Capital Markets

Lessons for ’08 from the ’07 Rollercoaster

Tatum's annual survey of CFOs — marking a record low opinion of business conditions — shows the strains of boom and bust. Credit markets far outpac...
Roy HarrisJanuary 29, 2008

Tatum LLC’s 2007 CFO Survey of Business Conditions shows executive assessments at an all-time low point in December. It also offers a window on a turbulent year, with “the biggest source of stress” for finance executives taking clear shape by November: credit market volatility and economic conditions.

Like some presidential candidate coming out of the blue to befuddle pollsters, the credit-market category overwhelmed the competition with a 43-percent vote: topping regulatory compliance at 29 percent and managing board expectations at 28 percent. Suddenly, concerns or expectations about private equity investment — which began drying up around mid-year seemed distant thoughts indeed.

With the “worsening trend of recent months [having] leveled off at least for the moment,” the Tatum survey cast a glance back at the turbulent business conditions of 2007 in an attempt to augur lessons for the current year.

It also helped explain why Tatum’s Index of Business Conditions hit that record low in December.

From a June peak for the index at 12.3, indicating an average of ratios of respondents reporting “improvement” versus “worsening” for the past 30 days, and for the next 60 days, the average ratio plunged to 1.7.

To the question of which events or trends are expected to impact 2008 corporate budgets most significantly, fully 68 percent gave the credit-crunch or volatile-markets answer, followed by the dollar’s decline, at 16 percent. The private equity boom? That was listed as having the biggest impact by a mere 8 percent, followed by 7 percent for Fed rate cuts. (Remember, that was last November.)

The survey at year-end gave a negative picture of capital expenditure commitments, a major confidence indicator, with cap-ex commitments declining signficantly in the last thirty days, and more deterioriation expected in the next two months. Order backlogs remained about the same as in the previous month, however, and were expected to improve slightly in the next sixy days.

The more-difficult financing picture emerged from the survey, with sub-prime mortgage problems still haunting financial institutions. As Treasury rates trend down and concerns about a slowing economy trend up, borrowers are facing more scrutiny and underwriting standards are being tightened. This was reflected in the “cautious but flat” outlook CFOs presented in that area.

In December, Tatum let CFOs wax philosophical in answer to this question: “Have we entered into a new era where a CFO is as powerful as the CEO?” A strong minority of Tatum’s 1,000 partners and professionals, who serve at U.S. companies of all sizes and in many industries — 20 percent, in fact — answered in the affirmative, with an explanation. “Yes, the CFO now serves on boards, where he/she plays an integral role in key business decisions, and this is the position that many shareholders trust the most,” came their interpretation.

One level of “no,” at 14 percent, suggested that the finance chief “remains the CEO’s scapegoat should the board or shareholders have problems with company performance.” And 66 percent said no for the more standard reason: “The CFO is viewed as the finance expert, and the CEO is viewed as the visionary.”

What a difference a year makes. In 2006, the same Tatum survey had revealed that the primary cause of turnover for a finance chief “was compliance and regulatory pressures, and as the fifth anniversary of Sarbanes-Oxley approached, more than 90 percent of Tatum survey respondents felt that SOX had contributed to CFO turnover.”

The mid-2007 picture of regulatory compliance showed that 48 percent of CFOs listed Sarbanes-Oxley as contributing “greatly” to higher finance-chief turnover, with 49 percent listing “somewhat” and 3 percent “not at all.”

What did respondents think was the effect on executive compensation from greater proxy-reporting detail? In a truly mixed picture, 17 percent said comp would increase; 16 percent said decrease; and 67 percent said it would remain the same.

In the merger-and-acquisition world, the fall of last year brought significant worries, as private equity investment and deals in general slowed dramatically. Asked about expectations for M&A activity over the next 12 months, 49 percent of CFOs predicted a decrease, with 29 percent looking for an increase and 22 percent believing the economic conditions wouldn’t have any impact.

What were the reasons they saw for a potential decrease in M&A? Dividing the reasons cited by the 52 percent who did expect a decline, 38 percent said financing would be a problem, while 5 percent said that targets would dry up, and 9 percent gave another answer.

Tatum’s summary of the finance executives’ position on dealmaking at year-end: “Companies in the midst of closing deals found changes in terms and capital availability as banks and other lenders had the option to cancel, rather than live with terms they could not fulfill profitably. Business executives began questioning whether deals would be completed and whether funds would be available in order to continue corporate growth through M&A activity.”

Time will tell if Tatum’s crystal ball is clearer for all the late-2007 surveying. But its conclusion seems undeniable about the current situation. “Today we face a Catch-22 situation: business leaders are conservative in making projections and taking risks as they look for cue from the markets; however, the markets remain stagnant and are waiting on movement from business leaders that demonstrates risks.”

Will there be improvement or recession? With Tatums’ business-conditions index at that low, the indications are of “a slightly better than 50/50 chance of recession,” it said.