Beyond the credit crisis - A call to Finance Directors in the corporate sector...
A call to Finance Directors in the corporate sector to be ready to take advantage of the next bonanza.
Is the recession over? Are we at the bottom of the curve, or still on a downward trajectory?
The world seems divided on the issue.
Last month, the National Institute for Economic and Social Research (NIESR) declared the recession over in Britain. Just a day later, the IMF rained on their parade, predicting another year of pain at least for the UK economy.
With economists and corporates alike focused on identifying the bottom of the market, attention has been slow to turn to life after the crisis. Will we experience a long, slow crawl towards growth, or go headlong into the next boom?
Feast after the famine
Just as companies such as Google and Amazon emerged from the ashes of the dotcom crash, so there will be life after the credit crisis. Once we reach the bottom of the curve, then as surely as the current bust followed a heady boom, we are likely to witness a rapid shift from 'crunch' to 'bonanza' as confidence returns to the market.
Six to nine months from now, Finance Directors may find themselves able to take advantage of a wealth of debt and equity funding options, not to mention market opportunities, as investors seek targets for the war chests they have amassed in austere times.
The next merger boom
On the M&A front, for example, we can expect a return to higher deal volumes and values, as investors who have been biding their time look for 'bargain' acquisitions once the market starts to turn. Financial Directors need to ensure that their businesses are ready to seize the opportunity to acquire sound businesses available 'on the cheap'.
However, we need not fear a return to the excessive spiral of mega-deals which over-inflated the market prior to the crunch. At its dizzying peak, the merger boom of 2006-7 was dominated by the meteoric rise of private equity (PE) players and the eye-watering leverage these investors were prepared to take on - and able to secure from banks.
The coming boom will be different. A more cautious, crisis-scarred market will not accept such a liberal approach to leverage second time around. Meanwhile, PE firms themselves, unable to quickly sell on acquired assets, have been forced to take a longer-term view of value creation across their investment portfolios. Corporates will not find themselves 'priced out of the market' by the PE houses as they were in 2007.
Bang to rights
The landscape for rights issues will also look very different - and far healthier.
In contrast to the current rash of distressed transactions, rights issues will emerge as a valuable source of funding for corporates once confidence seeps back and substantial amounts of stock-piled investor cash emerge.
Rather being seen as red flag to the market - which only acts to depress the issue price - rights issues will accelerate as equity investment loosens up. FDs will want to consider equity offers among the funding options open to them beyond the crisis.
A rapidly changing landscape
A word to the wise: Financial Directors need to look now at the opportunities that will emerge during the coming bonanza, and preparing their firms for the strategic direction they will need to take.
Once the market has turned the corner, the landscape is likely to move very quickly. The cleanout will create a very interesting and active market. Finance Directors will need to be ahead of the game if they are to be part of the boom and reap the rewards. Those caught off-guard may very quickly miss out.