Suddenly the music has stopped for dealmakers. Mergers and acquisitions, mainstays of consultancy work, are no more resistant to coronavirus than the rest of the global economy.
But the decline in transactions has led businesses to focus their attention elsewhere — in particular, on how to survive and potentially thrive once the recovery comes.
Worldwide volumes of M&A activity were down nearly a third in the first three months of the year compared with the same period in 2019, according to Refinitiv, the financial data provider. Asia Pacific experienced a 17 per cent drop.
Emerging markets are now growing at their slowest pace since records began and experts predict flat growth at best and declines in gross domestic product in some cases. Rating agency Fitch has forecast anaemic GDP growth of 0.8 per cent for Turkey this year, while it expects South Africa’s GDP to fall by 3.8 per cent and Russia’s by 1.4 per cent.
According to Fiona Czerniawska, co-founder of Source Global Research, which advises the professional services industry, the sudden fall in deals is not the prelude to a V-shaped recovery, where the economy suffers a sharp drop followed by an acute rise, but rather to a U-shaped upturn, in which activity picks up more gradually.
In part that is because of the constraints imposed by social-distancing measures. “It is much harder to build trust remotely,” says Ms Czerniawska. “In a lockdown it becomes much harder to go beyond the people that you know already. Consultants need to demonstrate that they don’t just bring advice but that they have been involved in developing results in the past.”
A downturn presents not only complex scenarios for companies but also opportunities for consultants in emerging markets to help them through the dark times, says Mehmet Sami, founding partner of Pretium Advisory in Istanbul.
“[The drop in economic activity] leads to a polarisation in the corporate world,” Mr Sami adds. “The difference between stressed companies and resilient players will be bigger.”
So what should consultants in emerging markets be advising companies to do if they are to weather the coronavirus storm?
Cash is king
Tim Mahapatra is a London-based managing director at consultancy firm Alvarez & Marsal. He says companies are in survival mode and should be looking at ways of preserving as much cash as possible.
“All the conversations with clients right now are about cash optimisation,” he says. “[The pandemic] is changing the mindset for the immediate period of the lockdown.”
He says some of the key concerns business leaders face now include questions such as: “What do you do when your revenues stop but you still have to pay your suppliers? How do you take advantage of the range of support that governments are offering? How do you interact with the banks?”
Mr Sami agrees that “cash control is going to be paramount” for businesses in emerging economies. He says it will be crucial for companies to make sure they have solid and easy-to-tap sources of credit.
“If you don’t have a [credit] line in a bank, you’ll clearly have difficulties. But if you don’t, is a financial institution able to help?” he asks. “The banks could also be under stress as well in emerging markets because the global flows are slowing down. If banks are cautious, will they be able to provide facilities to corporates?”
Map out scenarios
Companies — alongside consultants — need to start modelling various financial scenarios. Their survival may depend on their ability to respond swiftly to a wide range of possible outcomes.
There are plenty of unknowns that business leaders need to be thinking about now, says Mr Sami.
“What happens if the lockdown continues for the second quarter of this year?” he asks. “When do people think things will gradually improve? You need scenarios to make decisions and stress tests.”
The pandemic’s global impact will be shaped, he argues, by the response of regulators and by the “behaviour” of the virus. “While the latter’s impact is unknown, the former creates [a] worldwide regulated supply shock, which results in demand shock,” he says. “In response, corporate leadership — especially boards — have enormous responsibilities and need to exhibit duty of care.”
A key task is to set up robust board committees that can work through operational and financial scenarios to protect the business and satisfy regulators. Ultimately, Mr Sami thinks the health crisis will accelerate the “onboarding” of independent directors and consultants who can contribute their knowhow.
Protect workers and supply chains
Businesses need to start implementing “tracking policies” to make sure that manufacturing continues and that it is not hugely disrupted if — or when — coronavirus enters the workforce.
“You have to have a good contact tracing system,” says Mr Sami. “If someone gets [coronavirus], make sure you isolate certain goods and people. You do need a lot of workforce protection, especially on the manufacturing side of things, with committees reporting on a regular basis.”
The veteran consultant adds that monitoring supply chains is crucial in emerging markets such as Turkey. Where critical supply parts or raw materials are at risk, managers need to find alternative sources and new suppliers. Logistical analysis will help with developing flexible solutions.
“This is the time when the effectiveness of the boards will be really questioned.”
Plan for the long term
Whatever the priorities of businesses right now, executives must ensure they keep an eye on the future too, says Alvarez & Marsal’s Mr Mahapatra.
Companies will see different types of restructuring depending on the sector — anything from going into administration to mere discussions about sources of credit to get through the rough patch, he says.
But it is important to see beyond the immediate crisis. “What will the business look like in 12 months’ time?” he asks. “How do you maximise your chances of survival?”
While survival strategies vary hugely, he says, “there are some common considerations”.
One is the pivot to cash. Another is the need to secure supply chains in readiness for the rebound. “This includes accelerating payment to key suppliers to ensure they can respond and supporting smaller suppliers to make sure they can survive the next few months,” Mr Mahapatra says.
“Prior to the lockdown being lifted, companies will need to ensure availability of labour, liaise with customers and suppliers, and organise inventory to prepare for an uptick in demand. For some, Covid-19 will have a long-term business impact, meaning they need to start repositioning their brands and deliver operational changes now.”
With such measures in place, a rapid restart should be achievable. But he warns: “Many companies will emerge from the crisis with higher debt to repay or lower reserves. This will cause them to reprioritise their investment plans, potentially acting as a lag on recovery in the year ahead.”
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