The business impact of the Coronavirus (COVID-19) is changing daily. From executive stay-at-home mandates, to distribution center and manufacturing facility shutdowns, to improving situations in countries that saw an earlier outbreak than the United States. Keeping on top of a complex situation is simply not possible. Filtering through the hyperbole to find the facts and make smart decisions requires patience, perseverance, and maintaining reason.
One source of information is PriceWaterhouseCoopers (PwC) Chair and senior partner Tim Ryan. Over the past week he has commented on a number of business issues impacted by the coronavirus. Specifically for Q1, Mr. Ryan stated, “We don’t think it’s a time for companies or others to hold onto what original plans were for 2020. It is clear the virus will change plans of almost every company, and they need time to assess what the new normal looks like.” For the retail industry specifically, he stated that there is time to recover, but if China, as the originating location of parts, doesn’t get fully back to normal operations by the end of the summer, then the retail season may be at risk.
He went on to say, “The Q1 issues that we are dialoguing and will dialogue with our clients changed quite a bit because of this virus. For example, disclosures around risk, disclosures around business interruption, disclosures around supply chain, I expect will increase. I expect the number of going concern analyses that companies need to do and that auditors will need to do and look at will increase, particularly when we look at liquidity. When you look at impairments or valuations, those are issues that will move to top of mind as companies look to deal with a whole set of unique financial reporting issues that are presented by the virus.”
As it relates to the supply chain, Mr. Ryan acknowledges the challenges and disruptions we’re facing right now, “We are seeing some critical items that are significantly being disrupted because of the inability to move product, whether it be from China or other parts of the world, or even within the United States. We’re also seeing the — when you look at people working from home or social distancing — we are seeing the ability to just move product from place A to place B, and that is a challenge in certain areas.”
He also sees the bright side, “We should feel good about the fact that there is some resiliency built into the system which is allowing goods to flow at some level. I think it is reasonable to assume as we get through this combination of trade wars and lessons learned from this virus, supply chain is going to be a C-Suite boardroom topic for the foreseeable future, because it will inevitably be lessons learned, particularly around concentration and resiliency going forward.”
Relatedly, economist Arnold King also sees improvements in how the supply chain will be managed coming out of the COVID-19 outbreak, “In the long run, I don’t expect normal either. Pre-crisis, our patterns of specialization and trade were optimized for efficiency at the expense of fragility. Expect supply chains in the future to have a lot more redundancy and to be less driven by cost minimization. The Chief Risk Officer’s approval will now be needed before the CEO will approve a major new supply contract.”
Fortunately, cash is not in short supply. Per the Federal Deposit Insurance Corporation (FDIC), at the end of 2019 there was $2.5 trillion in untapped corporate credit commitments. And,the banking sector has been able to provide operating cash for companies that need it. They are being supported by the Federal Reserve, which has dropped interest rates to almost zero and increased its purchasing of mortgage bonds and Treasuries.
The number of M&A deals is inevitably going to fall as a result of the uncertainty. But remember, the number of deals has been declining since 2017. According to Neil Dhar, PwC US Financial Services Leader, “In the near term, I think we have to acknowledge that M&A activity will slow down significantly, as market uncertainty will clearly be no friend for deal making.” PwC’s CFO Pulse survey recently reported that while 80% of CFOs have less desire for M&A in the near term, only 10% have an intention to change their M&A strategy. So while M&A deals will decline in the short-term, it’s certainly not a bellwether of what’s to come.
If you have questions on how the coronavirus may impact your sector or hiring needs over the next quarter, please send us a note.