Surviving a Corporate Death

The fall of Peregrine Systems would be just one more tale of 1990s excess meeting a brutal comeuppance–except for its employees, who waged a remarkable fight to keep their company alive.

Sunday, May 5, 2002 was supposed to be a day off for Andy Cahill.


It had been a difficult few months for Cahill and his sales staff at Peregrine Systems. The technology bust was weighing heavily on the company, which makes “back office” software for corporations. Even so, Peregrine’s salespeople appeared to have met their quota for the fiscal year. Just two days later, Cahill and other company executives were scheduled to hold the annual Employee Kickoff, a pep rally at a hotel near Peregrine’s San Diego headquarters, where roughly half of the company’s 3,000 staffers would gather to be congratulated and pumped up for the new fiscal year.

Now Cahill was getting ready to go to the local ice rink, where he planned to host 30 kids at a skating party for his daughter’s eighth birthday. But as he was leaving his house, the telephone rang. The caller was Rick Nelson, a colleague. It wasn’t unusual for Cahill to take work-related calls at home, but on this Sunday, Nelson had devastating news:ÊThe following morning, Peregrine would announce the resignations of its chief executive, Stephen Gardner, and its chief financial officer, Matthew Gless. The board of directors was launching an internal investigation into the alleged falsification of $100 million in revenues. But Nelson wasn’t calling just to pass along the news. As of that day, he was Peregrine’s acting CEO, and he had rung Cahill with the urgency of a general under siege, screaming for reinforcements. “I felt disbelief,” Cahill, 46, recalls now. “Disbelief about the condition of the company, but also concern about the people who work here and concern about our customers.”

As would soon become clear, the condition of the company was far worse than anyone imagined. The news sent investors fleeing; by August, Peregrine’s stock had been delisted from the Nasdaq stock exchange. By September, despite radical cost-cutting measures, the company filed for Chapter 11 bankruptcy protection. When all the forensic accounting was complete–more than a year later–a half-billion dollars of Peregrine’s revenues had evaporated, nearly $260 million of it ex-posed as an outright sham. Earnings dating back to April 1999 had to be restated. Three former Peregrine executives, including former CFO Gless, would ultimately plead guilty to various counts of criminal fraud.


“If the CEO and CFO were gone, they were gone. I knew that I couldn’t dwell on why. I had to act fast to keep the company going.”

In many ways, then, Peregrine looked like just one more dead body to be tossed into the technology charnel house–just another instance of the arrogance, greed, and corporate malfeasance that came to characterize the 1990’s boom economy. But Peregrine survives. On August 7, 2003, the company emerged intact from bankruptcy. True, it’s just one-quarter its former size, as measured by both head count and annual revenues. And the turmoil and pressure clearly aren’t over. Suits against the company’s former officers and directors–those who reaped the biggest financial rewards–are still proceeding. And while the SEC’s claims against the company have been settled, the U.S. attorney for the Southern District of California continues to investigate the company, including its former officers, now with the cooperation of some who have pleaded guilty, including Gless. But in the assessment of some insiders and customers alike, Peregrine has emerged from its near-death ordeal a revived and refocused company–and with an even larger customer base than before its downfall.

Peregrine was able to survive partly because of the nature of its business: It sells software that helps IT managers keep track of their technology assets, such as the model numbers, lease terms, and software licenses on all the desktop computers inside a multinational bank or brokerage house. It’s boring but vital stuff that, even in a recession, customers are willing to buy. It’s also the sort of stuff that, once installed, is tough to uproot and replace.

But Peregrine hasn’t endured merely because of what it does, but because of who it is. While some executives set the company on a course for disaster, it was Peregrine’s rank and file that kept the company breathing. For one reason or another, even as they faced clear deception and betrayal by their superiors, Peregrine’s employees repeatedly dug in their heels and refused to let their company die.


Over the course of their yearlong ordeal, Peregrine’s staff endured withering rounds of layoffs and, at least twice, faced the prospect that the company many still refer to as a family would simply, irretrievably, collapse. The survivors continued to fight–to stay focused on customers, pitch new business, take on new challenges. Sure, some of them may have hunkered down and hung on at Peregrine because they had little choice: The high-tech industry in southern California isn’t exactly a golden land of opportunity these days. But many of them chose to stay, out of strong feelings of trust in each other, belief in their company, and loyalty to their customers. “The only reason that company is still around today is because at the bottom of the hierarchy, there are people who cared enough to make it so,” says one employee who lost his job at Peregrine in an early round of layoffs.

For all their dedication and effort, Peregrine isn’t out of the woods yet, and the pain isn’t over. Its ranks are continuing to thin, and the quality of its business–increased customer base or not–remains in question. In December, Peregrine delayed its SEC filings for the third time. But its foot soldiers march on. This is the story of a war for corporate survival, told from the trenches by those still fighting–and, in some cases, by those who have fallen–in a battle whose ultimate outcome remains unclear. It is also a glimpse of the challenge all too many workers at all too many companies have had to face in the last couple of years, and a window on what it takes to weather such crises.

Shortly after he hung up the phone with Rick Nelson in May 2002, Andy Cahill–now rinkside at his daughter’s skating party–began placing calls from his cell phone to his own four top lieutenants. “I never did put skates on, but I was going to go to my daughter’s party,” he says. In addition to overseeing Peregrine’s sales force, Cahill was also the executive vice president in charge of service and customer support, so the task of breaking the news to some 3,000 customers scattered across the globe would fall to his 200-person staff. Cahill instructed his lieutenants to establish a communications war room at headquarters and told them to speak directly to every single Peregrine client or partner inside of just 48 hours. The first task would be to “tell them everything we know about what’s going on.” The second, to reassure them that Peregrine’s troubles wouldn’t impede the company’s ability to deliver its products. Then Cahill threw in a parting comment: “And just in case any of you are interested, I’m not going anywhere.” It was a remark that would later give those who heard it reason to shudder.


That evening, Cahill met Nelson and several other Peregrine executives at headquarters to prepare for what promised to be a rough Monday. Nelson drafted a communique to the employees; Peregrine’s marketing department, headed by Nicole Eagan, began working on a telephone script for the salespeople in the war room to use in their calls to customers. It contained what she expected would be the most frequently asked questions about the audit, as well as talking points for answering them. At some point in the evening, Cahill recalls, one executive in the room suggested that, under the circumstances, Nelson consider canceling the Employee Kickoff planned for Tues-day. Cahill could hardly contain himself. “Cancel the Kickoff and you might as well cancel the company!” he shot back. “Let’s get in there and explain to our people what has happened. We’re gonna run this event, and we’re gonna carry on!”

Time to Hit the Silk?

As Peregrine’s staffers began trickling in to work the next day, they quickly began to sense that something was amiss. For Robert Munn, a clean-cut 34-year-old Web manager, the tip-off was the eerie emptiness around his third-floor office. “Something was off,” he recalls. “It was really quiet and there didn’t seem to be anyone around.” Munn, who builds and manages Peregrine’s Web sites for internal training and customer support, had been uncharacteristically late to the office. Had he forgotten something? Was today the day for the Employee Kickoff?

Minutes later, Munn joined so many other of his colleagues as he read–in stunned silence–an email from Nelson, crafted the previous night, explaining the executive changes and accounting investigation. When his telephone rang, Munn was just as shocked to find a headhunter on the line. Having already heard Peregrine’s news, the recruiter was calling to offer Munn a job interview with the information technology department of a local medical-systems company.


With just a year and a half at Peregrine and a young family to support, Munn hardly could have been faulted for hitting the silk. But remarkably, he turned the recruiter down. “You have to wait for more information in a situation like that,” he says. “You don’t automatically jump ship. You have to trust that the people sitting next to you will do their jobs.”

Other employees seemed to react in similar fashion. After reading Nelson’s email, veteran salesman Bruce Aboudara turned to a coworker and said, “Hold on tight, this is going to get really wild!” But that is about as emotional as he ever got. Older than many of his colleagues at 52, with graying hair and glasses, Aboudara exudes an easy confidence, and his reaction to the bad news was all business. “Salespeople don’t like uncertainty,” he says. “Most important that morning was reading quickly down to the bottom of the note to see what the plan was.”

It was a relief, he says, to see that in addition to appointing Nelson acting CEO, the board had installed John Moores as chairman and Fred Gerson as CFO. Moores, the billionaire owner of the San Diego Padres baseball team, was an early investor in Peregrine and had previously served as the company’s chairman. Gerson is the finance chief of the Padres. Better still, Aboudara says, while the letter acknowledged the current situation to be “difficult,” it also placed huge emphasis on customers. As Aboudara remembers it, the letter implored employees to focus first on customers’ needs, including answering whatever questions they might have. “The gist of it was that without them, there was no point to getting through any of this,” Aboudara recalls. “At that point, my feeling was, ‘Okay, we have a plan, we have in place some seasoned people who know our business to help get us through this. Now let’s get on with it.’ “


This much is certainly true: As at many high-flying public companies in the 1990s, executives at Peregrine lived large while the going was good.

Barely past 7:30 a.m., Aboudara settled down to his desk, a list of customers in his hand, and picked up his phone. Throughout the rest of the day, Aboudara and hundreds of other salespeople like him in San Diego and at field offices all over the world worked their way down such lists, paying particular attention to “open accounts”–customers contemplating new deals with Peregrine.

The effort clearly paid off. When Cahill stood to speak at the Employee Kickoff the following day, he concluded his explanation of the “bad news” with the upbeat disclosure that, even on Black Monday, Peregrine had actually signed a new contract with the Canadian government potentially worth millions in annual fees. “The size of the deal didn’t matter,” says one staffer who was there. Says another: “It gave a lot of people confidence that we were not that far off track.”

Peregrine’s employees may have focused on the job at hand, but many were wrestling with understandable feelings of anger. “That morning sparked long-term uncertainty for every aspect of our jobs,” says Nancy Pratt. “I was extremely dismayed at hearing the news, and felt betrayed.” Pratt, a cheerful 39-year-old blonde, had more reasons than most to feel that way. A supervisor in Peregrine’s accounts-payable division, she worked in the same department as former CFO Gless and his deputy, Peregrine’s former assistant treasurer, Ilse Cappel. (Cappel has since pleaded guilty to bank fraud for improperly selling accounts receivable, a tactic used to make outstanding revenues appear stronger than they actually were.) Pratt had been drawn to Cappel and had once asked her for a job in Peregrine’s finance department. “I really, really respected her. Who would’ve thought?”


In retrospect, Pratt says, there was at least one sign that Peregrine was about to implode. Less than a week before Gless resigned, Pratt had spoken to the CFO about her desire to continue to advance at the company. “I [told Matt] that I really liked working here and that I believed in the company. His reaction at the time seemed odd. He just stared blankly at me and said, ‘Work hard.’ “

Several current and former employees of Peregrine express even stronger feelings of resentment and anger toward management. An engineer who lost his job during one of Peregrine’s many rounds of layoffs attributes the company’s demise to “the hubris and ‘frat boy’ party atmosphere” that he claims characterized the executive suite.

“Management’s catchphrase was ‘perception is reality’ as in, if a product or acquisition is perceived to work by Wall Street, that’s good enough,” says Michael Slavitch, another former employee. “Management had it all! They had the best products and had bought all the companies that they needed to be the 500-pound gorilla in IT asset management. But they dropped the ball.” Slavitch, 37, helped found a Canadian company called Loran Technologies that was acquired by Peregine in 2000. He was laid off in the summer of 2002.


Others, in interviews and in lawsuits filed against the company, rage over the fact that several former company officers, chief among them former chairman Moores, earned hundreds of millions of dollars by selling their Peregrine shares before the company’s problems came to light. One investor lawsuit, spearheaded by San Diego lawyer Michael Aguirre, who has had business dealings with Moores, includes SEC records of some 100 stock sales by Moores alone between Peregrine’s 1997 IPO and March 2001. From these sales, the suit alleges, Moores is believed to have garnered more than $611 million. (Moores was ultimately forced to resign his post as interim chairman as part of the reorganization plan approved by the bankruptcy court.)

Keeping the Party Going

This much is certainly true: As at many high-flying public companies in the 1990s, executives at Peregrine lived large while the going was good. There was the requisite boom-era Gulfstream 4 corporate jet, the lavish company parties, the yachts executives were able to buy. Launched in 1981 by former IBM engineers, Peregrine attracted big-time investors including Moores, who earned his first fortune as the founder of software shop BMC. William Savoy, the former money manager for Microsoft cofounder Paul Allen, also briefly sat on Peregrine’s board.

Shortly after Peregrine went public, Stephen Gardner was installed as CEO, and set out on an acquisition binge. Between 1997 and 2000, Peregrine acquired 18 separate companies, boosting the company from just 180 employees at the end of fiscal 1997 to more than 3,000 at the end of fiscal 2002. And as long as the markets continued to soar, it was hard to tell what effect the aggressive strategy was having on Peregrine. Between 1997 and 2001, the company reported 17 straight quarters of revenue growth, and its stock performed accordingly: Shares soared from a split-adjusted $2.25 to nearly $80 by spring 2000.


But once the market and the economy turned, Peregrine could no longer keep delivering–at least not legitimately. Pressured to keep the stock up, Peregrine’s executives began inflating the numbers. Some of this was accomplished by selling accounts receivable that were either nonexistent or had already been sold, the offense to which Cappel pled guilty. And at least one sales representative, Steven Spitzer, has since pleaded guilty to securities fraud for prematurely reporting revenues on his sales contracts that were incomplete, could still be canceled, or were structured to produce no revenue for Peregrine at all.

“I knew that if we could save the customers, we could save Peregrine,” says the man brought in to perform emergency surgery on the company.

As these and other misdeeds became known, Peregrine fell into what looked like a death spiral. The accounting investigation meant Peregrine would further delay filing its 10K with the SEC, and on May 23, Peregrine issued a warning that its financial restatement would ulti- mately stretch back to April 1999. These actions called Peregrine’s creditworthiness into question, and it soon became clear that the company could not meet its $40 million-a-month payroll. By June, the board concluded that Peregrine needed more than an interim CEO: It needed a surgeon. On June 3, 2002, just four days after he first met with Peregrine’s board, Gary Greenfield walked in the door as the new CEO. Interim boss Rick Nelson remained at the company as chief operating officer.

A graduate of both the Naval Academy and Harvard Business School, Greenfield, 49, wasted no time on pleasantries when he arrived at his first meeting with Peregrine’s senior staff. “He introduced himself, said he knew we’d already been through a lot, and told us to focus on customers,” says marketing chief Eagan, 39. “Gary told us that he’d consult with us on issues, but that his decisions would be final. He said to keep our employees motivated, focused on how the customer uses our software rather than everything else that was going on.” With that, Greenfield excused himself to meet with CFO Gerson. By the time he left, he hadn’t even asked the names or occupations of the 15 people in the room. “I felt like I was being dropped into the middle of a forest fire,” Greenfield recalls now. “The whole first week is a blur.”


But at the end of that first week, each executive vice president received a first assignment from the new boss: Greenfield wanted a body count. That was because his initial review of Peregrine’s financials showed that the company had only enough cash to exist for another 10 days. There were some obvious first steps, like selling the company jet. Greenfield also secured $50 million in bridge financing from a group of high-risk equity firms. But it wasn’t enough.

Survivor Guilt

Greenfield quickly estimated an annual revenue run rate for Peregrine’s core businesses of no more than $170 million–a far cry from the estimated $700 million in revenues initially booked by Gless for the 2002 fiscal year that ended March 31. (Gless’s figure included revenues from divisions that Greenfield already decided to sell to keep Peregrine afloat.) Using a cost estimate of $200,000 per employee per year to the company, Greenfield conservatively figured Peregrine could support only about 650 workers, not 3,000. The ranks would have to be slashed by upward of 80% in some divisions. He gave each of his division heads 48 hours to come up with The List. The layoffs were to begin June 18, just two weeks into his tenure as CEO.

For Nicole Eagan, it meant reducing her global marketing staff of 118 people to just 35. Even for someone who cut her management teeth at the notoriously brutal Oracle Corp., this was one of the most difficult things Eagan says she’s ever done. “In some ways, I think it was harder for the people we kept. They have survivor’s guilt,” reasons Eagan. “They are also doing more work now. Five jobs now instead of one.”


For the survivors, that certainly meant more stress. But in some cases, it also meant more responsibility and opportunity. Robert Munn, the information-technology manager who builds Peregrine’s Web sites, saw his group shrink from 10 people to 2. He and his remaining colleague were tasked with rebuilding Peregrine’s entire customer service Web site, and Munn is proud that the pair finished the job in just six months. “Two years ago, it would have been easy to hire a bunch of consultants to rebuild that site,” he says. “Do I feel more fulfilled? Oh yeah, very much so.”

Nancy Pratt in accounts payable saw her career advance when her group dropped from nine people to four. “I got promoted because my boss left,” she says. “I’ve learned some new skills, so it has been an advantageous experience. I’ve learned how to deal with adversity. I’ve learned flexibility.”

For the sales teams, the elimination of so many jobs did add pressure, but it was the kind of pressure salespeople live for: Lots of sales territories were suddenly open, and soon reps were jockeying for the best portfolios. At the same time, management was trying to create some stability at the company, so commissions were scaled up. “Chaos breeds opportunity, and opportunity breeds reward,” Bruce Aboudara says. Before Peregrine’s implosion, his sales group, which focuses on smaller customers, rarely closed deals for more than $500,000. Now, thanks to a closer relationship with Peregrine’s business partners, sales groups such as Aboudara’s have had the opportunity to do sales of up to $1 million to $2 million.


As the employees grappled with their increased workloads and survivor’s guilt, Greenfield struggled to sell enough assets to keep Peregrine out of bankruptcy court. But by the end of August, despite the sale of three operating divisions and the planned elimination of 1,400 jobs, Peregrine was still on the brink of insolvency. On September 22, 2002, the company filed for Chapter 11 bankruptcy protection in a Delaware court. The filing, Greenfield reasoned, would give Peregrine some shelter from its creditors, buying enough time to rebuild the business. “That decision was about protecting the enterprise,” Greenfield says.

In the short term, however, the bankruptcy filing made the sales team’s task even tougher. For technology buyers, after all, few things are spookier than any hint that a supplier might not be around to service and update a complex system. Greenfield divided his senior staff into three teams and dispatched them around the globe to reassure Peregrine’s 2,250 customers (down from 3,000). In town hall-like forums, and countless phone conversations, Greenfield and his staff explained to customers what the filing meant for Peregrine, and for them. “I knew that if we could save the customers, we could save Peregrine,” Greenfield says.

One of those customers was Mark Bradley, the senior network engineer at Schaumburg, Illinois-based insurer Zurich Life, which uses Peregrine’s software to monitor its IT help desk and some external Web sites. Bradley was in the middle of renegotiating Zurich’s maintenance agreement with Peregrine when the accounting crisis erupted, prompting immediate pressure inside his company to rip out Peregrine’s code and replace it with a rival’s product. Salesmen from Hewlett-Packard and Computer Associates were circling. But Bradley, who is a big fan of Peregrine’s software, stalled. A Greenfield town-hall meeting in Chicago persuaded him to stick with the company. “They really laid out their cards,” he says. “They showed us what happened, told us why it happened, and explained how they were going to continue to support us.”

Peregrine’s pitch had the desired effect elsewhere, too. Three trouble-shooting sales teams visited 1,300 customers in 19 cities in just three weeks. By the time they returned to San Diego in mid-October, they had tied up 89 new sales. “When those three teams came back, there was a sense that we’d brought the whole company back,” Cahill recalls.

Just over a year after the nightmare began, the bankruptcy court confirmed Peregrine’s reorganization plan, and a month later, Peregrine Systems officially emerged from Chapter 11.

The grim reality, though, is that the company’s travails are far from over. Besides the ongoing financial mess that still prevents shareholders from getting a true picture of Peregrine’s current condition, the personnel casualties continue. On August 18, 2003, the board replaced Greenfield with a new permanent CEO, John Mutch. As recently as October 28, Peregrine juggled its board for the fifth time, announcing that it had named three new directors. Even more alarming was the quiet departure, on the day before Thanksgiving, of Andy Cahill. Peregrine won’t comment except to say that Cahill left voluntarily, and Cahill offered no comment, either. But it has to be troubling that someone who played as great a role in pulling Peregrine through the worst of its crisis–the man who wasn’t going anywhere–is gone.

Carleen Hawn ( is Fast Company‘s West Coast bureau chief.