Decision Making beyond Turmoil: Observations, comments and options…

A year ago I’ve quit my private equity job thinking that my management & investment expertise would ease the way to a management role in a high potential company. Now a year wiser and having failed at the task, I’ve set out to discover what’s available as a professional. This has led to talks with corporates who are understandably worn out by Turkey’s various problems. However, exactly therein lies the catch..

Common across the companies is a theme of confusion. Those in good shape are unimaginatively devoid of opportunistic reflexes and those with problems are locked in a day to day struggle. While I am gently exaggerating for this short piece, I profoundly disagree with the prevailing business mindset. Having been shaped by previous crises I can identify areas of immediate action for the corporates even with persistent substantial macro-risks.

In the following brief sections, I will outline some examples:

Groups (conglomerates) with good assets and a lot of debt:

• First a definition of “sustainable debt level” has to be set. One alternative is “principal and interest that can be repaid for couple of years under base case assumptions”.
• If the net debt level is above this, then the group will exit one or more of those businesses.
• Deciding which business to exit and managing the process can be aided by some external support where helpful.
• As a side-note: Exiting can mean an outright sale or a buy-in by a third party among other options. And – beware of timing, too slow is too late, fast but under control works best.

Groups (conglomerates) with a sound balance sheet and some cash flow:

• Unlike the first group, it is a time to be highly opportunistic for these companies.
• Since there will be those trying to restructure and those going directly out of business, the stronger players could either buy customers and/or assets and/or companies that otherwise would not be available (or be available for a dear price).
• There are groups with this financial power and there are shareholders that can provide this ammunition to their companies. The plans should be ready now and execution can be aided by outside experts that provide technical & market know-how.

Exporters in general:

• It is a great time for most to develop relative strength vis-à-vis importers and local market locked competitors.
• This stronger position would be squandered if these companies fail to diversify markets, introduce new products & services and emerge not only profitable but more strategically placed in the global game.
• Such plans should be implemented as soon as possible and government support could be forthcoming for some projects. Again external subject matter experts and those with export market connections would be helpful.

Big local players – such as banks and telcos:

• While they will be adversely affected initially, their size and market dominance would provide cash flow and opportunity.
• For these players, it is imperative to improve their business practices by embracing technology, driving down costs and enhancing customer value creation.
• Finance in general is a sector being transformed by technological innovation and today. is the time for the market participants to employ those tools and practices even before their global peers. Major macro concerns should not derail innovation.
• Similiarly for the telcos, it is a time to localize certain costs/projects and emerge as technology drivers. Past experience has clearly shown that telco is a high externality sector and certain choices made by the telcos can benefit the economy with a multiplier effect.

Cost-advantage global plays:

• There are animation artists in Turkey who work on cartoons and coders that turn out new applications. There are Tier 3 data centers with ample space and Class A office buildings sitting idle. In general there is significant cost advantage in Turkey and talent in certain areas.
• For companies that have the right connections and project management experience, this is a time to scale up global connections and offerings.

Family companies:

• All those structural decisions that you postponed – implement them now!
• Make sure to get the right management with strong incentives and oversight in place. Observe that most of the problems were a by-product of poor management policies and weak governance standards. Improve them – now please..
• For the strong and competitive family company, this is the time to build the team for the future.

Investors:

• For public market investors; it is a time to selectively buy equity and debt. Even if the turning point is at a lower price, some exposure is warranted at current valuations.
• For private investors in turnarounds, restructuring, large scale real estate and private equity; it is a time to access previously unavailable deals at not only good prices but with enhanced decision making power.
• Especially for these private investors it is imperative to build teams and connections that will navigate the volatility now in to a high return future.
• I used to say to foreign investors that Turkey is a good market only with a good investment team that knows how to manage it – the same holds very much true today as well.

Turkey is in a tough spot. With macroeconomic problems, policy responsibility can not be ignored. Nonetheless even under adverse policy conditions, it is the responsibility of the private sector to make good micro decisions. There are companies with excessive fx short positions and others in the same sector are fully hedged. There is oversupply in construction but some builders have manageable inventories while others have significant excess. Energy sector was badly hurt by regulatory pricing decisions over the last 5 years but debt profile of players and thus their endurance is not uniform.

All these companies faced the same macro conditions but what were the differentiating factors that led some to make much better choices?

It was the managerial talent and shareholder vision that made the difference. Other factors like balance sheet strength, path dependency, luck and politics did of course play a role – but to a lesser degree.

Most of the time the biggest impact makers are shareholders & boards with a vision for future, advocating accountability and incentive alignment, choosing the right professionals and providing good oversight. Then it is the turn of the professional management in running the company with a clear perception of the multitude of stakeholders involved.

I have observed that bad managers try to make rich shareholders, while good managers make valuable, sustainable and relevant companies.

The macro will reign supreme and more problems can come our way. But every storm dies one day.. Those with the right governance structures and have made decisions like those outlined in this piece will be the most likely set of future success stories.

September 2018, İstanbul