For Companies, Survival Is Not EnoughHarold L. Sirkin
Some 18 months into what's now being called the "Great Recession," many businesses are still hunkered down in survival mode. While survival, of course, is a prerequisite, companies should seek to do more than survive; they should seek to take advantage of the recession. This applies to both Western companies and those rooted in the rapidly developing economies of Asia, Latin America, and elsewhere.
In North America alone, the landscape already is littered with corporate corpses and the walking wounded. Several prominent retailers, including Circuit City, Gottschalks, and Mervyns, have gone out of business. Denver's 150-year-old Rocky Mountain News has folded, while the publishers of the Los Angeles Times, Chicago Tribune, Chicago Sun-Times, Philadelphia Inquirer, and Philadelphia Daily News have all filed for bankruptcy protection. Also in Chapter 11: Hartmarx, the famed menswear manufacturer; Filene's Basement; KB Toys; Ritz Camera; Sharper Image; the Crunch Fitness chain; and manufacturers Dayton Superior, Milacron, and Canada's Nortel Networks, among others. (Notice I didn't even mention the U.S. auto industry.)
In the world of globality, companies from everywhere will be looking for opportunity. And companies from everywhere will present opportunity. Mexico's economy, for example, fell at a 21.5% annualized rate in the first quarter; Japan's was down 15.2%; Germany's 14.4%. The U.S. economy was down 6.3%.
With many companies hurting, global challengers from China and other developing economies might see this as the perfect opportunity to expand domestically, or acquire a prominent Western brand on the cheap, while companies from the U.S. and other developed economies might see this as the perfect time to expand their portfolios, both domestically and internationally. Now is the chance to turn someone else's pain into your gain. Some already have taken the plunge. Wells Fargo (WFC), for example, has taken over Wachovia Bank, and Oracle (ORCL) has announced plans to purchase Sun Microsystems (JAVA).
Companies Ready to Make Merger Moves
On the retail front, Macy's (M) and Kohl's (KSS) seem to have figured out how to make the most of the recession. Though both retail chains have been hit hard by the recession, with Macy's reporting a first-quarter loss of $88 million and Kohl's reporting a significant (though less-than-expected) 11% drop in first-quarter earnings, both chains are aggressively going after the customers of former competitors. Kohl's, for example, has purchased 35 Mervyns stores on the West Coast. Macy's also is targeting former Mervyns customers, according to news reports, as well as former customers of Gottschalks and New York's now-defunct Fortunoff stores. "Wherever there is a store that has gone out of business, we are honing our sights on that customer," Macy's Chief Executive Terry Lundgren told The Wall Street Journal.
Many other companies appear ready to make their move. The 703 members of the Association for Corporate Growth—an organization comprised of corporate development officers, investment bankers, private equity professionals, and the like—who participated in a recent survey would seem to confirm this. According to the little-reported April 2009 survey, 52% of respondents indicated they expected a moderate increase in merger-and-acquisition activity during the next six months. Some 47% of the respondents predicted that "distressed deals" would make up one-fourth to one-half of all M&A deals; another 14% of respondents predicted that more than half of all M&A activity would involve distressed deals.
This is not rocket science. Business, in this respect, mimics nature, where the wounded are devoured. Nor is this a secret. Many businesses not only are on the hunt for customers, but for assets and entire companies—so long as they're priced right, of course.
What will separate those who profit from this downturn from those who merely survive will be the ability and preparedness to act. So how do you make sure your company is prepared to take advantage of the recession's upside?1. First, cut the fat, even a little muscle if necessary—but don't cut to the bone.
Only the strong can emerge stronger. Muscle can be rebuilt. It takes much longer for bone to heal. Managers who want their companies to do more than survive need to keep their operating units lean and strong. It's an imperative to make choices—keeping what you need to survive and what will be important to win in the upturn, and paring back costs and selling assets that are not critical to survive and are not necessary or can be built back quickly as the recession ends. These are tough choices to make, but not making them or not making them right can be fatal.2. Hold on to your cash until your once-in-a-lifetime opportunity appears.
And it's very likely that you will see once-in-a-lifetime opportunities. You may get to buy a competitor that can propel you from the No. 3 position in your industry to a leadership position, or you may be able to acquire assets that allow you to backward integrate to control your supply or allow you to forward integrate to get closer to your customers. With credit still tight, and possibly staying that way for a while, cash becomes king. Companies holding cash will have a lot more leverage and flexibility than those needing financing. Wait, you're likely to see opportunities that you've not even dreamed of. You'll know when they come by.3. Buy on the cheap.
This is the exact right time for managers to think big, but also to act prudently. This is a good time to buy, but cash must be spent wisely. Seek out bargains. It might not be entire companies, but you should consider specific strategic assets, such as distribution systems, as well as customers and even talent. There are a lot of highly talented and accomplished people out there looking for jobs. You can do them and yourself a favor by finding them and giving them a new place to call home. Bargains will be available at prices so low that you'll never see them again in your lifetime.
The National Bureau for Economic Research will report the official end of the recession many months after it occurs, just as it took the NBER a full year to amass the data indicating the recession's December 2007 beginning. Companies that wait until the NBER announces that the recession is officially over will have missed an opportunity.
Recessions are painful, always, but they are not extraordinary events. We've had 11 prior recessions since World War II, according to the Federal Reserve Bank of St. Louis, lasting between six months and 16 months. Whether it is a slow and weak recovery, as expected, or a rapid and sharp recovery, there is money to be made on the upside. So now is the time—while the "experts" are still debating whether we've reached bottom—that managers should put their postrecession plans in place and, if possible, start making their moves.
"The best and the brightest" often emerge from recessions stronger, larger, smarter, more nimble, or all of the above. At the very least, companies that act prudently can emerge with a larger market share. Looking at the long term, that's not a bad result.