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What are the most effective strategies for conducting industry and sector research for distressed companies?

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If you are an investment banker working on distressed debt or restructuring deals, you need to conduct thorough industry and sector research to understand the root causes, risks, and opportunities of the companies you are analyzing. Industry and sector research can help you identify the key drivers, trends, and competitive forces that affect the performance and valuation of distressed companies. In this article, we will share some of the most effective strategies for conducting industry and sector research for distressed companies.

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罗杰成 Roger Loh

?? 特许会计师 | ?? 业务评估 | ?? 并购咨询 | ? 与初创企业和成熟企业合作

1 Use multiple sources

When conducting industry and sector research for distressed companies, one of the challenges is that the information available can be outdated, biased, or incomplete. To address this issue, it is important to use multiple sources to cross-check and validate your findings. Sources such as industry reports from reputable firms like McKinsey, Bain, BCG, or Deloitte can provide insights into the industry structure, dynamics, and outlook. Additionally, trade associations and regulatory bodies often publish data, standards, and guidelines for the industry and sector. News articles and press releases cover the latest developments, events, and issues affecting the industry and sector. Academic journals and books offer theoretical and empirical frameworks, models, and case studies for the industry and sector. Lastly, company filings and presentations can disclose financial, operational, and strategic information of distressed companies as well as their peers.

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罗杰成 Roger Loh

?? 特许会计师 | ?? 业务评估 | ?? 并购咨询 | ? 与初创企业和成熟企业合作
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In a fast-paced business environment, having access to the latest information is key. Utilising the latest news articles, press releases, and regulatory publications is more relevant to keep the analysis updated with the most recent developments.

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2 Focus on the critical factors

When conducting industry and sector research for distressed companies, it can be difficult to sift through all the information available and determine what is relevant. To make the process easier, it is important to focus on the critical factors that have the most impact on the financial distress and recovery potential. These factors include the life cycle and growth rate of the industry, which indicate its maturity, stability, and attractiveness; the structure and competitive intensity of the industry, which determine profitability and market share; the drivers and trends that influence demand, supply, and innovation; as well as any risks or opportunities that could create threats or openings for industry players.

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罗杰成 Roger Loh

?? 特许会计师 | ?? 业务评估 | ?? 并购咨询 | ? 与初创企业和成熟企业合作
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For a distressed company, my initial focus is on macro factors, such as the industry outlook, to ascertain whether the distressed company operates within a sunset industry. Following this, I would delve into the competitive landscape, examining the level of competition and market share dynamics as they significantly influence a company's profitability and sustainability. Lastly, I would scrutinise key financial metrics, including liquidity, solvency, and profitability, to gain a good insight into the distressed company's financial standing.

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David Hope

Area Manager Corporate Property Finance, Central North Island & South Island, Institutional & Business Banking. Westpac New Zealand. NZ Institute of Directors (Associate)
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Consider also management and leadership capability. It’s people making recommendations and decisions that can cause company stress. Often the “big project” is promoted as they way to move the company forward and this proves disastrous. Lack of diversity in decision making, not bringing enough options to the table to debate or not testing financial assumptions by requiring presenters back up with actual data.

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3 Apply analytical frameworks

Conducting industry and sector research for distressed companies is a vital skill for investment bankers that can provide sound advice and solutions to their clients. A challenge of this research is that the information available may be complex and ambiguous, so you should apply analytical frameworks to simplify and structure your analysis and findings. For instance, the Porter's Five Forces framework can help you assess the competitive forces and attractiveness of the industry and sector, while the PESTEL framework can help you evaluate the political, economic, social, technological, environmental, and legal factors affecting the industry. Additionally, the SWOT framework can help you identify strengths, weaknesses, opportunities, and threats of the distressed companies and their peers. Lastly, the VRIO framework can help you examine the value, rarity, imitability, and organization of resources and capabilities of the distressed companies. By using multiple sources, focusing on critical factors, and applying analytical frameworks, you can enhance your research to deliver better results.

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David Hope

Area Manager Corporate Property Finance, Central North Island & South Island, Institutional & Business Banking. Westpac New Zealand. NZ Institute of Directors (Associate)
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Consider also using Du Pont analysis. Even though it dates back to 1914, it’s still one of my key tools for figuring out what is happening in a business and very useful if things aren’t going well and it’s not immediately apparent why. Du Pont is when you split out the components of ROE (operational efficiency, asset use and leverage) so you can assess what activities contribute most to ROE thereby being extremely useful as a tool to compare one say well performing business with another say less well performing business.

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4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the most effective strategies for conducting industry and sector research for distressed companies?

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1 Use multiple sources

2 Focus on the critical factors

3 Apply analytical frameworks

4 Here’s what else to consider

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