The recent liquidity crisis in the financial markets has the potential to
force a significant increase in corporate restructuring and insolvencies because
the ease of raising cash during the past two decades has masked a huge number of
poorly performing companies.
Risk consultancy firm Kroll commissioned Penn, Schoen & Berland to
research FTSE-250 companies and their European equivalents, for 20:20
Vision: Boom, bang or bust?
The report looked at the key trends of the past 20 years since the 1987
crash and recognised six key trends which have revealed sources of strength
“The outstanding feature of the British economy since the mid-1990s is its
stability,” the report says. “The economy has been expanding without
interruption since 1993, a longer period than any previously recorded.”
However, lower inflation and interest rates have naturally resulted in higher
gearing within companies in many cases, excessively so. “Failure is being
masked by the increased liquidity that is available in today’s capital markets,”
said one FTSE-250 managing director.
Both financial and technological innovation have made the world a much smaller
place over the past 20 years and complex financial instruments have acted as
lubrication to a vast number of deals. The risk, however, is that no one really
knows who owns what financial asset, leading to the potential of financial
volatility, the likes of which was experienced this summer.
The massive amount of inwards and outwards foreign direct investment has helped
to prop up western economies. “The exportation of deflation through low-cost
wage regimes in China and India has had a significant impact on the way European
companies do business,” said the CFO of a FTSE-250 financial services company.
“As production is moved to Asia, firms find themselves competing with businesses
that invest sparsely in R&D and rely on duplication for product development.
The impact of this has been a reduction in R&D spend in order to generate
Advances in technology have had a huge impact on the corporate world over the
past two decades, and the spread of the internet and mobile communications have
been at the forefront of developments. As one finance director said: “Many
global competitors are on the cutting edge of technology… and those that are not
reinvesting in technology are doomed to fail.”
Following on from technological developments and much easier access to funding,
complexity is now far more of an issue than 20 years ago. New technology and
easy money allows access to new markets both geographical and vertical and
this, in turn, leads to huge levels of complexity. As one director of internal
audit said: “Understanding the totality of operational risks that a business is
exposed to is quite difficult… Recognising and managing those risks is key to
Enterprise culture and M&A
The culture of the past 20 years has been unashamedly pro-business. And while
this has resulted in a more entrepreneurial spirit in businesses, this has both
positive and negative impacts. “It’s easier for risks to be unnoticed and,
therefore, unmitigated,” said one chief risk officer.
The past 20 years have provided a platform for huge amounts of change. The
next 20 years are likely to be even more of a challenge, concludes the report.
Go to www.kroll.com/2020vision
forum to download the report in full.