DON'T JUST STAND THERE
Valedor Bulletin: “Don’t Just Stand There”
March 9, 2020
Vanguard founder John Bogle famously espoused the inverse investment maxim, “Don't do something. Just stand there.” These may prove to be wise words for investors in today’s tumultuous public markets, but at Valedor we deal with owners and managers of operating businesses who would do well to ignore this advice in the face of potentially significant health consequences and economic disruption from the COVID-19 pandemic. In this Valedor Bulletin, Chief Scientist George Danner offers actionable advice for business owners and operators.
COVID-19 is having a dramatic and chaotic impact on global markets. We recommend that our consulting clients and portfolio companies consider some or all of the following tactical responses to help them endure the pandemic and thrive in the long-term:
Start scenario planning. Companies need a means for stress-testing their economic and operational models against a large number of plausible scenarios. This includes extreme- conditions testing where perfect storms of multiple events conspire to create unprecedented situations. Valedor can create financial/operational and simulation models to assist in the analysis of these scenarios and promote objective, data-driven conversation in the board room and C-suite.
Evaluate supply chain vulnerabilities. Particular attention must be paid to supply chains. Where are inventories? What orders are in the pipeline? Will there be parts/material shortages and if so where? How can insurance be created to mitigate these effects? Our product SupplyBrain can help companies get immediate visibility around these questions.
Reduce costs. The intelligent reduction of non-labor cost drivers works no matter what conditions are present. Our models can help identify these drivers and the effect of streamlining operations while avoiding impairments to long-term growth.
Re-negotiate contracts. Firms are often legally bound to perform under contracts with customers and suppliers. Force majeure allows parties to re-examine contracts and, where appropriate, to re-negotiate them in good faith, particularly by building optionality into contracts in light of the volatility that will be with us for at least the next 90 days. Valedor has extensive knowledge of the Real Options Framework that allows us to value optionality in a systematic way, as in “How much is this clause worth to me?”
Shore up the balance sheet. Allocate resources immediately to forecast future cash needs and available credit to confront the increased odds of an extended economic downturn. This effort should closely follow the aforementioned scenario analysis and could encourage de-levering, refinancing, or even borrowing more from existing credit lines. In light of the recent prevalence of covenant-lite financings, healthy banks and companies with hitherto strong relationships with their lenders should have the incentive and flexibility to work with one another to ensure optimal outcomes.
Diversify. Many firms are disproportionately exposed to certain sectors that will be deeply affected by COVID-19. We can help enhance market agility to create near-term diversification while respecting commitments.
Automate. Most firms have been automating processes intermittently in recent years. We recommend using the pressures caused by COVID-19 to accelerate those initiatives in ways large and small, surgically applying them to areas that provide the most leverage. Our recently published book on automation provides practical guidance on how to do this well.
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