While the world is watching the news and waiting for the next big announcement on the crisis, we are all experiencing an economical impact we never expected. COVID-19 is and will be a big challenge for most companies but especially big and well financed corporates could be the big winners in this situation.
But why do big corporates win, while SME companies are missing out these opportunities? For this we have to also look into the process of what the successful digital transformation looks like. While smaller companies are struggling to optimize their processes, to keep their employees somehow employed and fight for some public support most bigger corporates have giant cash reserves. This imbalance will lead to a big wave of bankruptcies but also in a spike in M&A activities.
Lets first look into the situation, to understand what is going on.
The Top Dogs – Power and cash reserves for the win
The last years were good for many companies. Apple has a cash reserve of $210bn, which is bigger than the stimulus packages of most countries in the world. Other companies have such a good credit rating, so they get money at almost zero interest rate. E.g. Johnson & Johnson has a better credit rating than the state of Canada.
While these reserves also ensure that these companies will survive the crisis they also enable them to be prepared to invest more, take more market shares and also increase their M&A activities while others need to be in panic mode.
This spread of wealthy corporates and weaker corporates was also seen in the last financial crisis 2008. While the top companies gained in share prices the lower quartile lost almost half of their value.
When looking at the overall cash reserves of companies (e.g. top 17 in S&P 500) vs. their actual turnover, then you see a very interesting picture why these companies are more than prepared to enforce their strategy of buying competitors and taking leverage of falling share prices and weakening competitors.
Unsurprisingly the best prepared industries are Technology and Pharma. They are sitting on stockpiles of cash and they are also able to move fast as they don’t employ lots of blue-collar workers. Fast scaling digital business models as well as surging demand in pharma supplies are key to their success. So it is no surprise to see that Amazon is adding more than 100.000 workers to its staff to deal with the surge in eCommerce. Industries like travel, events and gastronomy are being hit the hardest. These industries might leave now lots of gaps which bigger corporates will fill. (Google, Amazon etc. wanted to enter some of these markets for years)
SMEs are less resilient – The Pandemic reveals their weaknesses
Not just looking at the overall cash situation but also in some other aspects we find why most companies are struggling at the moment. Most smaller companies couldn’t leverage the full advantages of new business models, more efficient processes (e.g. Digitization, RPA etc.) or also financial mechanisms used by big corporates to leverage the capital.
This crisis will reveal weaknesses in their structures, business models and also operating models. Especially companies which missed out bigger parts of the digital age, will now struggle hard to keep up with oligopolistic markets which are more and more consolidating. The network-effects are crucial for companies in a digital age and this is certainly not something easy to achieve. This situation gets another twist: Just switching from “normal office” to home office is a big struggle for most smaller companies as infrastructure, security, tools etc. are not in place to deal with this.
Hard times for Start-Ups
While smaller companies can still file for some governmental help and they may have some buffer in their balance sheets, start-ups typically lack these qualities. For most start-up companies this will be the end of their entrepreneurial road. Especially here we potentially also see a big spike in acquisitions from bigger corporate in many fields as the start-ups are potentially more willing to sell fast (before defaulting) or the prices of the companies drop suddenly so an acquisition is easier to finance.
Also in times of high uncertainty and a low demand, lots of entrepreneurs will wait with their ideas. So the overall innovation activity from start-up companies will be smaller and also less risk-full then in a stable environment. This gives bigger corporates a further advantage of expanding their market position by leapfrogging their competitors and start-ups.
Pressure from Governments will arise
Saving jobs will be one of the highest priorities for governments to prevent a total collapse of the system. Raising public debt and also uncertainty on the length of this economic impact will put lots of corporates under lots of pressure. Especially when bigger corporates with lots of jobs are struggling it is usually that governments allow mergers and acquisitions which were normally not possible due to antitrust concerns in the market. When these boundaries are falling, then we potentially see new industry giants and monopoly-like situations arising from this economic slowdown.
And as most of the economic stimulus is coming from dept for companies, this will add an extra layer of pressure on companies with not so stable finances and already bad balance sheets. Especially if the cash-flow was already low for companies before, this dept can risk the whole business. Low margins combined with high repayments can be a potentially dangerous combination.
The top companies resilience to this crisis will be a big factor in the growth for most of these companies. The cost of capital is lower, higher margins as competitors fail, they gain more trust with their suppliers (risk of bankruptcy is lower – so sourcing prices fall) and they have enough cash to invest while others need to hold or even divest.
But not everything will go the “Top Dog’s way”. Social pressure and inequality concerns are already raising. So will also the social pressure rise. Concerns against these giants in the industry are fueling social media movements and are finally also leading to changing customer behavior. This might make it harder for big corporate to fully leverage their advantage out of this crisis but the final assessment can only be done after the virus passes and some years of normal business.
COVID-19 will have a big ability to change key aspects of our social life, economic development but also will have a big impact on the structures of global business.