Looking Beyond the Horizon
“The world is suffering through the worst financial crisis since the 1930s, a crisis that has precipitated a sharp down-turn in the global economy.” - Federal Reserve Chairman, Ben Bernanke
Much has been written and much will be written about the magnitude, cause and cure for the current global recession that has profoundly affected corporate and individual lives around the world. Since we do not know how much economic activity will drop and for how long, corporate management, like the consumer, has reacted in the same way. They reduce spending and increase savings, reduce debt and lower their appetite for risk.
All this is not in the least surprising since the primal instinct is for survival. Managers can best insure the survival of their companies by reducing expenses including capital investment, reducing costs and maximizing the retention of cash. For the present they will be judged on how they developed the worst case scenario and put in place contingency plans to protect the enterprise from “mortal injury.”
When this crisis passes and it will, the evaluation of management will be more holistic. What was done to protect the competitive advantage of the company and how was the company positioned to respond ahead of their competition to the new opportunities it will be presented with?
Even during the long days of fire-fighting, it is essential to allocate some time to review the business plan and recast it in light of what is happening to the markets served and the competition. If we invested in products or business units that have not returned on their assets, this would be the time to exit. Not because you would realize the best price but because the capital can be redeployed to better purposes and management efforts would be better utilized elsewhere.
In addition to our worst case scenario, how do we see the eventual recovery affecting our markets? Will there be pent up demand for existing products that will tax our ability to respond or demand for new “greener” technologies? Will our traditional customers participate in the recovery or will there be new “market makers” formed from strategic consolidations and mergers? How will the global markets exit the recession differently than they entered it?
The flip side of every crisis is the opportunities it presents to those with vision, conviction and courage to act. Lee Iacocca said it bluntly when he guided Chrysler Corporation through its first restructuring, “Lead, follow or get out of the way.”
There is a short list of actions that must be taken at the onset of a recession.
Take care of your loyal customers and step in to help potential new customers who are not being serviced adequately. Your financially weaker competitors are a liability to their customers and undertaking a customer rescue may help you replace some lost sales volume.
Continuous improvement of operations is a discipline not a destination. If you have a lean manufacturing program and practice total quality management you are only average. Now is the time to take your operating culture to the next level. Compare your lean metrics to the best in class and pick your opportunities.
Look at your business as a portfolio of profit centers. Ranking business units by return on net assets or a more sophisticated economic value added calculation which considers the average cost of capital will allow management to classify product line or division profit centers as cash cows, rising stars or dogs. Now is the time to liquidate the dogs as well as the associated overhead because very little spending is fixed.
While these are critical survival tactics, they are not sufficient for a company to emerge at the other side of a recession stronger and sustainable. Now is the best time to also implement the foundation of a growth strategy. If consolidation is inevitable in your industry, leverage this trend to your advantage. If your analysis and planning indicate you are missing an important business adjacency; products, technology, geographic presence, market presence or distribution channel that is keeping you from positioning the company in the profit “sweet spot” of your industry, this can be the ideal time to acquire.
It is not the best time to leverage the balance sheet if you don’t have free cash to deploy but a merger based on today’s valuation can be attractive to the reluctant seller. Yes, credit lines may need to be renegotiated because of a change of control or covenants but if it passes your due-diligence, your banker should see the merits as well.
Turn-around situations abound but a careful evaluation must be made to justify the effort. In accounting for the synergies, it is good to reflect on Jack Welch’s admonition, “What doesn’t get done in the first year rarely gets done.” Cash will be king for several more years and a sufficient cash flow in the worst case is essential.
If you are not in a position to be an acquirer, this might be the time to seek out a merger partner who will insure your sustainability. Giving up control is a difficult decision but it is a decision better made while you are still seen as bringing strengths to a merger rather than liabilities.
Most companies will survive this economic crisis but those that proactively position themselves to out perform the competitor when the ultimate recovery occurs will be the winners. This should be the measure of excellence for every management team and their boards.
GGI stands ready to draw on its years of experience advising clients on all phases of merger, acquisition and divestiture to assist you in these difficult times.