Turnaround Value & Valuation: Reassessing Scott Paper

Abstract

This paper presents an approach for assessing turnaround opportunities that entails both pre- and post-turnaround valuation considerations, as well as exit planning. The approach is illustrated by way of the Scott Paper Company (Scott) turnaround. In April of 1994, Scott appointed “Chainsaw” Al Dunlap, Chairman and CEO with a mandate to turn the firm’s poor performance around. Slightly more than one year into the turnaround, Scott’s value increased from approximately $2.8 billion on the market to approximately $9.4 billion via Kimberly-Clark’s acquisition price. We show how Scott qualified as a turnaround opportunity using our approach prior to Dunlap’s appointment, and how a conservative exit plan could have been formulated following his appointment. Conservative exit planning mitigates execution risk, which could manifest in a variety of ways, as we discuss. The approach presented in this paper could be significant from a private equity perspective because, according to some observers, there is a scarcity of professionals skilled in turnaround analysis and management. If that observation is correct, turnaround-related opportunities could emerge if current economic risks manifest and corporate returns decline.

Keywords: Turnaround analysis, valuation, exit planning

JEL Classification: G34, G39