Sunbeam never fades... again just the stakeholders lost big time

["Miklos A. Vasarhelyi" <miklosv@andromeda.rutgers.edu>]

May 20, 2005

At Sunbeam, Big Guys Won, Public Lost

By FLOYD NORRIS

SEVEN years ago, two financiers who were among the most respected and
feared in America sat down to make a deal that turned out to be
disastrous for almost everyone involved. 

Everyone, that is, except for the men most directly involved. Long after
the public investors toted up their losses, Ronald O. Perelman and Albert
J. Dunlap are doing fine. The biggest loser appears to be an investment
bank that lost a lot of money financing the deal and now must pay much
more to Mr. Perelman.

In early 1998, Mr. Dunlap was among the most revered and most reviled
chief executives in the country. Credited with having turned around Scott
Paper in 1994 and 1995, he then appeared to have done the same thing for
Sunbeam, a maker of small home appliances. Its profits had soared and so
had its shares.

He relished the nickname Chainsaw Al, bestowed for his willingness to
fire people. His memoirs had been a best seller in hardcover and were
selling well in the paperback edition.

Mr. Perelman was also widely respected. To be sure, his Marvel
Entertainment had gone bankrupt, leaving public investors with big
losses. But shares in

Revlon, the cosmetics company he controlled, were trading for twice
the price at which they had gone public two years earlier.

But behind the scenes, neither man's empire was as solid as it seemed.
Revlon's shares were destined to plunge later that year as sales
suffered, and since then Mr. Perelman has been forced to put more money
into the company, whose stock price is less than a tenth of what it was
in early 1998.

But Revlon's problems were small compared with Sunbeam's. That company's
turnaround was soon to be exposed as being based on false accounting.
Sunbeam went bankrupt, with shareholders losing everything.

Mr. Perelman was one of those shareholders, because he had sold Coleman,
the camping equipment company, to Sunbeam for cash and stock. He may have
gotten a higher price for Coleman than its operations warranted, as
Sunbeam later claimed, but he did not sell his Sunbeam stock to realize
that gain.

AFTER Sunbeam unraveled, Mr. Perelman decided to sue. But, for reasons
his aides will not discuss now, he did not sue Mr. Dunlap. Instead, he
sued

Morgan Stanley, which had advised Sunbeam and underwrote the junk
bonds and bank loans that financed the Coleman acquisition. Morgan
Stanley had intended to syndicate the bank loan to other institutions,
but it was not able to do so, and says it lost $300 million on the
deal.

The judge in Florida hearing Mr. Perelman's suit decided that Morgan
Stanley had failed to produce evidence and thus had acted so badly that
the jury should assume it was in on the fraud. This week the jury awarded
$1.45 billion to Mr. Perelman, most of it in punitive damages. 

The former public owners of Coleman stock were not in the lawsuit, and
will get nothing from it. If this verdict stands, Mr. Perelman will have
a large profit, but public investors who followed his lead will have lost
nearly everything they invested. 

Another winner is Mr. Dunlap, whose lawyer did not return telephone
calls. He has always denied doing anything wrong, but paid $18.5 million
to settle various lawsuits. He appears to have many millions left and he
faces no criminal charges.

When Sunbeam collapsed, federal prosecutors were not as interested in
accounting fraud as they later became, and it was not until 2002 that the
Justice Department began an investigation. No indictments
followed.

By then it had come out that Mr. Dunlap had lied on his résumé,
concealing a job in the 1970's. That employer claimed in federal court
that Mr. Dunlap had directed an accounting fraud similar to what later
happened at Sunbeam, but the employer went bankrupt and the suit was
settled without anything being proven.

Mr. Perelman and Mr. Dunlap have reason to smile now. Small investors who
believed in them do not.

Miklos A. Vasarhelyi
KPMG Professor of AIS
Director RARC / CARLAB
Rutgers University
315 Ackerson Hall
180 University Avenue
Newark, NJ 07102
(973) 353 5002
(201) 454 4377 (cell)
http://raw.rutgers.edu/mik los