Managing turbulence
Saturday, October 25, 2008
During this credit crunch, we need to do more than just perform profitably to impress investors, says CapitaLand CEO in an e-mail he wrote to his colleagues recently
Liew Mun Leong
President and CEO,
CapitaLand Group
DURING the current turbulent times it is all the more crucial to keep close communication with the company’s employees about what is happening around the world and how it is affecting the company. Clear, honest and transparent communication will help a lot in managing their psychology and at the same time gain better understanding and support from them. Two Sundays ago, I wrote an e-mail to my colleagues with this purpose in mind. An edited version is reproduced below:
Dear Colleagues,
The current global financial crisis has been deteriorating rapidly. It happened so fast, and no one can believe how quickly Wall Street blue chips like Bear Stearns, Fannie Mae and Freddie Mac and Lehman Brothers have fallen. Even savvy and smart financial global giants like AIG, Goldman Sachs, Morgan Stanley, and Merrill Lynch have needed bailouts or buyouts. The ‘theory of common happiness’ which infected the world just a year ago is a sharp contrast to the fiery turmoil engulfing international financial markets today, turning the theory into one of ‘common misery’, globally.
Understandably, CapitaLand’s share price has also not been spared. It is very apparent that the drop in share prices in the stock market has been across the board, across the world, indiscriminate, and not company-specific. As a large real estate company with investments and operations in the Asia Pacific, Europe and the Gulf, CapitaLand is naturally affected by these economic ups and downs, even if these are unrelated to the company’s fundamentals. As a highly-liquid blue chip company, we are a likely candidate for redemptions by hedge funds and other investors looking to realize their gains.
Notwithstanding the share price drop, how we, as a company, withstand the current global financial crisis depends on how strong we are financially.
During this credit crunch, we need to do more than just perform profitably to impress investors. Investors want to see our balance sheet - how liquid we are? How are we managing our debt, especially short-term debt? How much cash are we holding? Indeed, we have a very healthy balance sheet which is stronger than ever before. Our debt and liquidity have been pro-actively managed long before the present crisis. As at 30 June 2008, the Group had S$3.4 billion of cash, excluding additional proceeds from recent divestments in the last few months. On a proforma basis, assuming these divestments were completed on 30 June 2008 and all things being equal, the Group’s net debt-to-equity ratio would have been 0.43 as at 30 June 2008. I believe we are one of the lowest geared Singapore property companies. In addition, our private equity funds have undrawn commitments of S$2.2 billion.
Call it ‘blessings in disguise’. We were outbid on several projects, including the two integrated resorts, the Marina Bay Financial Centre sites, the Beach Road/former NCO Club site and the JTC privatisation project. All these multi-billion dollar undertakings would have weighed heavily on our books had we been successful.
Instead, we are in a favourable cash position to ride out the current credit and capital market turmoil. Indeed we are ready to seize opportunities in this capital constrained environment, looking out for distressed assets and companies to collaborate with. We are in the enviable position of being able to ‘plant seeds’ during this down cycle. Similar seeds were planted during the 1997 Asian Financial Crisis: we acquired Furama Hotel to build AIG Tower in Hong Kong, developed the Canary Riverside project in London’s Canary Wharf, resurrected Raffles City Shanghai as well as bought and refurbished the half-completed Capital Tower Beijing. These developments have since been monetised to prepare us for this latest cycle of opportunities.
In fact, our former board member Andrew Buxton commented that CapitaLand’s management has been ‘actively managing its balance sheet’ all these years. This active capital management has always been misunderstood as either hollowing out, or as exceptional one-off transactions that are not seen as part of our business strategy. We have been aggressively managing our property transactions - divesting and acquiring, and expanding our business in the process.
‘Disciplined aggression’
At all times, we have been prudent and disciplined with our investments. Gail Fosler, President of The Conference Board and one of CapitaLand’s International Advisory Panel members, recently used the term ‘disciplined aggression’ to describe companies that proactively and prudently manage their business. I think this term captures the essence of our investment management strategy accurately.
Someone asked me whether during today’s financial climate, a company could save a troubled balance sheet. Clearly, it is too late for a company currently in such a predicament to take corrective action. Banks are resistant to lending to anyone, even to one another. Recently, I read an article where an American industrialist said, ‘Unless you have more cash than you need to borrow, they (local banks) won’t do business with you.’ Sounds counter-intuitive, but it’s true.
In his book ‘Managing in Turbulent Times’, Peter Drucker advised that in such a volatile environment, management should go back to the fundamentals of business and stick to the basics. We intend to do just that. Our corporate strategy has been planned for ups and downs and can be captured in three simple words: Focus, Balance and Scale. We will continue to focus capital and human resources on our key sectors of residential, retail, commercial, integrated developments, hospitality and financial services. We will also remain balanced in our investment approach and will continue to maintain scale and scalability in our business operations.
In particular, we are ‘long’ on human resource investment. People is the most important asset in our company. We continue to ‘hire and fire’ in good or bad times. In bad times we will continue to hire as there will be a wider pool of talents to attract. We manage our people the same way that we manage our balance sheet. If you have not managed your balance sheet well consistently then it is too late to repair it during a crisis. The same goes for human resource management. Talent management is about being rigorous but not ruthless.
I am often asked what we plan to do with our accumulated cash. We will continue to build up our cash position even though we have currently secured S$3 to $4 billion. We will watch the distressed market very carefully, seeking out opportunities but not investing hastily, asking questions: It may be cheap but is it a good asset? Is it going to be part of our focused strategy? Can we add value to it?
We have weathered two crises - the Asian Financial Crisis in 1997 and a prolonged one in 2001-2003 after our formation in 2000. Both times we emerged a stronger company and further extended our leadership in the real estate sector. We are riding into this latest storm with a much stronger ship and a more experienced crew, and on course to enter the next growth cycle.
An eminent US economist Paul Romer once said, ‘A crisis is a terrible thing to waste.’ Yes, provided that in trying not to waste the crisis, you do not get in it yourself. We are mindful of that.
Source : Business Times - 25 Oct 2008
Loading ...