolis Colts games and one Indiana Pacers game this fall.
He also was in the stands at Memorial Stadium in Bloomington when the Indiana
University football team played the University of Wisconsin, his alma mater.
Wendt's game plan for Conseco emphasizes internal growth over external growth.
"Obviously, with our capital constraints, we're not going to be out doing any major
acquisitions,'' he said.
Meanwhile, rival insurance and financial-services companies are consolidating to gain
market power and extend their product lines.
That trend could work against Conseco and raise new doubts about its viability, Devine
said.
"Is it viable from a monetary perspective, or is it viable from a long-term strategic
perspective?'' he said. "At this point, I'd seriously question the latter.'' |
