The best management teams know to plan for the worst and hope for the best. COVID was a reminder to many business leaders that anything can come out of left field and blind side a business. Despite the COVID lesson we believe that many CEOs and CFOs take certain financial conditions for granted as if they were irrefutable laws of physics. Examples include low interest rates and access to capital.
**Check out the 60 second video clip below where famed media investor and operator John Malone makes the case for our CEORater service by way of stressing the importance of Management Team Quality when performing due diligence on any investment opportunity. View CEORater’s 2019 and 2020 CEOs of the Year HERE and HERE.**
Management teams that assume they will be able to continue to access significant amounts of capital at record low cost face the risk of being blindsided when the Fed ultimately raises interest rates. This will undoubtedly cause financial pain for a great number of firms (we have yet to put pencil to paper to calculate how many firms with a net debt position have executed Reductions-in-Force year-to-date). Further, what would it mean for the capital markets and U.S. Economy if the U.S. was to lose reserve currency status? Stanley Druckenmiller believes the U.S. will lose reserve currency status in 15 years (our bet is 25 years unless the current pace of fiscal spending continues which is unsustainable).
With uncertainty ahead our view is that companies ought to trim debt levels, pare back share buybacks and use a portion of the related savings to invest in people and technology. A great offense is the best defense. Market-leading companies ought to double-down on developing and refining products and services that deliver high customer value. If most of your customers continue to buy your products and services in tough economic times you know your firm has built something of longstanding value. Another reason why companies ought to take a conservative approach with their balance sheets – especially highly profitable market leaders – is that as valuation multiples fall back to earth cash-rich companies will have a competitive advantage as it relates to M&A.