Michael Mcloughlin – Managing Director (April 2020)
The economic uncertainty created by the spread of Covid-19 globally is undeniable. Many have begun to draw comparison between today’s economic crisis and the financial downturn of 2008-2009, which saw global output contract by 1.8% in 2009 compared with an expansion of 4.3% in 2007. In parallel, the stock market crash of 2020 saw the Dow Jones Industrial Average and the FTSE suffer their biggest one-day declines since 1987 (with the UK’s FTSE 100 wiping £160.4bn off the market).
Studies show that it was a minimum of 4 years before the market recovered following the 2008 stock market crash which, if the current economic crisis is any comparison, could indicate a slow recovery. However, others are taking a more positive viewpoint that the 2008 crash was a far worse financial disaster. BlackRock stated that: “market moves have been reminiscent of the financial crisis. But we don’t think it’s 2008, as the economy and financial system are on much stronger footing.” Similarly, Matthias Tauber Head Boston Consulting Group (BCG) in Germany and Austria, stated that the firm had looked at epidemic crises over the past 100 years, and “in all cases, a V-shaped economic development was recognisable.” This would suggest that many believe we will eventually head towards a strong economic recovery.
In support of this theory, new measures from the UK Government and changes to UK insolvency law should have a promising influence on business stability. As of March 2020, the UK government announced new insolvency measures to prevent businesses from bankruptcy that are unable to meet debts due to the impact of coronavirus. Additionally, the rules on wrongful trading have been temporarily suspended to ensure that measures can be taken to protect businesses without legal scrutiny. This comes alongside the news that President Trump has signed the largest ever US financial stimulus package worth $2tn (£1.7tn), and other countries have followed suit with India announcing a $22bn (£19bn) bail out for the country’s poor to help counter economic fallout from Covid-19.
With the world now facing an unprecedented threat to business stability, the importance of leveraging laws and measures to protect the livelihoods of millions is at an all-time high and is clearly on the forefront of many countries policies. The Bank of England stated that it would extend its emergency liquidity measures to run until the end of April and that they will hold a once a month CTRF operation. Liquidity is vital to a company during times of emergency and these measures will provide welcome relief for many. A Managing Director of a prominent Wealth Management and Global Investing company outlined the importance of having liquid assets in times of emergency, he instructs people to remember the lesson “that at least some portion of your net worth should be kept in liquid assets” and “that liquid portion has one primary job, and that job is to be there when you reach for it.”
With the correct support, organisations can focus on and prioritise restructuring and cost-cutting initiatives that will allow companies to be in good shape and ready for growth once the situation stabilises. Global strategy firm Kearney devised a “5-point Coronavirus Health Check for Businesses” which identifies the actions businesses must take right now honing in on: the importance of realistic forecasting; considering the impact on supply chains; and proactively planning and putting into action ways to come out of the other side. Furthermore Kearney reference the potential changes in customer preferences from global to local as an important consideration businesses need to build into their plans.
In a recent study conducted by FTI Consulting, they predict that sales and operational disruptions will likely intensify and extend into Q2 of 2020, adopting the attitude that things will become much worse before improving. As a result, they believe that “cracks” in the finance and operating models of organisations may become more apparent and that because periods of disruption highlight business vulnerabilities, management should establish long term financial and operational resilience across the business. This has created a unique environment in which companies facing financial decline and insolvency will require entire restructuring teams (from lawyers and bankers, to advisors) in order to save them from crisis and even bankruptcy.
Further highlighting the importance of weathering the storm and getting restructuring and recovery right, Steve Russell Head of Business Restructuring Services at PwC UK said “It is also key for all companies impacted by COVID-19, irrespective of their size, to urgently stabilise their cash position and review all elements of their business to assess what efficiencies can be driven out of their working capital, operational processes and supply chains. Businesses that act quickly now are likely to be best positioned to bounce back once COVID-19 has been contained.”
Operational and Financial Restructuring teams are at the forefront of preparing companies and ensuring the survival of business during troubling times. However, the pressure on bankers and lawyers to prepare has been enormous. Major law firms are adopting agile ways of working to fulfil the needs of clients seeking advice on the use of ‘force majeure’ clauses and banks are striving to raise emergency funds and retain restructuring staff so that they can help the flood of struggling companies. A Partner at a major US law firm has outlined their response in the following statement: “we are reassigning people from other areas to help our restructuring business.” He also suggested that his firm were creating virtual training sessions throughout their UK office to ensure that staff are equipped and properly trained to cope with the need for restructuring professionals.
Prior to the recent the stock market crash and before the outbreak of Covid-19, the world (in particular the UK) was facing economic slow-down which saw the increase in demand for professional services. The belief that this need will likely intensify is widespread. Following the outbreak, Financial and Operational Restructuring teams and experts will be crucial to alleviate and advise on the financial pressures that are currently facing a significant number of businesses around the world, the pressure on advisors, lawyers and bankers to deploy restructuring teams is immense and will prove critical to the survival of businesses in the coming months.
It is now clear that companies need to position themselves for a new normal. Whilst the present need, as per KPMG, is to respond to both the operational and financial challenges posed by COVID-19 in the weeks and months ahead; they also refer to businesses adopting a “grasp the nettle” viewpoint whereby preserving a strong foundation can only be achieved by asking the right, and often difficult, questions sooner rather than later. A recent global M&A strategy survey conducted by EY highlighted that while focusing on the immediate implications of COVID-19 crisis is imperative, CEOs also have to plan for next and think beyond. They state that companies will eventually focus on “beyond” — “activating transformation including re-configuring capital allocation, portfolio transformation and accelerating M&A”. The Boston Consulting Group are exploring the inevitability of an economic rebound and have suggested through their research, that companies that will come out of the crisis strongest will use it as an opportunity to increase and improve their long-term transformation plans. By ensuring survival of our businesses now, can the “beyond” become the new normal?
IRG have specialised in Executive Search in Restructuring and Turnaround for over 10 years. To find out more about how we can assist your organisation at this time please contact Michael Mcloughlin on +44 7766 257138 or email@example.com