After crossing over to consultancy work more than a decade ago, I was invited to deliver a challenging lecture to a select group of developers operating in Asia Pacific.
The topic assigned to me was “Turnaround Strategies amidst GFC” and I was asked to focus on one thing: what intervention did my team initiate in helping financially distressed developers in the region. This was when the global financial crisis (GFC) was holding sway over major economies in Asia.
GFC refers to the period of extreme stress in global financial markets and banking systems between mid 2007 and early 2009. Many banks globally incurred huge losses and relied on government support to avoid bankruptcy. This economic upheaval caused the collapse of investment houses that gambled on real estate.
Today we are again at a crossroads. As COVID-19 continues to shock economies globally and with looming recession about to make a hard landing, what should businesses in Asia do to survive? The current pandemic is unprecedented in its impact.
A couple of months into this crisis, I can say that extreme uncertainty is the only certainty. Companies must simultaneously think outside the box, develop a variety of scenario planning models and use resources to fuel growth and preserve gains effectively. Remaining calm under pressure will help firms make strong, well-informed and rational decisions.
Highly likely scenario
I received invitations to lecture online and offline and the same questions emerge: how can developers navigate in an uncertain future? Let us dissect a highly likely scenario with a real case that my colleagues and I helped turn around. For confidentiality, we call it Co A.
Co A is a housing developer catering to the mid-market segment. For many years, it churned out successful projects, exceeding revenue targets. Everything appeared to be working in its favor. The planned initial public offering was gaining momentum. There was even one year that it came close to matching revenues of top tier developers. Suddenly, the market dried up and the real estate bubble burst, values plunged and it took a nose dive.
Co A was highly leveraged and its debt to equity ratio was more than twice the industry average. A high D/E ratio is associated with high risk for lenders and investors. It means that a company financed a larger amount of its growth through borrowing. You can get away with a great deal when times are good, but a slump turns minor issues into major problems.
The bust created a market where demand slackened, unemployment rate peaked, notice of foreclosures rose and credit squeezes everywhere. We discovered strategic and functional failures like poor operating controls in cost management, cash flow forecasts, overexpansion that led to bad acquisitions and debt accumulation.
Real fault
Overall, it was a combination of external and internal blind spots that compromised the business. But a company is as good or bad as its leaders so the real fault lies on those who run them. It was clear that the management overlooked business fundamentals. It didn’t help that the board was run by one colorful founder dictating the campaign. Cowed executives and directors, who were mostly family members, told him what he needed to hear.
In short, he created a climate of fear among subordinates. Any business failure is an extension of failed leadership and this company represented what was entirely wrong with family owned real estate enterprises.
In the next article, I will share several internal reasons for the sudden decline notably the visible symptoms of bad management.
(To be continued)