VideoAt first glance Citigroup, a giant of American banking, and Wolseley, a British firm that makes building products, have little in common. The former is part of the plumbing of the global financial system; the latter is the world’s biggest distributor of pipes, bathroom fittings and other plumbing paraphernalia. Yet both have found themselves on the rapidly growing list of victims of the global economic turmoil. Citigroup has been hammered by the fallout from the subprime-mortgage debacle and its repercussions in financial markets. But as the chaos spills into the real economy, firms in many different industries are being infected by it. Hence Wolseley has seen demand for its products dry up as the number of new homes being built has plummeted.
Now they have something else in common: this week both announced a further round of mass lay-offs. On November 17th Vikram Pandit, Citi's boss, said his bank would shed a whopping 52,000 jobs in the next few months, bringing the total number of planned job cuts to 75,000, or 20 percent of the bank's workforce (see article). On November 18th Chip Hornsby, Wolseley's boss, announced another 2,300 job cuts at his firm. Once these employees have departed, his company will have cut 14,500 jobs, or roughly 18 percent of its total.
With Messrs. Pandit and Hornsby, bosses at many other firms have been cutting hundreds of thousands of jobs. Apart from carmakers and other manufacturers, the list of those laying people off now includes Pepsi bottlers, law firms, retailers, media companies, chemicals producers and even technology firms. All are desperately seeking a cure. And the most attractive medicine on offer looks like cash.
Hoarding for Hard Times
Preserving cash in such formidable times will present managers with an unprecedented test of their skills. "We've come through a half-century of history where recessions have been sort of mild," notes Richard Sylla, a professor at New York University's Stern School of Business. "But never have problems in the financial sector been as great as they are now."
Faced with huge difficulties of their own, banks have tightened their purse strings, lending less and driving up the cost of credit to consumers and corporations. That is compounding an already grim prognosis for the world economy. This week Japan said its economy had shrunk for the second quarter running. Much of Europe is in a similar state. And a new survey by the Federal Reserve Bank of Philadelphia has shown that many economists believe the United States went into recession in April and will not emerge from it until the middle of 2009.
Opinions differ as to how long and deep the global slowdown might be. But the combination of a battered banking system and shell-shocked consumers mired in debt suggests it could be particularly hard for many businesses, whatever the duration. So bosses are rushing to secure as much cash as they can now to see their companies through the downturn.
How times change. Not long ago companies with cash piles were assailed by corporate activists to return money to shareholders. Nowadays it is only a slight exaggeration to say that the more cash that investors see in a firm's coffers, the happier they are. A recent report from Citigroup's investment bank shows that since the credit crisis began the returns of firms with ample liquidity have outperformed those of their cash-strapped industry peers by almost 7 percent. Before the crunch, cash-rich firms were generally underperforming.
There is a big risk that some behemoths will run out of money. Moody's, a credit-rating agency, says its liquidity-stress index, which tracks the cash position of heavily indebted American firms, shows they are feeling as pinched as at any time since late 2002. Among those most at risk are some casinos and carmakers. Harrah's Entertainment, a Las Vegas-based casino, is trying to persuade creditors to renegotiate its payment terms to avoid a default. General Motors (GM), along with Ford and Chrysler, is lobbying Congress for a bail-out after burning through billions of dollars in the third quarter of the year.
Few companies are in as bad shape as the three American carmakers. Yet that is no excuse for complacency. Faced with such difficult markets, firms in many industries are likely to see sales fall, bad debts soar and cash flows deteriorate sharply — if they have not done so already. Although every company's situation is unique, there are some common themes that managers would do well to bear in mind when tackling the current crisis.
Don't Bet on the Bank
One thing not to take for granted, even for firms with strong balance-sheets, is that they will get access to external capital. For the foreseeable future, bank credit is likely to be harder to come by and will certainly be more expensive than when the financial crisis began. Strong companies may be able to issue corporate debt at a more reasonable price, but that market remains fragile. Although government action has unblocked the commercial-paper market, an important source of short-term funding, the cost of tapping it remains very high for all but the healthiest of issuers.
Faced with all this, some companies such as Marriott International, an American hotel group, have drawn down bank credit lines, even though they did not need the money urgently. Many of these so-called "revolving credit facilities" were set up during the boom, when credit was cheap. A recent paper by two Harvard Business School economists, David Scharfstein and Victoria Ivashina, shows that between April 2006 and April 2008, such credit lines grew by 36 percent, to $3.5 trillion.
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