Minimizing The Pain

Folio: The Magazine for Magazine Management, Oct, 2001 by Lorne Manly

Three days after the attack on America, Folio: sat down with a group of magazine investment bankers to talk about the impending economic crash, the threat of war and the prospects for recovery. Here's their take on the health of the M&A market, and their advice for budgeting and rebuilding in these troubled times. Moderated by Folio:'s Lorne Manly Photography by Jorge Colombo

LORNE MANLY During the last few days, everyone's mind has been elsewhere. It's been difficult to concentrate. But once the dust settles and we return to some semblance of normalcy, what can we expect?

ROGER KRAKOFF Clearly, the country was shocked by the events on September 11th. There is going to be a return to general business, but it is going to take time as the nation grieves, mourns and heals. Ultimately, the speed of the recovery will depend on the government. Other institutions will look to it to restore confidence in the way that we do business. But the U.S. has shown that it's willing to put money behind the recovery to help ensure that the financial markets are stabilized.

We as business people, but also as consumers, have to remember that the attack on America was an attack on our way of life. So it's important that we return to the way we want to live, rather than have other people dictate how they think we should live.

REED PHILLIPS In the short term there's going to be a delay in closing some of the deals that were already in progress. Some of these contracts are contingent upon financing, and we know that that process is going to slow down. A lot of people are going to be looking to the stock market as a leading indicator of the health of business. As for macro issues, a lot is going to depend on the U.S. response. So far, it sounds like it's going to be a long campaign. We already knew that advertising in 2002 was predicted to be flat with 2001. Now I doubt we'll see an upturn until 2003--and a protracted war against terrorism will just exacerbate that.

MARK EDMISTON The key thing is what happens next. This is not going be a single event. It's going to be a continuous series of events. Afghanistan is hard to get to. If there's an attack on Afghanistan, how are we going to do it? As someone said, you can't bomb Afghanistan back into the Stone Age--it's already in the Stone Age. We're at war, and the economy is going to respond.

The biggest problem with M&A in the past year has been getting credit. Credit has been getting tighter and tighter. I don't see that changing in the short term. The banks are going to be nervous--and when they're nervous, they stop lending.

ANDY BUCHHOLTZ The government has been actively assisting the economy since the start of the year, but it's the banks that are nursing a lot of wounds. So even though short-term rates have been going down, that hasn't helped with the availability of credit.

EDMISTON If we drop another point of GNP growth, we're no longer positive, we're negative--it's a recession. There will be more layoffs.

NET CONSEQUENCES

PHILLIPS In 1999 and 2000 we went through a period of "irrational exuberance." What people need to remember is that we should actually be comparing 1998 to 2001. The consequences of the Internet reverberate throughout the economy and our industry. We've seen a number of clients and banks that are in trouble now with loans and properties because of the Internet investments they made. They took their eye off their primary business. They raised money for Net investments and then smoked through all that cash, and now they're in a lot of trouble.

KRAKOFF The business of the Internet will continue on. But a lot of the economic difficulties really relate to how the portfolios were built by banks. Now we're returning to a more balanced perspective where things are based on traditional metrics--customer markets and how well they're served, or the profitability of a business. Businesses that have strong franchises with established brands will still be able to engage in M&A.

MANLY Reed, you mentioned that we have to go back a couple of years for a fair comparison, but how realistic is that?Ifyou look at all the cutbacks made by companies this year, it's clear that they are basing numbers on 2000. What needs to change so that people can make that leap and say, "Okay, let's base it on 1998"?

PHILLIPS A lot of it is psychological. In American business, we're used to comparing year over year. We're not used to going back and comparing to two or three years earlier.

EDMISTON Public markets are really the issue here because your company is valued on projected earnings. If all of a sudden you say, "All right, we're going back to 1998," they'll say, "Fine, we'll go back to see what your value was in 1998." And then your stock price falls. So you respond by cutting expenses to compensate. Cutting your expenses is permitted in a way that wasn't permitted in the last recession. It's more acceptable to fire people, and part of that has to do with the Internet. When the Internet collapsed, dot-corns locked the doors and said, "You're out of work."