May 23, 2017
Steven Fleming, Principal, US Crisis and Restructuring Leader, PwC Deals
We often hear of companies cutting staff, shutting operations or slashing budgets in response to a challenging business environment, often leading to a bankruptcy filing or sparking a shareholder revolt. However, the best way to stay out of crisis management mode is to take action long before challenges deepen.
Business managers usually are optimistic by nature. While they may see a few hurdles ahead, most tend to believe the long-term outlook is bright. In PwC’s recently released 20th CEO Survey, only 38 percent of CEOs surveyed worldwide were very confident about the year ahead, but 51 percent felt confident about their three-year outlook. Unfortunately, experience has taught us things don’t always go according to plan.
In reality, the outlook for many industries remains challenging. Uncertainty about global trade agreements, the volatility of commodity prices, geopolitical instability and other factors fuel concerns in the energy, garment, retail, media and several other sectors. When added to a recent surge in shareholder activism – 1,398 companies were targeted by activists from 2010-2016 – senior managers are well-advised to diagnose and address potential problems lurking down the road, particularly in sectors where growth outlooks are flat or trending lower. We explored this trend in a new publication, Dodging the Bankruptcy Bullet.
In retail, for example, department store sales in the US fell 5.2 percent through November 2016 from the prior year while appliance store sales slid 3.3 percent. Clothing and accessory stores saw only 0.5 percent growth. Some leading retailers are now shutting down hundreds of stores nationwide in response to the rising threat of online commerce. In hindsight, it appears retailers should have focused more on their own e-commerce strategies.
The energy sector also remains volatile, with declines anticipated in coal and lignite mining and oil and natural gas extraction, thanks in part to the trend toward renewable fuels. Oil prices have fallen by half since the peak in mid-2014 with analysts expecting only modest improvements, if any, in 2017. Yet many companies are bullishly investing in new pipelines and production that could increase pressure on prices.
A detailed review of finances and operations now not only may head off a crisis before it arrives but can advance a company’s position in a challenging sector by lowering the company’s costs, widening margins and improving overall performance. In other words, it can turn a vulnerability into a strength. Here are a few areas to consider:
Liquidity and working capital: Insufficient capital management raises the risks to otherwise stable businesses, making it difficult to support debt, cap-ex plans, pension payment or other one-off events.
Access to capital: Instead of raising critical capital on unfavorable terms during a crisis, companies should evaluate their capital structures during periods of relative stability. Lenders may offer more favorable terms on existing structures when a strong company acts proactively.
Operations and organization: Poor alignment of fixed assets or failed projects can sap a company’s strength. Unfavorable supply chain contracts, insufficient cap-ex spending and other factors each offer an opportunity for improvement.
Shareholder management: It’s wiser to increase visibility and relationships with shareholders about challenges that may lie ahead. Senior management knows the business better than the shareholders, and it’s important to demonstrate that through a dialogue that explores areas of mutual concern.
Too often, companies fail to see the warning signs of trouble ahead. But a detailed review can ensure you’re on the path to preserving options and building value, no matter what may lie ahead.