Amid the uncertainty of COVID-19, it is becoming clear that big, powerful companies will likely emerge stronger by virtue of business resilience.
Economic downturns have a way of exposing flaws. They can also offer stronger companies, particularly those gifted in crisis response and change management, the opportunity to make further gains. Describing downturns as “capitalism’s sorting mechanism,” The Economist reports that in the last three recessions, “the share prices of American firms in the top quartile of each of 10 sectors rose by 6% on average, while those in the bottom quartile fell by 44%.”
To gauge the resilience of various sectors and companies, The Economist evaluated the biggest 800 or so listed American and European firms on the basis of debt cost, liquidity, leverage and margins. By sector, technology and pharma emerged as winners. Of the top 100, 48 are Silicon Valley firms. Microsoft, Apple, Facebook and Alphabet scored especially high, due to their vast cash reserves. There has also been a bump in demand for some products, such as Microsoft’s Teams software. Twenty-four of the top 100 are healthcare firms. Transportation, retail and recreation fall on the other end of the spectrum.
There are also clear disparities in the business resilience of different companies within sectors. In technology, Amazon is going strong, adding to its ranks to keep up with the surge in ecommerce demand. Japanese conglomerate SoftBank, on the other hand, had to announce $41 billion in divestments to raise cash, having made some bad investments. In energy, the share prices of behemoths like ExxonMobil, Royal Dutch Shell and BP have beat smaller firms. French personal care company L’Oréal has outperformed American counterpart Coty. As to how aircraft manufacturers are faring, Airbus is in a much better position than Boeing.
The business resilience of stronger companies, especially if their executives take the right actions around crisis response and change management, will likely give them long-term advantages. It will enable them to increase their market share and lower their cost of capital. They will be able to make investments at a time when competitors are making budget cuts. Some will buy up smaller rivals. Startups may pose less of a threat to profits as valuations fall and the costs of capital rise.
Then again, the aftermath of the coronavirus could usher in a new social contract, with companies pressured to offer essential products at lower prices and give their employees more job security. “Capitalism may become less Darwinian”, The Economist speculates, as weaker firms are buoyed by government bailouts and loans. There could be political manoeuvres to stabilise prices and production, making it harder for big firms to seize advantages. “Covid-19 won’t only have lasting effects on society and people’s behaviour. It will also alter the structure of global business.”
