- Email: [email protected]
Corporate finance in the 1990s
Corporate
83
0024-6301/91 $3.00 + .OO Pergamon Press plc
Long Range Planning, Vol. 24, No. 1, pp. 83 to 87, 1991 Printed in Great Britain
Finance in the 1990s
E. C. Emerson
The financialservices industry is experiencing a transition from an historically stable and regulated environment to one in which the participants are being increasingly permitted to serve each others’markets. Commercial banks, securities firms, finance houses, merchant banks, insurance companies and building societies are, in many cases, entering each others markets. To survive such a transition banks must ‘face the unpalatable reality that there may have to be fundamental changes in who they are, what they do and how they do it’. ’ Why they will need to do this is the subject of this article.
Phase III 1980 to 1990 To maintain their oriented corporations efficiency as;
$r international policy co-ordination broke down and communications made markets more efficient and hence more uncertain,3 and *
An Historical Perspective During the last 40 years the worlds major banking groups have seen fundamental changes in the nature and scope of their markets as shown in Figure 1.
Phase I 1945 to 1965 The growth of most companies during the first period, starting in 1945, was financed from internal cash generation and from their neighbourhood bankers, but, as domestic markets became saturated, the larger, more successful, companies decided to internationalize to maintain their profit performance.*
profitability, internationally initiated a drive for improved
moves continued towards regional integration and the deregulation of financial markets.
These changes prompted a rising demand for ‘risk products’ and the stock market funding of merger and acquisition activity as companies now seek to survive in an environment which is becoming tougher, more uncertain and global.4 Figure 1 shows that, as each break-point occurred, a number of fundamental changes took place in the early 196Os, in that the nature and scope of the financial markets changed in the late 1980s and they are changing again today. At each breakpoint: *
new entrants into the markets of competition
*
market leaders lost market
*
the cost structure
*
companies needs services changed.5
changed
share to new entrants
of the industry for
the rules
financial
changed, products
and
Phase II 1965 to 1980 International banking then became important as demand rose for trade finance, correspondent banking, international money management and multi-currency borrowing through the overseas expansion of these multi-national companies. Increasing international trade led to increasing financial imbalances between currencies and increasing volatility in exchange rates as international market saturation approached. Christopher Emerson is a Director of a Management consultancy. He was formerly Corporate Banking Director with an international bank.
The Position Today Figure 1 shows that a further break point has arrived because productivity gains of up to 30 per cent are available to those companies which change the way they operate through the use of commercially available technology. By the end of 1986, just 11 per cent of companies in the 10-99 people range had introduced computer aided design and manufacturing technology. Today, integrated circuit production is increasing at the rate of 200 per cent per yeal-h as its applications
Long
84
Range
Planning
Vol. 24
February
PHASE I
SALES
1991
PHASE III
PHASE II
The Drive for Business Integration
7
\// I/ 0 1945
1955
1965 International
Domestic
Source:
1975
1985
Banking
Banking
0
/
1995
Time
Networking.
..
Risk Products
International Financial Statistics and the centre for Financial analysis and research, Princeton, U.S.A.
L
Figure
1. Product
group
life cycles
and services will decline as they meet them through inter-company networking, purchasing the necessary technology and by raising funds themselves more cheaply;
spread into numerous activities including networking between companies through Electronic Data Interchange (EDI). By 1990 thousands of companies are expected to be involved in inter-company networking. This growth will accelerate with the expected arrival of intra-European integration in 1992 and the potential lifting of cross border restrictions between EC member countries, common standards, open trading for public contracts and tax differential elimination. In addition companies are realizing that; *
market requirements over time,
change
as their sales grow
*
fragmenting runs,
require
shorter production
*
the financial cost of geographically integrated operations is rising,
*
small scale operation is now becoming profitable for many companies.
networking will concentrate channels of trade and communication into fewer groups of customers and suppliers;
*
many financial services can be distributed through information technology, as shown in Figure 2.
Barriers to Entry
markets
dispersed but more
These trends will have a very significant effect on the nature and scope of the financial services market because: -A the demand for foreign exchange risk products will decline as companies replace integrated but geographically dispersed operations with ‘local for local’ ones; *
the profitability of many risk products will decline as risk products and services become automated through appropriate technology;
B
many
companies’
B
needs
for financial
products
Few barriers exist to prevent new suppliers entering those markets traditionally served by the banks’ because, when a customer needs to raise money (short, medium or long term debt or equity), the supplier (a bank or new entrant) needs capital strength, a consistent presence in the market, business volume and the ability to satisfy legal and other regulatory measures. When a company needs to obtain a return on financial assets, to transmit money to settle financial liabilities and to purchase domestic and international assets, the supplier needs to have a reputation to ensure depositor confidence and to make a significant investment in technology on a global scale. When a company needs to manage or mitigate financial risks arising from movements in interest rates and currencies, barriers to potential new suppliers entering such markets are much lower
Corporate Finance in the 1990s
CATEGORY OF NEED
IT POlENTlAL
To Raise Money To Raise Equity or Off-balance Sheet Finance Poolihg / Netting Existing Balances To Obtain a Return on Financial Assets To Transmit Money Domestically / Internationally Risk Management - Interest / Exchange Rates Risk Management - Debtors / Insurance Information on Balances /Transactions / Market Opportunities To Provide Advice Confirm and Integrate Trade and Value Data
High
85
High High High High High High Low High
Figure 2. The potential to satisfy companies’ financial needs through IT because these products/services can be supplied through brokers, and the operation does not need to be large before it becomes viable. When a company needs to obtain information or advice on financial matters there are virtually no barriers to new entrant suppliers because any organization can educate appropriate personnel to serve this market.
The Impact of Company
Growth
When large companies grow, their abilities to serve
1,000
their own financial services needs increase. This point is shown in Figure 3 where the changing nature of a company’s financial services needs are shown. It can be seen that as companies grow, their needs change as the nature and scope of their markets increase until it becomes financially attractive to, for example; *
‘network’ between suppliers, the company and its major buyers,
*
invest in flexible manufacturing
B establish a centralized treasury operation.
Global Network
100 ‘iii s ‘z 2 k! % B E 30-
Securitized Paper
In-house Bank Treasury Sells Services to Subsidiaries
Central Treasury
Global Risk Management
Appoint Treasurer
Flexible Manufacturing
3 10 Market Information Business Advice 0.1 Market Segment:
Time Small
systems, and
Medium
Sources: Derived from the Financial Press / Business International
Figure 3. The changing need for financial services as companies grow
Large
86
Long Range
Planning
February
Vol. 24
*
These steps are already occurring and will significantly reduce the number of middle market companies in Europe as trading and communication channels concentrate because; *
it is more economic and buyers,
*
suppliers and buyers will merge or ‘network’ mutual economic benefit.
Q lower
a *
for
*
The economies of flexible manufacturing systems will force many small companies to amalgamate or become insolvent and, as successful companies grow, it will become attractive for them to raise their financial management capability because large companies can often raise funds more cheaply than their bankers. In addition, a profitable centralized treasury operation in Head Office can often be established to : idle balances
*
facilities and funding
negotiate
I!? minimize B reduce
financial
decision
can benefit
making.
from:
debt and interest
costs,
lower bank charges and transaction
costs,
reduced time spent in obtaining quotes and other financial work,
competitive
being partly fluctuations,
A treasury nesses,
sheltered
advisors
from
who
foreign
exchange
understand
their
*
a credit analysis and monitoring
*
their ability to hedge or not to hedge.
service,
The decision to enhance a company’s management capability depends upon:
after tax
$7 the size of the group and potential
busiand
financial
cash through-
put,
group
foreign
transaction
B improve payments
and maximize
enhance
Subsidiaries
to deal with fewer suppliers
A minimize earnings,
1991
as a Group,
exchange
exposure,
delays
their tax profile to reduce tax liabilities,
*
control levels,
and
a
control and monitor appropriate liquidity levels in terms of timing, location, currency and cost,
*
increase the remittances company,
monitor
72 improve and
overall
*
the nature of their subsidiaries, timing, currencies and markets,
overall
group
A group
in
72 improve
in-house
the vulnerability
costs using ‘netting’,
credit control and reduce resulting in lost discounts,
A provide advice,
*
gearing
and
asset and liability
their shareholder
*
the cost of the facility in people and technology,
*
the methods
profile,
chosen,
their
financial
Many
motor
manufacturers
Integrate Office Technology Systems in Europe
49%
Cash Management
39%
Information Technology
39%
Strategic Budgeting
32%
Foreign Currency Management
28%
Source: Management Centre Europe
management
of financial
*
Business and Profit Planning
financial
understanding
Ford has invested in First Interstate Bank in America, focusing their attention on its 2000 branches inside the K. Mart chain of stores.
The Need to Monitor and Act Upon Currency and Interest Rates, Tax, Competitor and Other Industry Information
Figure 4. Key issues affecting
and
*
management,
How Best to
their locations,
*
Many companies are enhancing management capabilities:
professional
subsidiaries,
strategy,
A senior management’s services.
to be made to the parent
financial
of their group
(1989)
are offering
hire
Corporate Finance in the 1990s purchase facilities to car buyers to encourage the purchase of their cars their products. *
Marks and Spencer have obtained a banking license and are issuing their own credit card.
*
Building societies are offering current accounts with cheque books.
$7 Some companies are now lending and borrowing funds among themselves, and by-passing the banks. The key issues affecting financial management in Europe today are as shown in Figure 4, but these will change as the problems listed are overcome through new technology, ‘local for local’ manufacturing and distribution, customized services and integrated products and services. While corporate customers are spending 75 per cent of their development budgets on looking at ways of integrating their businesses through networking to increase their competitiveness, many of their bankers are much more concerned with automating yesterday’s products. Such banks will experience a serious decline in the demand for related products
87
once the integration problems have been overcome, as other mature industries have experienced in the past at the same stage of evolution.
References (1) Harvard Business Review. (2) The Second Industrial Divide, Piore. (3) Professor D. Heam, speaking at INSEAD’s seminar on ‘Strategy in the 1990s’. Fontainbleau (1987). (4) R. Wright, The Second Wave, Waterlow Press. (5) Corporate Finance in Multi-National
Companies. Zenoff.
(6) The Japanese want to be your banker, Fortune, Industry Forecast, 27 October (1986). (7) IS redraws competitive boundaries, (Electronic links can enlarge a company’s strategic options) J. I. Cash et a/., Harvard Business Review, March/April (1985). (8) Strategic Planning for Electronic Banking, Chorafas. (9) The Publications of Management Centre Europe and Business International.
83
0024-6301/91 $3.00 + .OO Pergamon Press plc
Long Range Planning, Vol. 24, No. 1, pp. 83 to 87, 1991 Printed in Great Britain
Finance in the 1990s
E. C. Emerson
The financialservices industry is experiencing a transition from an historically stable and regulated environment to one in which the participants are being increasingly permitted to serve each others’markets. Commercial banks, securities firms, finance houses, merchant banks, insurance companies and building societies are, in many cases, entering each others markets. To survive such a transition banks must ‘face the unpalatable reality that there may have to be fundamental changes in who they are, what they do and how they do it’. ’ Why they will need to do this is the subject of this article.
Phase III 1980 to 1990 To maintain their oriented corporations efficiency as;
$r international policy co-ordination broke down and communications made markets more efficient and hence more uncertain,3 and *
An Historical Perspective During the last 40 years the worlds major banking groups have seen fundamental changes in the nature and scope of their markets as shown in Figure 1.
Phase I 1945 to 1965 The growth of most companies during the first period, starting in 1945, was financed from internal cash generation and from their neighbourhood bankers, but, as domestic markets became saturated, the larger, more successful, companies decided to internationalize to maintain their profit performance.*
profitability, internationally initiated a drive for improved
moves continued towards regional integration and the deregulation of financial markets.
These changes prompted a rising demand for ‘risk products’ and the stock market funding of merger and acquisition activity as companies now seek to survive in an environment which is becoming tougher, more uncertain and global.4 Figure 1 shows that, as each break-point occurred, a number of fundamental changes took place in the early 196Os, in that the nature and scope of the financial markets changed in the late 1980s and they are changing again today. At each breakpoint: *
new entrants into the markets of competition
*
market leaders lost market
*
the cost structure
*
companies needs services changed.5
changed
share to new entrants
of the industry for
the rules
financial
changed, products
and
Phase II 1965 to 1980 International banking then became important as demand rose for trade finance, correspondent banking, international money management and multi-currency borrowing through the overseas expansion of these multi-national companies. Increasing international trade led to increasing financial imbalances between currencies and increasing volatility in exchange rates as international market saturation approached. Christopher Emerson is a Director of a Management consultancy. He was formerly Corporate Banking Director with an international bank.
The Position Today Figure 1 shows that a further break point has arrived because productivity gains of up to 30 per cent are available to those companies which change the way they operate through the use of commercially available technology. By the end of 1986, just 11 per cent of companies in the 10-99 people range had introduced computer aided design and manufacturing technology. Today, integrated circuit production is increasing at the rate of 200 per cent per yeal-h as its applications
Long
84
Range
Planning
Vol. 24
February
PHASE I
SALES
1991
PHASE III
PHASE II
The Drive for Business Integration
7
\// I/ 0 1945
1955
1965 International
Domestic
Source:
1975
1985
Banking
Banking
0
/
1995
Time
Networking.
..
Risk Products
International Financial Statistics and the centre for Financial analysis and research, Princeton, U.S.A.
L
Figure
1. Product
group
life cycles
and services will decline as they meet them through inter-company networking, purchasing the necessary technology and by raising funds themselves more cheaply;
spread into numerous activities including networking between companies through Electronic Data Interchange (EDI). By 1990 thousands of companies are expected to be involved in inter-company networking. This growth will accelerate with the expected arrival of intra-European integration in 1992 and the potential lifting of cross border restrictions between EC member countries, common standards, open trading for public contracts and tax differential elimination. In addition companies are realizing that; *
market requirements over time,
change
as their sales grow
*
fragmenting runs,
require
shorter production
*
the financial cost of geographically integrated operations is rising,
*
small scale operation is now becoming profitable for many companies.
networking will concentrate channels of trade and communication into fewer groups of customers and suppliers;
*
many financial services can be distributed through information technology, as shown in Figure 2.
Barriers to Entry
markets
dispersed but more
These trends will have a very significant effect on the nature and scope of the financial services market because: -A the demand for foreign exchange risk products will decline as companies replace integrated but geographically dispersed operations with ‘local for local’ ones; *
the profitability of many risk products will decline as risk products and services become automated through appropriate technology;
B
many
companies’
B
needs
for financial
products
Few barriers exist to prevent new suppliers entering those markets traditionally served by the banks’ because, when a customer needs to raise money (short, medium or long term debt or equity), the supplier (a bank or new entrant) needs capital strength, a consistent presence in the market, business volume and the ability to satisfy legal and other regulatory measures. When a company needs to obtain a return on financial assets, to transmit money to settle financial liabilities and to purchase domestic and international assets, the supplier needs to have a reputation to ensure depositor confidence and to make a significant investment in technology on a global scale. When a company needs to manage or mitigate financial risks arising from movements in interest rates and currencies, barriers to potential new suppliers entering such markets are much lower
Corporate Finance in the 1990s
CATEGORY OF NEED
IT POlENTlAL
To Raise Money To Raise Equity or Off-balance Sheet Finance Poolihg / Netting Existing Balances To Obtain a Return on Financial Assets To Transmit Money Domestically / Internationally Risk Management - Interest / Exchange Rates Risk Management - Debtors / Insurance Information on Balances /Transactions / Market Opportunities To Provide Advice Confirm and Integrate Trade and Value Data
High
85
High High High High High High Low High
Figure 2. The potential to satisfy companies’ financial needs through IT because these products/services can be supplied through brokers, and the operation does not need to be large before it becomes viable. When a company needs to obtain information or advice on financial matters there are virtually no barriers to new entrant suppliers because any organization can educate appropriate personnel to serve this market.
The Impact of Company
Growth
When large companies grow, their abilities to serve
1,000
their own financial services needs increase. This point is shown in Figure 3 where the changing nature of a company’s financial services needs are shown. It can be seen that as companies grow, their needs change as the nature and scope of their markets increase until it becomes financially attractive to, for example; *
‘network’ between suppliers, the company and its major buyers,
*
invest in flexible manufacturing
B establish a centralized treasury operation.
Global Network
100 ‘iii s ‘z 2 k! % B E 30-
Securitized Paper
In-house Bank Treasury Sells Services to Subsidiaries
Central Treasury
Global Risk Management
Appoint Treasurer
Flexible Manufacturing
3 10 Market Information Business Advice 0.1 Market Segment:
Time Small
systems, and
Medium
Sources: Derived from the Financial Press / Business International
Figure 3. The changing need for financial services as companies grow
Large
86
Long Range
Planning
February
Vol. 24
*
These steps are already occurring and will significantly reduce the number of middle market companies in Europe as trading and communication channels concentrate because; *
it is more economic and buyers,
*
suppliers and buyers will merge or ‘network’ mutual economic benefit.
Q lower
a *
for
*
The economies of flexible manufacturing systems will force many small companies to amalgamate or become insolvent and, as successful companies grow, it will become attractive for them to raise their financial management capability because large companies can often raise funds more cheaply than their bankers. In addition, a profitable centralized treasury operation in Head Office can often be established to : idle balances
*
facilities and funding
negotiate
I!? minimize B reduce
financial
decision
can benefit
making.
from:
debt and interest
costs,
lower bank charges and transaction
costs,
reduced time spent in obtaining quotes and other financial work,
competitive
being partly fluctuations,
A treasury nesses,
sheltered
advisors
from
who
foreign
exchange
understand
their
*
a credit analysis and monitoring
*
their ability to hedge or not to hedge.
service,
The decision to enhance a company’s management capability depends upon:
after tax
$7 the size of the group and potential
busiand
financial
cash through-
put,
group
foreign
transaction
B improve payments
and maximize
enhance
Subsidiaries
to deal with fewer suppliers
A minimize earnings,
1991
as a Group,
exchange
exposure,
delays
their tax profile to reduce tax liabilities,
*
control levels,
and
a
control and monitor appropriate liquidity levels in terms of timing, location, currency and cost,
*
increase the remittances company,
monitor
72 improve and
overall
*
the nature of their subsidiaries, timing, currencies and markets,
overall
group
A group
in
72 improve
in-house
the vulnerability
costs using ‘netting’,
credit control and reduce resulting in lost discounts,
A provide advice,
*
gearing
and
asset and liability
their shareholder
*
the cost of the facility in people and technology,
*
the methods
profile,
chosen,
their
financial
Many
motor
manufacturers
Integrate Office Technology Systems in Europe
49%
Cash Management
39%
Information Technology
39%
Strategic Budgeting
32%
Foreign Currency Management
28%
Source: Management Centre Europe
management
of financial
*
Business and Profit Planning
financial
understanding
Ford has invested in First Interstate Bank in America, focusing their attention on its 2000 branches inside the K. Mart chain of stores.
The Need to Monitor and Act Upon Currency and Interest Rates, Tax, Competitor and Other Industry Information
Figure 4. Key issues affecting
and
*
management,
How Best to
their locations,
*
Many companies are enhancing management capabilities:
professional
subsidiaries,
strategy,
A senior management’s services.
to be made to the parent
financial
of their group
(1989)
are offering
hire
Corporate Finance in the 1990s purchase facilities to car buyers to encourage the purchase of their cars their products. *
Marks and Spencer have obtained a banking license and are issuing their own credit card.
*
Building societies are offering current accounts with cheque books.
$7 Some companies are now lending and borrowing funds among themselves, and by-passing the banks. The key issues affecting financial management in Europe today are as shown in Figure 4, but these will change as the problems listed are overcome through new technology, ‘local for local’ manufacturing and distribution, customized services and integrated products and services. While corporate customers are spending 75 per cent of their development budgets on looking at ways of integrating their businesses through networking to increase their competitiveness, many of their bankers are much more concerned with automating yesterday’s products. Such banks will experience a serious decline in the demand for related products
87
once the integration problems have been overcome, as other mature industries have experienced in the past at the same stage of evolution.
References (1) Harvard Business Review. (2) The Second Industrial Divide, Piore. (3) Professor D. Heam, speaking at INSEAD’s seminar on ‘Strategy in the 1990s’. Fontainbleau (1987). (4) R. Wright, The Second Wave, Waterlow Press. (5) Corporate Finance in Multi-National
Companies. Zenoff.
(6) The Japanese want to be your banker, Fortune, Industry Forecast, 27 October (1986). (7) IS redraws competitive boundaries, (Electronic links can enlarge a company’s strategic options) J. I. Cash et a/., Harvard Business Review, March/April (1985). (8) Strategic Planning for Electronic Banking, Chorafas. (9) The Publications of Management Centre Europe and Business International.