The Tale of a Turnaround – Centennial Technologies, Inc.

When Centennial Technologies, Inc. was acquired by California-based Solectron Corporation in May 2001 for $108 million, the acquisition marked the successful conclusion of a dramatic turnaround in Centennial’s fortunes. Located 20 minutes north of Boston in Wilmington, Massachusetts, Centennial had been a leading manufacturer of custom and industry-standard PC memory cards for makers of telecommunications, networking and mobile computing equipment. In 1996, Centennial was the hottest company on the New York Stock Exchange — its shares advanced 451 percent that year alone. Founded in 1987 and publicly owned since 1994, Centennial was the toast of a market that had gone crazy for technology stocks. At its height it had a market capitalization of nearly $1 billion.

Then disaster struck. Early in 1997, members of Centennial’s board of directors discovered that the company’s senior managers had been manipulating its financial results for several years. This news set in motion a rapid-fire sequence of events that sent the company into a tailspin. Centennial’s chief executive officer was fired on February 11, 1997, and trading of the company’s stock was halted the same day. When it resumed trading a week later, the stock plummeted from a high of $444 a share on December 30th to just $25. The Securities and Exchange Commission and Federal Bureau of Investigation quickly descended on Centennial and more than 40 shareholder suits were eventually filed against the company and its board. Suspicion, recriminations and paranoia threatened to tear the company apart.

Centennial’s survival was very much in doubt.This case study tracks how a dedicated team of experienced managers, led by former Chairman of the Board William Shea and former Chief Executive Officer L. Michael Hone, ultimately saved Centennial. The study shows that speed and decisiveness were key when dealing with a crisis of this magnitude. It also demonstrates the significance of bringing in a new management team that had worked together in previous turnaround assignments. And it shows that in a turnaround situation, whether a company survives is ultimately up to its customers. Realizing it was the beleaguered company’s best chance for the future, Hone and his teammates were determined not to lose a single customer throughout the turnaround process — and they didn’t.

Suspicions about the company had first surfaced in late 1996 when an article in Financial World magazine cast doubt on a claim made by Centennial CEO Emanuel Pinez that he had degrees from Hebrew University and the London School of Economics. Shea, a former BankBoston Corp. vice chairman and chief financial officer who joined Centennial’s board shortly before Pinez’s scheme was uncovered, took the lead. He and other directors confronted Pinez with the facts in the article. Initially Pinez denied that he had misled the board and investors about his background, but when Shea and other board members probed deeper over the next few days, Pinez finally conceded that he had lied about the degrees. Far more troubling was his admission that he, along with CFO James Murphy, had cooked the company’s books by recording millions of dollars in phony sales.

Pinez ultimately was indicted on federal charges of insider trading and securities fraud and sentenced to five years in prison. Murphy pled guilty to securities fraud. Centennial was delisted from the New York Stock Exchange, and the SEC forced the company to restate its earnings for a three-and-a-half year period.

In an effort to control this significant damage, Shea made several quick decisions. As soon as Pinez was relieved of his duties, Shea brought in a crisis management firm, Chicago-based Jay Alix & Associates, to run Centennial while he dealt with the fraud. He also hired a law firm to represent the board, and directed the company’s accounting firm to conduct a full-scale audit. Shea’s most controversial decision was to have the entire board — himself included — undergo extensive background checks to make sure there were no more problems that would further damage the company’s credibility.

Shea also began to look for a permanent management team, and following an extensive search the board recruited Hone in August 1997 to join Centennial as president and CEO. Hone was a veteran of corporate turnarounds, having directed the recovery of PSC Inc., a Rochester, N.Y.-based company that made hand-held scanning equipment. The board also liked the fact that Hone has an extensive background in sales and that he is very comfortable working with customers. If Centennial was to be saved, it had to retain its most important customers. Within six weeks of his arrival, Hone had recruited two members of his PSC team to join him at Centennial. Jacques Assour, who has a Ph.D. in electrophysics and engineering, was brought in as senior vice president in charge of operations, while Richard Stathes became senior vice president for sales and marketing. A third PSC veteran, Mary Gallahan, was retained as a consultant on personnel matters. She later joined the company as a vice president for human resources and administration.

Hone and his team made several immediate decisions. One was to assess Centennial’s personnel, including senior managers below Pinez and Murphy. The company’s vice president of operations was replaced with Assour and a complete revamping of the sales and marketing effort resulted in several replacements there as well. In total, approximately 15 people were fired during Hone’s early months at the company. But other managers who had nothing to do with Pinez’s scheme were encouraged to stay, and did.

Hone also looked carefully at Centennial’s business model and soon decided that its core business — the design and manufacture of PC memory cards — could power the company’s growth if managed properly. Consequently, the company sold off several peripheral businesses that Centennial had either acquired or built, including plants in the United Kingdom and Taiwan.

Centennial’s expansion had been financed with a $24 million loan from BankBoston Corp., but early on, it was clear that Centennial couldn’t afford to carry that much debt. The company persuaded BankBoston to not foreclose on the loan until he could pay it off by disposing of unwanted assets. The BankBoston loan was replaced with an operating line of credit from Congress Financial , a commercial finance company, and then later with funding from Fleet Financial Corp.

Shareholder suits placed an additional demand on Hone’s time and attention. Investors were shaken and outraged by the discovery of fraud and the collapse of Centennial’s stock price. Hone had numerous conversations with institutional and individual shareholders in which he asked for patience and forbearance. In many instances, investors simply wanted someone to complain to — and Hone, with his easy-going manner, listened. The final settlement, announced in June of 1999, called for shareholders to receive 37 percent more shares in the company. Had Centennial not settled the matter as quickly as it did, litigation costs might have forced it to file for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As it was, the company spent $1.5 million dealing with the shareholder suits.

As one might expect, internal morale was quite low when the new management team took over. Attrition reached nearly 25 percent in 1997 as many Centennial employees, fearing for their jobs given the company’s precarious financial condition, left on their own accord. The physical plant had been allowed to deteriorate, and a stronger company-wide work ethic needed to be instilled.

Starting with improved communication, Hone’s team gradually turned this situation around. Hone began holding monthly company meetings where, among other things, he briefed employees on Centennial’s financial performance. Afternoon gatherings were planned regularly to celebrate special events. The company’s office complex was spruced up with new paint, carpet and reconditioned furniture, and cubicles replaced most private offices to promote a more open atmosphere. Employees also were required to adhere to a more stringent business casual dress code and to arrive for work on time, which contributed to a more professional environment.

Six months into Centennial’s revival, Hone gave stock options to all of its employees. By the time the transaction with Solectron closed, Centennial employees owned 21 percent of the company’s stock and options. He also began to increase salaries to market rates, and installed a 401(k) plan, first with no company match, then with an increasingly larger contribution. He replaced Centennial’s health insurance coverage with a broader, more generous plan.

Simultaneous with the rebuilding of morale, Hone and his team began to rebuild certain key aspects of operations. Where prior Centennial managers had no quick way of checking whether a particular batch of PC cards was being completed on schedule, or had been shipped, within three months of his arrival, operations chief Assour had installed a management information system that enabled him to track the progress of client orders. Assour also loaded the new system with cost data for all the company’s standard products so that Centennial’s sales people could make informed decisions when they offered quotes to prospective customers — particularly when competitive pressure forced them to lower their price. Previously, the sales staff did not have a clear idea of whether a particular piece of business would be profitable at an indicated price.

The sales and customer service operation also had to be rebuilt virtually from the ground up, a job that fell largely to Stathes. Under Centennial’s old management, the sales effort relied on a group of highly paid individuals who worked in the company’s Wilmington location, rarely visited customers and sold primarily on price. In addition to being very expensive, this also was the wrong type of sales force for the direction that Hone wanted to take the company, which was to emphasize Centennial’s custom design capability and which required people with greater technical knowledge. In the first year, Stathes established a new customer service unit and virtually replaced the entire sales staff with field representatives throughout the U.S. For international stabilization and expansion, the company hired John Nugent, another former PSC associate, as vice president of international operations. Nugent opened a sales and support office in the U.K. and hired a team to fuel growth.

While Hone and Stathes were rebuilding the sales team, they were also paying close attention to the customers that Centennial already had. Its largest and most important customer was Nortel Networks, and Centennial provided Nortel with a level of service that none of its competitors were willing to offer. Recently the company was given Nortel’s P.R.I.D.E award in recognition of its quality service. Other loyal customers that have stayed in the fold include Compaq Computer, Lucent Technologies, 3Com, Symbol Technologies, Intermec Technologies and United Parcel Service. In the end, Centennial kept all its key customers throughout a crisis that, by all rights, should have sent customers scurrying for other suppliers. Hone and his team also convinced Centennial’s various suppliers to stick with the company despite its well-publicized problems. Ultimately, the loyalty of its customers and suppliers was the single-most important factor in Centennial’s revival. Keeping the product pipeline flowing brought cash into the company and gave the turnaround team valuable time to fix other serious problems. Richard Pulsifer joined the team in June of 1999 as vice president and chief financial officer to help manage the company’s financial, legal and SEC issues.

There is no doubt that Centennial’s survival was aided in large measure by the experience and teamwork of a group of managers who had worked together before, particularly in turnaround situations. Because they knew one another well and understood each other’s work style, the team of Hone, Stathes, Assour, Nugent and Gallahan were able to focus all of their attention on the job that needed to be done without the distraction of internal politics or personality clashes. Functioning successfully in a corporate crisis situation requires clear thinking, decisive action and long hours in an intense, pressure-filled environment. In contrast, a turnaround team that has never worked together to effectively resolve a crisis situation loses valuable time building trust and sorting out their own interpersonal dynamics.

Although Centennial’s stock price never returned to the heady days of 1996, that earlier valuation reflected both an exuberant stock market and the company’s misleading financial results. After three years of level growth as Centennial’s management team sold off non-performing assets and rebuilt the company, strong top line growth returned in the fiscal year ending March 31, 2001, when sales grew 127 percent to $80.8 million compared to 1999. Net income for the period was $14.3 million. The company’s shares have been traded on the Nasdaq system since November 2000.

Solectron’s purchase price of $108 million reflects a 49 percent premium over Centennial’s 30-day average stock price of approximately $14. The company’s shareholders, who might have lost their entire investment in 1997 when the company was delisted on the New York Stock Exchange, were finally rewarded for their perseverance. And Centennial, which once seemed destined for the corporate scrap heap, will become the centerpiece of Solectron’s custom PC card business, where the California-based company previously had a relatively small presence.