Post-COVID business world – a total restructuring?
WRITTEN BY RAM RAMAKRISHNAN PHOTOGRAPHY BY JAMES YAREMA
As of January 2021, vaccines are being deployed across the world. Soon the lockdowns will end but can we expect to go back to the business world we knew before the pandemic?
Previous major geopolitical and macroeconomic shocks have brought forth dramatic changes in the business world. For example, the 9/11 attacks and the dot.com crashes at the turn of the millennium saw the rise of Asian giants – Samsung in Korea, Infosys in India, and Koç in Tukey. The 2008-9 Great Recession saw the rise of tech companies and a boom in corporate sectors of China coincident with falls in the same sectors in Japan and Europe. China now has more companies (124) in the Fortune Global 500 than any other country. The previous shocks could not have predicted the changes in global business that followed.
How will COVID-19 lockdowns impact the business world in the next few years? Social distancing and restricted movement Post-COVID business world – a total restructuring? have affected certain industries deeply, but we know some of these changes may be more permanent than others. It looks like the drastic short-term falls in airlines, movie theaters, hotels, and tourism services will recover. Consumer demand is likely to bounce back when it is safe to engage in travel and entertainment. On the other hand, increased online shopping and online education offerings (early age through university level) – which have been a mainstay of the lockdown months – are here to stay. The bump in brand-name consumer product sales (like P&G, Clorox) should fade. For the purpose of this essay, I will review the changes we are seeing in two areas: financial markets and the data revolution.
The COVID-19 economy is a paradox; most countries saw dramatic drops in GDP in the first 3 quarters of 2020 (except China) and over 2m people have sadly lost their lives. Simultaneously, several industries and sectors have prospered. One can understand the boom in the prospects of lockdown related firms (e.g. Zoom, Moderna) but the 60% growth in the valuations of FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks in 2020 is inexplicable. Tesla going up 740% in a pandemic year with driving vastly reduced is a puzzle.
So, how did global financial markets have such a remarkable year in 2020? Though the COVID-19 pandemic sparked the worst crash in a generation, stimulus measures and vaccine breakthroughs have sent stocks roaring back to record highs throughout the globe. Most indices throughout the world (S&P, Sensex, DAX, Nikkei) are up over 10% (FTSE is an exception). In a year in which at least 90m people were infected with the coronavirus and unemployment soared, world stock markets ending 2020 up 13% – despite the latest surge in cases forcing further lockdowns over winter.
In spite of COVID-19, 2020 has had the highest IPO (initial public offering) activity since 2000. The valuations of Airbnb, Palantir, or Doordash are in the stratosphere. It looks like the capital markets are seeing far beyond financial statements. With firms that have done well in the lockdown phase (Robinhood, Bumble, Instacart, Nextdoor etc.) waiting to enter the equity markets, it will be interesting to see if the surge continues in 2021. The rise in ‘IPOs’ of blank check companies (with no established business operations, to serve as a vessel to engage in acquisition of unidentified companies) is the biggest trend in capital markets. Also called SPACs (special-purpose acquisition companies), these firms constituted three fourths of the ‘IPO’s’ in the US. With wild valuations, the SPAC market is centered in Silicon Valley and has formed its own financial ecosystem. New accounting firms like Marcum and Withum have dominated the traditional ‘Big 4’ firms. Follow-on stock offerings are also way up (80 in the US) in record numbers. Investors will have larger and more expensive opportunity sets. Without a doubt, financial markets have been affected by the pandemic: an acceleration of both private and public market valuations.
The global digital transformation space is estimated to be worth $1.8tn. Data analytics tools, used to understand, track, and reduce the spread of COVID-19, have been moderately successful. Big data analytics and health informatics are changing in the COVID-19 era. Policymakers and general users have been amazed by charts and visualizations produced with big data. The firms that provide the software for data analytics have seen a dramatic increase in interest. MongoDB is valued at $22bn with $462m revenues. Other data analytics firms like Splunk ($24bn), Elastic NV ($15bn) have been followed enthusiastically by market watchers, academics, and investors alike. Last year, Salesforce wrapped up Tableau for $15.7bn. Big data skills adoption is accelerating. There is also an explosion in the scope of related fields like cybersecurity, AI, and IoT networking in most industries. The rise of the smartphone and the revolutionizing of business models in developing countries is remarkable. The world was undeniably hooked on data prior to COVID-19, but time spent communicating and working almost entirely virtually over the past 12 months has sped up its adoption and increased the excitement around digital hubs and tools.
COVID-19 has changed our lives in countless ways: healthcare, families, businesses, governments, and portfolios. Changes in financial markets and digital transformation are just two topics explored here. But the trends within them are ones to watch and, I believe, will be sustained far past this year and the next. I should hope that we are avidly tracking growing financial ecosystems and the expanding use of data long after the vaccines, masks, and stay-at-home orders that have defined the pandemic thus far.
Ram Ramakrishnan
Ram Ramakrishnan is Professor of Accounting at the University of Illinois at Chicago and the Director of Graduate Programs in Accounting. Previously, he taught at the Stern School of Business of New York University, Columbia University, and the Sloan School of Management at Massachusetts Institute of Technology. He received his MBA and Doctorate in Accounting from the Kellogg School of Management at Northwestern University and BTech from the Indian Institute of Technology, Madras. He consults with leading accounting and business firms in the US and abroad, has won numerous teaching awards, and has served on several academic and professional accounting bodies.