"For companies with robust finances, however, the recession offers once-in-a-lifetime opportunities. High-quality assets will become available – for anyone with the capital, and the courage, to acquire them – at bargain-basement prices". MARK THOMAS, PA Consulting Group QUOTED in The Times, 10 February 2009
Stock markets and business confidence have collapsed. Many of the world’s banks are technically insolvent. No one in management today has experience of working through such a crisis, and no one in government or academia has a grasp of how deep and how long the recession will be.
Despite this uncertainty it is possible to draw some conclusions about the likely impact of the crisis and the response required from business leaders. In short, this recession is different in nature and degree from those we have seen before, and in most sectors we shall see profound restructuring, which will create big winners and losers, with little in the middle. This is why we call it a bipolar world.
At the heart of this issue lies the crisis in the financial markets. In future, credit will be much harder to come by. For business, this creates a double problem: demand falls at the same time as finance dries up. Consumer spending has reduced and virtually all sectors will be affected.
In most sectors there are significant numbers of companies whose liquidity is in doubt. The very sectors that are most exposed to volatility in demand, such as retail, property and manufacturing, are those that have assumed the highest levels of debt. These companies will suffer and many will not survive.
For companies with robust finances, however, the recession offers once-in-a-lifetime opportunities: weakened competitors will see their share prices fall to levels that make them attractive acquisition targets; they may sell their crown jewels to raise cash; or they may simply disappear, reducing the overcapacity that exists in so many sectors. High-quality assets will become available – for anyone with the capital, and the courage, to acquire them – at bargain-basement prices. Well-positioned companies can achieve a decade’s progress in two years. The question, therefore, is how to be one of the winners. I believe there are four steps.
First, maximise your liquidity. Map out your debt-maturity profile, assess headroom under the most conservative scenario, raise capital if needed, even at high cost, sell assets or businesses and hoard capital until you are sure that survival is secured.
Second, adjust your business mix to focus on winners. Determine which businesses are worth fighting to stay in; exit unattractive businesses.
Third, optimise performance. Ensure that your risk management takes full account of the crisis, reduce costs, consider outsourcing and restructuring.
Finally, take the opportunities offered by the crisis. Understand the dynamics at play in your sector, pick out the winners and losers, and identify an end-game in which your business will emerge strengthened. Although this recession will be extremely serious, it will also be bipolar. There are huge opportunities for the well-positioned, but companies will need to act fast.