Strategies For The Coming Downturn: Don’t Fight The Last War

Fortune writer Geoff Colvin has a good piece out this week making the case that the strategies that allowed companies to survive the 2008-9 recession are a poor match for the current environment, and that management teams and advisors who seek to “fight the last war” will put themselves at a severe disadvantage.

Colvin has five main points:

  • U.S. consumer behaviour has reversed: Agree.  It is absolutely the case that the high-end consumer market has regained lost ground and is currently doing very well, whereas lower and middle-income consumers remain cautious.  A nuance that I think Colvin is missing here is that the affluent, while they may recover from income shocks more quickly, are still susceptible to them.  It is not inconceivable to me that a double-dip recession leading to large job cuts in financial and professional services could considerably weaken the demand of affluent consumers, at least for a while.
  • The capital markets are far friendlier to most companies: Disagree.  The availability of capital since recovery began has been a tale of two markets: one with access, one without.  Larger companies or those in favoured industries have been showered with capital, while smaller companies have remained capital constrained.  Also, Colvin should know better than to assume persistent capital market accommodation of companies across the risk spectrum in the wake of a double-dip recession.  We are already seeing signs of pullback in the credit markets.
  • U.S. layoffs may not be necessary this time: Disagree.  This is wishful thinking at best.  In the 2008-9 recession lenders succeeded in amending and extending troubled credits.  Debtors survived by reducing headcount, securing equity infusions, carefully managing working capital and where necessary pursuing debt-for-equity restructurings.  Companies have been very hesitant to increase headcount in the years since, family owned companies can no longer rely on equity infusions from their ownership (they are largely tapped out), careful working capital management is unlikely to yield substantial improvements in companies that have been focused on it and a second restructuring in less than five years is a strong indication that perhaps a company should not exist.  I believe that if we see a double-dip recession many companies that just barely survived the last recession will not be so lucky this time.
  • A different set of industries is being revolutionised: Agree.  Colvin is correct to call out finance and government as industries being revolutionised.  However, the collateral damage to companies in diverse industries from the shakeout in those two will be severe.
  • Government’s role is radically different: Agree.  Federal austerity is a reality that will have to be dealt with, and pain will be inevitable.

Fighting the last war is a recipe for defeat.  With the prospect of a double-dip recession becoming increasing likely, it is incumbent upon advisors, capital providers and management teams to prepare themselves for the challenges they will face this time around, not the challenges that were overcome in the 2008-9 recession.

About the author:

David Johnson is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services to companies and municipalities. He can be reached at 312-505-7238 or at [email protected].

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