Companies find opportunities in adversity

Securing the present is the top priority for companies over the next 12 months as they navigate through the current global downturn, according to Ernst & Youngs Opportunities in adversity survey report.

Seventy percent of the executives surveyed believed there are opportunities to do more even in adversity, while only 30 percent felt that their focus would be on corporate survival.

Opportunities in adversity is based on a survey of over 300 C-suite and board level executives around the world with turnovers in excess of US$1b, and was conducted by the Economist Intelligence Unit for Ernst & Young in January 2009.

The survey reveals that companies are prioritizing their business goals differently in response to the economic downturn. Close to three-quarters of the respondents were focused on securing the present for their businesses and 40 percent expected to see a marked increase in activity to protect their financial and non-financial assets.

A close 39 percent were seeking significant performance improvement by leveraging performance and cost efficiency programs, while 37 percent were expecting to reshape their business by reviewing their operations and business models to meet the new market conditions. On the other end, a sizable minority of 19 percent expected to see a significant increase in pursuing new market opportunities to sustain the future of their business.

Asean Sub-Area Managing Partner and Country Managing Partner of Ernst & Young LLP Steven Phan, Singapore says: The survey affirms our view that not all companies are equally affected by the current economic downturn, and many do see the glass as half full.

On one hand, cash-rich companies are now finding themselves in privileged positions to capitalize on acquisition opportunities to strengthen their foothold or diversify their businesses.

On the other hand, cash-strapped companies can ride on the impetus for change during the current downturn to review their efficiencies in managing working capital and business processes, and that can be beneficial for the long term. What’s for sure is that companies cannot afford to be clouded by the uncertainties, and end up paralyzed by stress or caught in a frenzy of untargeted activities.

Leading companies understand that the right investments made today in response to the downturn can well give them a competitive advantage that sustains their business into the future.

Steven Phan said at Ernst & Young, we are now focused on helping our clients crystallize their needs and priorities, and find the right balance of short and long-term solutions to steer their business through adversity. More than ever, our clients need us to be precise, innovative and quick in helping them to cope with pressing issues or get ahead of the pack. So we are making sure that our teams are ready and out there with them.

Cash preservation and generation key to securing the present.

With declining revenues and continued limited access to funds, working capital management is a significant concern for companies looking to secure their positions. The survey indicates that 68 percent of the respondents have conducted a top-down review of their cash management, more than half have built working capital measures into their performance objectives, and 36 percent are considering to release cash from assets.

To maintain liquidity, companies are reckoning a mixed bag of measures.

The most popular step undertaken, as indicated by 43 percent of the respondents, was to consider alternative sources of liquidity, including disposal of assets, and shutting down or sale of segments or revenue streams.

Other steps undertaken include making an inventory of debt covenants and monitoring covenant compliance (35 percent) obtaining access to short-term finance facilities (33 percent), communicating with lenders, analysts and rating agencies proactively (29 percent) and considering options to renegotiate debt covenants (23 percent).

Asean Sub-Area Leader for Transaction Advisory Services, Ernst & Young Harsha Basnayake says, “Looking at the manner in which market conditions are changing, cash flow and speed in resolving critical business issues are of the essence”.

Companies need to holistically review their abilities to access liquidity, manage cash and control costs. Fundamental issues that may not have mattered as much during the past decade of high growth but are now taking on unprecedented significance.

It is timely for companies to now scrutinize their customer portfolios, vendor contracts, finance operations, supply chain, information technology and assets, and seriously consider how one can minimize expenditure and maximize cash returns without compromising long-term business viability.

Robust risk management critical to protecting assets-A majority (70 percent) of the respondents revealed they have conducted a revised risk assessment either in the last quarter (October to December 2008) or the last six months (June to December 2008) to protect their companies assets.

The survey also revealed that companies are realizing the value of risk management and the assurance it can provide over key financial and non-financial assets. The main focus is on cash, with 49 percent citing liquidity and cash management benefitting from an enhanced risk assessment.

This was closely followed by increased operational effectiveness (48 percent), re-alignment of company resources behind key priorities (48 percent) and protection of brand and reputation (48 per cent).

‘It is critical for companies to invest in protecting both their financial and non-financial assets as these are integral to investor decision-making and public confidence in a business,’ says Robert Cullen, Asean Sub-Area Leader for Business Risk Services, Ernst & Young.

Decision-makers need to ensure that they are regularly updated on the risks facing their business, and their likelihood and impact on those assets that drive value for the company. Our research and observation shows that leading companies are already taking steps to increase the frequency of reporting risks to the board and audit committee.

They are also defining their own exposures to the global financial crisis, identifying their key assets and improving processes that will alert them to emerging risks.

Adversity drives deal opportunities Executives are facing intense pressure to make the right strategic divestment and acquisitions decisions as sectors look to consolidate further. 40 percent of the respondents said that the current economic environment would make them more likely to divest non-core or non-performing businesses; over 30 percent are looking to undertake strategic acquisitions in their core businesses and 15 percent are looking for acquisitions in new areas of business.

Companies that are seeking to expand their market share view emerging markets as offering the best growth prospects, with China, India and Southeast Asia markets topping the list.

Purandar Rao, Far East Area Leader for Transaction Support, Ernst & Young says: “Many expect 2009 to be the year in which financially strong companies grow through acquisition, given the unparalleled opportunities to acquire assets at very modest valuations.