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Regional Economist - April 2009
A Quarterly Review of Business and Economic Conditions Vol. 17, No. 2 April 2...
McKinsey on
Finance
The
CFO
’s role in navigating the downturn
2
Companies—and their
CEO
s—may have to adapt more radically to thedownturn than they now expect.
Leading through uncertainty
8
The range o possible utures conronting business is great. Companies thatnurture exibility, awareness, and resiliency are more likely to survive the crisis,and even to prosper.
Financial crises, past and present
15
Past fnancial crises had very dierent eects on the real economy. Thoughthe lessons o the past don’t give much cause or optimism, they do provide hints onhow companies should prepare this time around.
Mapping decline and recovery across sectors
21
Dierent sectors enter and emerge rom downturns at dierent times. A lookat past recessions suggests how some industries may are.
Why the crisis hasn’t shaken the cost of capital
26
The cost o capital hasn’t increased so ar in the downturn—and didn’tin past recessions.
What’s different about
M&A
in this downturn
31
M&A
may be more resilient in this downturn than in previous ones, but it willbe a dierent kind o
M&A
.
Perspectives onCorporate Financeand Strategy
Number 30,Winter 2009
McKinsey on Finance
is a quarterly publication written by experts and practitioners inMcKinsey & Company’s Corporate Finance practice. This publication oers readersinsights into value-creating strategies and the translation o those strategies into companyperormance. This and archived issues o
McKinsey on Finance
are available onlineat corporatefnance.mckinsey.com, where selected articles are also available in audioormat. A
McKinsey on Finance
podcast is also available on iTunes.Editorial Contact: McKinsey_on_Finance@McKinsey.comTo request permission to republish an article, send an e-mail toQuarterly_Reprints@McKinsey.com.Editorial Board: David Cogman, Richard Dobbs, Massimo Giordano,Marc Goedhart, Bill Javetski, Timothy Koller, Werner Rehm, Dennis SwinordEditor: Dennis SwinordDesign Director: Donald BerghDesign and Layout: Veronica BelsuzarriManaging Editor: Drew HolzeindEditorial Production: Sue Catapano, Lillian Cunningham, Roger Draper, Mary ReddyCirculation: Subita GurbaniCover illustration by Christian MontenegroCopyright © 2009 McKinsey & Company. All rights reserved.This publication is not intended to be used as the basis or trading in the shares o anycompany or or undertaking any other complex or signifcant fnancial transaction withoutconsulting appropriate proessional advisers. No part o this publication may be copiedor redistributed in any orm without the prior written consent o McKinsey & Company.
11
Editors’ note
Richard Dobbs
(Richard_Dobbs@McKinsey.com) is a partner in McKinsey’s Seoul office, and
Tim Koller
(Tim_Koller@McKinsey.com) is a partner in the New York office. Copyright © 2009 McKinsey & Company.All rights reserved.
1
See “McKinsey Global Survey Results:Economic conditions snapshot,November 2008,” mckinseyquarterly.com.
If one thing has now become clear
amid the extreme uncertainty spawned bythe global crisis in credit markets, it is this: the bubbles—in consumer spending,real-estate prices, leverage, and corporate protability—that have developed over the pastgeneration have burst, but their eects will be elt or a long time. Across the world,stunning amounts o wealth have disappeared in the housing and equity markets, andthe eects are now rippling through the real economy. As a result,
CFO
s and otherexecutives are already acing a strategic landscape that has been dramatically redrawn,with ew, i any, precedents.Risks abound on that landscape. In a recent McKinsey survey, global executives agreedthat their businesses would enter 2009 in a global recession marked by continuinghigh volatility in equity and credit markets, which they believe will remain more stagnantthan liquid.
1
As in every downturn, there will be opportunities as well. As manyexecutives expect their companies’ prots to rise as to all in the next scal year, andsome are nding opportunity in the turmoil—entering markets where competitorshave weakened, hiring talent that would otherwise not have been available, and seeking
M&A
opportunities.The wisest course or
CFO
s during a period o distress—as well as in a period o growth—is to resist addish impulses and instead ocus on undamentals: understanding val-uations, weighing investment opportunities, managing the balance sheet, and makingstrategic choices that create value. As such, we devote this issue o
McKinsey on Finance
to an exploration o some perspectives that can assist executives as they conront neweconomic and business realities. We examine the important role the
CFO
must play in acompany’s nancial and planning processes—and the challenges o leading duringa period o uncertainty. We position current and past crises in a historical perspective andgauge the decline in protability that executives can expect as earnings, swelled by theleverage bubble, revert to the mean. Other research demonstrates that, despite the marketturmoil, the cost o equity actually hasn’t changed signicantly. Finally, we review theyear’s
M&A
activity, comparing it to the rst years o past downturns and pondering what2008 portends or the uture.
Richard Dobbs and Timothy M. Koller
of 00
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