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Act – don't react!

think: act CONTENT

2008

No time to be idle – Restructuring must remain high on the corporate agenda

It seems as if the bad news never stops: As central banks inject billions into the markets to offset a liquidity crisis, banking giants are facing daily depreciations. Although the impact of the perceived crisis is seen differently in the United States and Europe, the markets' interdependency is fueling uncertainty among companies and consumers alike. Already, the dangerous 'R'- word – recession – is no longer a whisper. US Federal Reserve Chairman, Ben Bernanke, admits the signals are not good. Consumer trust is strained at best. Exporting companies in Europe remain dependent on US market developments. They are watching their revenues dwindle due to the weak US dollar, but still face high Euro-based factor costs. Until now, analysts have drawn a positive economic outlook for Europe's export-oriented countries. But can it last? It is high time for companies to increase their flexibility to ensure that they can respond. True champions don't sit back and wait: They start restructuring measures even when they are still experiencing profitable growth. But many companies still have a lot of groundwork to cover in this area, according to an exclusive Roland Berger survey.

Our analysis revealed that around 8% of Europe's large companies exhibit all the classic symptoms of a strategic crisis. Their competitive position has gradually deteriorated for one of two reasons. Either they have held onto unprofitable businesses for too long, or they have been too slow in responding to major changes in patterns of demand.

Nearly 20% of the companies examined are in fact already struggling with acute earnings or liquidity crises. Fewer and fewer entrepreneurial options are still open to the management. Creditors, suppliers and customers want more than just regular information: In a volatile environment, they want guarantees. In some cases, companies are having to make extensive concessions and having to submit to the terms of strict covenants.

In other words, over a quarter of the companies examined are mired in a crisis of some sort. For many of them, thorough and painful restructuring is the only way out. Our study didn't examine the behavior of niche players. We investigated a thousand large, publicly traded companies that each generate annual sales of more than EUR 500 million – the very heart of Europe's economy. In recent years, the best of these key players have significantly improved revenues, productivity and profitability. They have also nearly doubled free cash flow and are now much better placed to service debts. At first glance, even the worst of the lot do not appear to have done too badly for themselves, boosting their revenues by almost one fifth. But don't be fooled by outward appearances. A closer look reveals glaring discrepancies: Profits are stagnating, cash flows have dropped by nearly 10% and servicing debt has become a serious problem. The alarm bells are ringing loud and clear.

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