Last hope of a dying company: Shaky Pillowtex finances cast shadow over last CEO
07/21/2004 11:06 AM
07/18/2014 11:31 AM
This story was originally published July 21, 2004.
In a pitch in 2003 to Wal-Mart executives, Pillowtex CEO Michael Gannaway pointed to a new line of sheets and towels laid out in his New York showroom.
With Pillowtex again facing collapse, Gannaway dreamed of producing the Cannon line for the world's largest retailer - a deal that could fetch up to $200 million in annual sales for the Kannapolis textile giant.
The Wal-Mart executives seemed impressed. One called the designs "dazzling."
But as the meeting closed, Gannaway made no move to sign Wal-Mart to a deal.
That meeting, in March 2003, would typify Gannaway's tenure. Repeatedly, he would flirt with proposals offering hope for the company. Each time, they fell frustratingly short.
Gannaway and his Wal-Mart guests knew in advance that Pillowtex was in no position to make long-term plans; its financial future was too uncertain. He held the meeting anyway, hoping to win Wal-Mart's order later, perhaps after finding a buyer for Pillowtex.
Neither would work as he envisioned.
After the Wal-Mart team left, Gannaway turned to his staff. This failure, he told them, is not a reflection on your outstanding work.
As Pillowtex foundered, company executives blamed global trade. But pressure from low-cost imports paints an incomplete picture of Pillowtex's demise.
In its final three years, the company had four top leaders and an ever-changing board of directors. Some leaders made critical miscalculations. Others squandered opportunities to remake Pillowtex into a multinational company that could compete against, or partner with, textile makers in Asia.
When Pillowtex collapsed, it wiped out 7,650 jobs, including about 4,800 in North Carolina. It was the biggest mass layoff in N.C. history, and the industry's most spectacular failure.
Gannaway, 51 when appointed CEO, believed the company could be salvaged.
Eyes wide open
Gannaway's rise to CEO was unexpected. He joined Pillowtex as president in October 2002, assigned to manage daily operations.
But when CEO David Perdue abruptly quit, telling associates he felt misled about the company's problems, the Pillowtex board turned to Gannaway, a former Sara Lee executive.
Gannaway, a Minnesota native who once planned a career as a sociology professor, specialized in marketing.
At Sara Lee's apparel division in Winston-Salem, he had directed the U.S. introduction of the Wonderbra with a marketing blitz that emphasized the allure of cleavage.
He left to join Pillowtex because he relished a challenge. He also thought Perdue's strategy, which emphasized marketing and overseas production, was a good one. He says his eyes were "wide open" to the risks of joining such a troubled company.
At the LongHorn Steakhouse in Concord, where Gannaway met Perdue to discuss the president's job, the two men clicked.
"It was like I had known him for 10 years," Gannaway recalls.
Early on, he says, he believed he and Perdue could rescue Pillowtex, even if it meant moving thousands of its U.S. jobs overseas where labor and other costs are lower. Hopes faded as he and Perdue learned the extent of Pillowtex's problems.
As CEO, Gannaway's thoughtful, inclusive tone appealed to Pillowtex managers. Some say they found him approachable, open to ideas and willing to share information.
Gradually, he came to accept that finding a buyer might be his best alternative.
"Emotionally, it was a difficult time for me," he says. "It felt like there was a hole in my stomach. Intellectually, I said, a job's got to get done here."
Union fights sale
Gannaway's best chance for selling Pillowtex rested with Springs Industries, a rival in nearby Fort Mill, S.C. The two had flirted with a merger at least twice in the 1990s. And in 2000, Springs CEO Crandall Bowles had quietly made inquiries about buying a Pillowtex plant in Alabama, Pillowtex executives say.
In early 2003, Springs representatives made regular trips to Pillowtex headquarters. Perdue had even met with David Stockman, President Reagan's first budget director and founding partner of an investment company that held a large stake in Springs, a Pillowtex source says.
Gannaway refuses to confirm talks with Springs or other potential buyers.
Springs wanted to couple its purchase with a second bankruptcy filing by Pillowtex, sources familiar with the talks say. By eliminating Pillowtex debt in bankruptcy, the deal would have cost Springs less. The bulk of Pillowtex's 7,800 workers would have been terminated, but at least 2,000 jobs might have been saved, the sources say.
Quietly, Pillowtex alerted N.C. employment officials in late April of potential layoffs.
Officials with UNITE, a textile union representing 4,300 Pillowtex workers in North Carolina, were livid over the potential job cuts. They promised a "hue and cry heard throughout the South" if the sale went through.
Gannaway and others talked weekly with UNITE, says Harris Raynor, UNITE's regional director. In one phone call, Pillowtex leaders urged UNITE to tone down its rhetoric. Raynor refused.
"The union made independent decisions and independent judgments regardless of what Mike Gannaway or Springs had to say," Raynor says.
Gannaway refuses to discuss his dealings with UNITE.
The companies drafted sales agreements and prepared to seek federal anti-trust approval, says Pillowtex general counsel John Sterling.
"We were far down that road," he says.
The deal collapsed the second week of May, partly because of an industrywide sales slowdown that hurt both companies, Pillowtex officials later said. That may have hindered Springs' ability to finance the deal, the sources say.
UNITE took credit for derailing the buyout, which it says was days from completion.
Raynor, who says he holds Gannaway in high regard, insists UNITE made the right decision. Springs was interested mainly in Pillowtex's brands and would have kept few jobs, he says.
People close to the deal say the union's actions, while not helpful, were not a major factor in Springs' decision to walk away.
That same week, in mid-May, Gannaway began talks with a liquidation company called GGST, bankruptcy documents show. GGST had no interest in making sheets and towels. It wanted to buy Pillowtex assets and sell them piecemeal.
For the next two months, Gannaway says, he retained hope of finding a buyer willing to run the mills. He reminded his staff that if they focused on work, they would bring value to Pillowtex and themselves.
Just five years earlier, Pillowtex was vibrant. It employed 14,000 workers and seemed to have a promising future.
Now its very survival was in doubt.
Retailers that sold its sheets and towels were finding new suppliers. Longtime office workers began job-hunting or left.
All the while, Gannaway juggled potential buyers, anxious workers, restless bankers and his board of directors.
"We were burning cash, and we were living on borrowed time," he says.
Other suitors emerged.
British fabric company Broome & Wellington expressed interest, but the complicated proposal bogged down as lawyers on both sides haggled over details.
In mid-July, Broome & Wellington bowed out.
"Everything dragged on for too long," Broome & Wellington Chairman Joshua Rowe later told the Observer in an e-mail.
In Kannapolis, the community braced for hard times. For as long as anyone could remember, the big mill with its twin smokestacks had defined the town. Everybody knew somebody at the plant. And with 40 percent of the mill workers lacking a high school diploma, big layoffs would make job hunting an ordeal.
To save cash, Pillowtex idled many of its plants in June and July. It also withheld the July Fourth bonuses mill workers had come to expect.
At headquarters, some workers began boxing their personal effects. Administrative clerk Linda Bryant says she read several books at her desk, including all 1,024 pages of "Gone With the Wind."
In the end, just one suitor remained: GGST, the liquidators.
On the morning of July 18, Don Mallo, Pillowtex's vice president for human resources, called a federal labor official in Atlanta, who dashed off an e-mail to colleagues.
"Barring an unforeseen (and unexpected) miracle," Helen Parker wrote,"Pillowtex will declare Chapter 11 bankruptcy within the next two weeks. A complete liquidation is planned."
Reality sets in
Two days later, after Sunday breakfast, Gannaway sat reading The New York Times on the back porch of his home in Winston-Salem, overlooking his pool. For the first time, he says, he realized the end was imminent.
He laid down the paper.
He says he thought of the 7,650 workers who counted on a Pillowtex paycheck.
He thought of James Cannon, the cotton buyer who founded Cannon Mills in 1887. He thought of the generations of workers who, like him, were part of the company's history.
"It went from being an intellectual exercise to becoming a reality," Gannaway recalls. "It was one of those moments where you go, 'Holy Christ! This is a big deal!' "
After a half-hour in thought, he wrote a to-do list: contact social-services agencies, write a letter to employees, and other tasks.
In an hourlong conference call the next day, Gannaway and the Pillowtex board decided to accept the liquidator's offer.
Companies whose bankruptcy reorganizations fail usually survive at least two years after leaving bankruptcy court, says bankruptcy expert Lynn LoPucki at UCLA Law School. Pillowtex survived only 14 months.
"Pillowtex's quick failure suggests that its managers and professionals - and the court - did a poor job of reorganizing," LoPucki said in an e-mail interview.
So much had led to this day, former Pillowtex executives say: The heavy debt accumulated under CEO Chuck Hansen. A flawed bankruptcy reorganization plan under Tony Williams, who followed Hansen. A return to financial disarray under David Perdue, Gannaway's predecessor.
Each of the last three leaders had talked of moving some jobs abroad to make the company competitive. But as cheaper imports eroded sales, Pillowtex executives and their boards of directors failed to adopt necessary changes.
Gannaway had just one task left.
On Wednesday, July 30, Gannaway says, he rose from bed at 4 a.m. - nearly an hour and a half earlier than usual.
On his drive to Kannapolis, he thought about how horrible the day would be. He was determined to stay focused. He rehearsed what he would say to employees.
Pillowtex had been living day to day since missing a loan payment a month earlier. Lenders had granted repeated extensions.
Employees filing into headquarters saw a police cruiser out front. Inside, guards stood at the doors of top executives.
Factory workers milled around the lobby, confused, asking questions.
At 8:30, in the basement auditorium, the scene of countless meetings good and bad, Gannaway rose to talk to about 75 employees. He stood near the audience to the side of the lectern, without a jacket or tie, and began speaking:
The worst-case scenario is upon us.
Senior management worked hard to avoid this day.
There is no bogeyman, no one person or single decision responsible.
We must all go forward. We must get on with our lives.
Gannaway spoke for about 30 minutes. He choked up once. His voice cracked as he talked about how difficult the day was for the entire Pillowtex family.
He paused to regain composure.
He said he wanted everybody treated with dignity and respect.
He took a few questions: There would be no severance; liquidators would sell everything, including the Cannon brand that no longer could save the company.
Afterward, nobody hugged. A few thanked Gannaway for his efforts. His audience shuffled out in silence.
Gannaway oversaw the closing of Pillowtex until mid-October of 2003, when he began hunting for work.
In addition to his $500,000 salary, he received a $300,000 bonus for sticking with the company for three months after production stopped.
In July 2004, he joined Greensboro apparel giant VF Corp. as vice president of customer management, where he helped oversee the company's relationship with Wal-Mart, among others.
As for his time as CEO, he says there's nothing he'd do differently. He says he's satisfied that top executives worked as hard as they could to find a buyer and preserve jobs.
Still, he says he feels some responsibility for the company's fate.
"I think everybody that's been involved in the management of this company is responsible for its outcome," he says. "I feel responsible for it. But there are also many others who are accountable for it."
One of the lessons of Pillowtex's collapse, he says, is that companies must respond to challenges.
"If you have significant, fundamental problems, it needs strong and fundamental action," he says. "At the end of the day, root-cause problems are painful to address. But they need to be addressed."
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