Op­por­tu­ni­ties in the credit crunch

Com­pa­nies can ben­e­fit from cur­rent fi­nan­cial down­turn by chang­ing tack

Finweek English Edition - - Creating Wealth - AMANDA WARNER

THE CREDIT CRUNCH in global fi­nan­cial mar­kets con­tin­ues to be a hot topic world­wide. The cur­rent eco­nomic tur­bu­lence is re­sult­ing in a harsh en­vi­ron­ment in which to do busi­ness and al­most all com­pa­nies are feel­ing the crunch. Cur­rent fi­nan­cial and strate­gic is­sues be­ing faced by com­pa­nies through­out the world due to the down­turn in­clude: • Re­stricted credit (dif­fi­cul­ties in rais­ing new fi­nance from banks and far higher costs in­volved in fi­nanc­ing or hedg­ing). Short-term liq­uid­ity con­cerns. As­set price falls. Hos­tile takeovers to de­fend. An in­crease in debtors’ days and bad debt write­offs. Pres­sures to di­vest or close un­der­per­form­ing di­vi­sions. Work­force man­age­ment and re­duc­tions in head count. Rep­u­ta­tional and brand risk. Gen­eral abil­ity to op­er­ate. While leg­is­la­tors, reg­u­la­tors, fi­nan­cial in­sti­tu­tions and other stake­hold­ers are tak­ing steps to pro­duce some sta­bil­ity in the mar­kets, the ef­fects of the down­turn are go­ing to be felt for a long time and it re­mains a fast­mov­ing and evolv­ing story for all com­pa­nies in all in­dus­tries world­wide.

In un­sta­ble times op­por­tu­ni­ties also arise for those com­pa­nies pre­pared for the down­turn or those with the abil­ity to change tack rel­a­tively quickly and take ad­van­tage of un­ex­pected op­por­tu­ni­ties. Now is the time to as­sess com­peti­tors for their strengths and weak­nesses and re­alise strate­gic op­por­tu­ni­ties by buy­ing as­sets from dis­tressed sit­u­a­tions or tak­ing over com­pa­nies un­able to op­er­ate in the cur­rent en­vi­ron­ment or which, due to the cri­sis, have lost as­set value but have the abil­ity to re­bound. Re­view­ing a com­pany’s sup­ply • • • • chain ef­fi­ciency and the abil­ity to re­struc­ture toxic or dis­tressed as­sets or op­er­a­tions is es­sen­tial in iden­ti­fy­ing takeover op­por­tu­ni­ties.

Now is also the time to re­assess strate­gic plans and up­date your busi­ness model, per­form com­pre­hen­sive risk as­sess­ments and put in place all nec­es­sary steps to en­sure com­pli­ance with risk poli­cies. Though pro­tect­ing your strate­gic tal­ent is cru­cial, the op­por­tu­nity arises to take ad­van­tage of a large tal­ent pool that has and will be­come avail­able in the mar­ket place.

From a fi­nan­cial per­spec­tive in the cur­rent en­vi­ron­ment cash is king, and liq­uid­ity and avail­abil­ity of af­ford­able credit are high on ev­ery com­pany’s list of is­sues. Whereas tax is largely seen by com­pa­nies as a cost of do­ing busi­ness and not an area of op­por­tu­nity, re­duc­tion in tax costs due to re­struc­tur­ing or sim­ply fur­ther com­pli­ance can re­sult in an un­ex­pected but very wel­come cash in­jec­tion into the busi­ness. Tax can be used to help re­fi­nance your busi­ness in­ter­nally, by tight­en­ing up on com­pli­ance or en­gag­ing in tax ef­fi­cient re­struc­tur­ing or, ex­ter­nally, where a third party’s in­volve­ment is nec­es­sary.

Re­views of in­ter-com­pany flows where, for ex­am­ple, there are div­i­dend blocks (repa­tri­a­tion of funds) or cash/tax leak­age can have an im­me­di­ate ef­fect on your cash po­si­tion. Loss util­i­sa­tion and re­al­i­sa­tion of tax re­funds, strate­gies to im­ple­ment early recog­ni­tion of VAT cash flows and re­duc­tions of cus­toms du­ties for big multi­na­tion­als by virtue of re­struc­tur­ing sup­ply chains can be crit­i­cal to a com­pany’s sur­vival through the down­turn. Pre­vi­ously con­sid­ered ideas of debt fac­tor­ing, util­is­ing tax in­cen­tives and other tax ben­e­fits should now be re­con­sid­ered, as­sessed and where vi­able quickly im­ple­mented.

Where the above in­ter­nal fund­ing isn’t suf­fi­cient, tax-ef­fi­cient re­fi­nanc­ing with ex­ter­nal par­ties, re­al­is­ing cash through sale and lease-back ar­range­ments and ac­quir­ing debt at a large dis­count can be used to pro­vide the needed cash in­jec­tion into your busi­ness. Cross-bor­der fi­nanc­ing struc­tures util­is­ing lower costs of fi­nance in other ju­ris­dic­tions and struc­tur­ing to re­duce the tax cost and hence the fi­nance costs are avail­able and should be con­sid­ered.

If you do de­cide now is the strate­gic time to sell un­der­per­form­ing as­sets or close non­core or un­der­per­form­ing di­vi­sions, you need to care­fully re­view all costs in­volved in such an exit or ra­tio­nal­i­sa­tion as, if not con­trolled ef­fi­ciently, those can be pro­hib­i­tive and re­duce the ben­e­fit you ex­pect to achieve. Re­view your en­tire group struc­ture to en­sure the sup­ply chain re­mains ef­fi­cient and that an in­tended clo­sure doesn’t block or re­duce cash flows, release un­ex­pected de­ferred tax obli­ga­tions or trig­ger new tax li­a­bil­i­ties.

Now is not the time to sit and wait out the down­turn. Now is the time to take ad­van­tage of the op­por­tu­ni­ties that arise in such an eco­nomic cli­mate and to slim down your busi­ness to its op­ti­mum lev­els, re­view fi­nanc­ing struc­tures and costs, re-eval­u­ate your sup­ply chain and make ef­fec­tive and ef­fi­cient changes where nec­es­sary.

Those com­pa­nies that act now to re­duce their ex­po­sures and costs, take ad­van­tage of op­por­tu­ni­ties and change their short-term game plans or strate­gies to fit in with the cur­rent en­vi­ron­ment are the com­pa­nies that will sur­vive and pros­per over the un­doubt­edly dif­fi­cult next few months.

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