With inhospitable capital markets and weak demand hurting finances, corporate pruning efforts to free up cash are in full swing. Witness energy giant Mirant Corp.'s pledge to slash its already slashed capital spending budget for this year and next, Deere & Co.'s plans to further slow heavy equipment production, and DaimlerChrysler AG's three-year cost-cutting initiative, which is at the halfway point.
But can such companies cut costs without destroying their capacity to exploit growth opportunities? At this point, that's impossible to predict. Yet a new joint study from Ernst & Young and Cap Gemini Ernst & Young offers grounds for optimism.
The study, entitled "Business Redefined: Generating Returns," is based on the opinions of more than 60 CFOs and financial executives from three industries hard hit by the economic slowdown -- telecommunications, technology, and media and entertainment. It suggests that executives aren't blindly wielding a corporate machete, which bodes well for growth in cash flow.
To be sure, the study finds that senior management is counting on CFOs to restore the basic financial discipline that was abandoned during the last phase of the 1990s bull market by focusing much more closely on projected returns. More specifically, finance chiefs are likely to make smaller investments pegged to shorter return cycles, says Stephen Almassy, Ernst & Young's global vice chair of technology, communications, and entertainment.
But the study also indicates that astute CFOs aren't likely to make blunt, across-the-board cuts. Instead, they're more likely to "polarize" investments; that is, to focus on "either infrastructure or customers--not both," notes Billie Williamson, national industry leader for technology at Ernst & Young.
The study also indicates that companies are not likely to shed valuable assets to raise cash for debt reduction. "Companies cannot cut assets that are catalysts of free cash flow," declares Williamson. There are always exceptions, of course. Carol Levenson, director of research at Chicago-based Gimme Credit, a research service for institutional bond investors, cites Lucent Technologies's recent decision to sell off its optical fiber solutions business.