Anatomy of a collapse: Five lessons from the demise of Timber giant Gunns

Gunns has entered into receivership after announcing yesterday that it was unable to continue trading.

Korda Mentha has been appointed as receivers.

“Ongoing lender group support has been required in order to stabilise the company’s operations whilst discussions in relation to a potential capital raising, restructuring or alternative transaction proceed,” the company told the Australian Securities Exchange.

“The company now regretfully advises that the lender group has informed the company that the lenders will not permit the company to retain further funds,” it said.

The timber company has been in trouble for some time, posting a $904 million loss for the 2011-12 year earlier this year.

We’ve looked at what went wrong for Gunns and five lessons for your business from the collapse of the timber giant.

1. Don’t stay stuck in the past

Tasmanian Premier Lara Giddings has warned that Gunns’ failure underscores the collapse of the state’s forestry industry at a time when the state is turning to tourism as a major source of income.

”It is a blunt and unfortunate reminder that maintaining the status quo or trying to hold onto the ways of the past is not an option,” Giddings said.

2. Don’t let litigation get nasty

The litigation Gunns has engaged in over the years could almost be used as a textbook case of how not to litigate.

The timber company achieved notoriety through its $6.9 million dollar claim against the Wilderness Society and individuals including former senator Bob Brown.

The claim was aimed at keeping protesters away from Tasmania’s old-growth forests but it collapsed after four years, with the company ordered to pay the Wilderness Society $350,000 in legal costs.

At the time, Wilderness Society executive director Alec Marr described the case as the greatest corporate legal fiasco since “McLibel”, when McDonald’s successfully sued activists for defamation but endured a public relations disaster.

“We believe the whole thing has been a monumental waste of shareholders’ money and … the court’s time,” he said.

3. Watch out for insider trading

Former Gunns chairman John Gay is about to have his day in court thanks to the Australian Securities and Investments Commission.

ASIC is alleging that Gay, while chairman of Gunns, used insider information to profit from a personal share transaction – information that he knew was not available to the general public.

Gay is alleged to have breached two sections of the Corporations Act between December 2 and 4 in 2009, when he disposed of 3.4 million shares he held in the timber company.

The case goes to court in the next week.

4. Don’t ignore public sentiment

Gunns has been enraging environmentalists and many others ever since the timber company announced plans in 2004 for a $2 billion project including a pulp mill in the Tamar Valley.

Gunns pushed ahead with the project despite rising community opposition and in 2007 it pulled out of the official environmental assessment process after Tasmania’s planning regulator found the project ”critically non-compliant”.

Instead, the then premier, Paul Lennon, agreed with Gunns to push through state parliament environmental approvals.

In Crikey, Tasmanian author Richard Flanagan, a longstanding critic of Gunns, accuses the company of a “greed at all costs” attitude that turned public opinion against it.

5. Consider a name change

Gunns’ reputation was so tattered that recently the timber company considered a name change in an attempt to try to change its image.

Things probably couldn’t have got any worse for Gunns and a name change can work when a business’s current name is a complete barrier to success.

However, it’s important not to confuse name and brand. While Gunns could have changed its name, any change would have been fairly meaningless without change as well to Gunns’ brand and public image.