Quick Takes, COVID-19 edition: A roundup of news, notes and notions from the NeuGroup Network.
Strategic Acquistions: Waiting for Small Biotechs to Adjust to Lower Values
Here’s some post-meeting follow-up from a treasurer in the biotech industry on his expectations for a “resetting of asset prices” and opportunities for strategic acquisitions as markets gyrate.
“I would characterize it as an emerging opportunity. So far, you have had price adjustments (lower stock prices) for smaller biotechs. But you need two parties to make a deal. What needs to happen in the future is that those same smaller biotechs need to become acclimated to their new prices.
- Right now, many [executives at small biotechs] believe the price will recover as this is a temporary phenomenon; but if the recovery is not a sharp, V-shaped recovery it will begin to impact management’s views on price. Additionally, those without a large cash cushion will not be able to fund using equity issuance. They will begin to feel the pain sooner.
Until the market makes progress on the last two steps, I don’t see immediate deal opportunities. Let’s see how the market moves in the 30-60 days.”
A Treasury Investment Manager Seizes Opportunities, Adjusts for Uncertainty in the Business
The head of global investments at a NeuGroup member company described how his team has navigated volatile financial markets and shared his insights on the phases of financial crises like the one we’re in now. Here’s what he said:
“I think of financial crises in three stages:
- Dash for cash/forced liquidation. Market participants want to own the shortest term, highest quality securities possible. However, it takes two parties to make a trade, if no one is buying, no one can sell – in trader speak “No bid.” No primary transactions occur.
- Illiquidity. Capital markets are frozen or sticky. Issuers can get deals done at a premium.
- Balance sheet rebuilding. Most issuers can access the market to repair balance sheets that were wrecked during the previous two stages.
We were fortunate:
- The balance sheet investments had the lowest duration and highest quality in nine years.
- The internally managed liquidity portfolio (investment-grade corporate credit) had the most assets ever.
- We had significant maturities every week.
- Once we understood there wasn’t an immediate cash need by the company, we were able to take advantage of “dash for cash” and purchase high quality commercial paper at crazy yields; as I recall Boeing was offering two-week CP north of 4%. Those opportunities are fleeting.
We also shifted our money market funds to government-only to avoid the risk of gates.
Over the past two weeks, we’ve seen more normalcy in the markets. We can pick up extra yield by investing in non-marquis issuers. The rating agencies started the downgrade cycle which always provides opportunities.
- For us, the biggest challenge is the uncertainty in the business. Every [similar] company that has announced earnings has given no forward guidance. Due to the uncertainty, we have to stay short and forego opportunities even three months out.”
Back to Work: Not So Fast
Most members on a recent COVID-19 check-in call for NeuGroup’s Internal Auditors’ Peer Group are beginning the process of getting employees back to work. It’s anything but straightforward. Here’s some of what we heard:
- Manage the return. The idea is to “control the process” using a phased or staggered approach, one member said. Another said his company was looking at the process and doing “re-entry modeling.” The current plan at this business is to allow back the most critically needed people—such as engineers—and then go down the chain from there. The main workforce would return in shifts to better manage spacing and social distancing rules.
- No uniformity. This phased-in approach takes on added complexity since companies have to account for different rules in different US states as well as in other countries. India—where many companies have call centers or shared service centers—is almost in full lockdown mode, members noted. So even getting “essential employees” back to work could be a challenge.
- The kid factor. Another member mentioned that in many areas, school will be cancelled for the rest of the year. And since summer camps and other programs haven’t started yet, it might not be feasible for parents to just jump back into work.
- Permanent remote for some? There are also real estate considerations, said one member. The thinking at this company was that in certain places, perhaps remote work made more sense and renting office space was not economically practical. Management is asking, “Can we reduce our footprint?”
The process of companies getting people back to work could raise unforeseen problems. A member of a NeuGroup teasurers’ group recently wondered if the company would be liable financially if a worker went back to his job and then became ill with COVID-19.
Distressed Customers and Other Priorities for a Tech Treasurer
Here’s what one NeuGroup member tells us he and his team are working on in the current, COVID-19 climate:
- Liquidity needs for the rest of the year
- Stress test around liquidity from revenues, expenses, margin compression, etc
- Staying on top of capital markets
- Working with teams on A/R programs for distressed customers
- Forecasting cash needs around the globe
- Analyzing investment portfolios to understand unrealized losses and making adjustment where needed
- And, of course, day-to-day operations