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Since last August, Chairmen and Chief Executives have been watching the events unfold and trying to assess what implications the credit crunch will have for their businesses.

Whilst bankers, in their lobbying for Government support, have repeatedly used the phrase "unprecedented and unforeseen", I have not met many Chairmen or Chief Executives of non-financial businesses who share this view. Indeed, when I think back over my meetings in the last three years, there was not a single lunch at which we did not talk about the buoyant conditions that prevailed and on almost every occasion, the conversation included the observation that much of the buoyancy was fuelled by the cheap and almost unlimited availability of debt.

Plenty of figures were being released about the high level of consumer debt on credit cards and the price of property, fuelled by cheap and plentiful mortgages, seemed to be defying gravity. Companies with perfect strategic fits could not consolidate amongst themselves but rather were falling to private equity bids, financed by eye watering levels of debt.

The signs that the credit market was losing touch with reality were there for all to see but when things are good, the temptation is to enjoy one’s champagne and lobster rather than dwell on any future unpleasantness.

As revealed by the then Chairman of Citigroup’s remark about the situation being complicated when the music stopped but as long as the music was playing one had to get up and dance, there were plenty of bankers who knew perfectly well that it was going to end in tears. However, the remuneration structure of financial institutions and short term pressures from shareholders meant that many were quite happy to go along with it.

A classic example of pressure from shareholders was the castigation of HBOS by analysts and fund managers for not keeping up with the brilliant Northern Rock just months before Northern Rock imploded. It was not dissimilar to Marconi being applauded for jumping on the TMT band wagon right until the moment it collapsed.

The banks are now paying the price for enjoying the music a bit too much and dancing until rather late. Private equity companies are now going to have to earn their money because they may not simply be able to bid for ever bigger companies and win almost every auction. Corporations with genuine strategic and synergistic benefits will be able to bid for companies and have a realistic chance of winning. Many property companies have seen their share prices fall by 50% over the last few months.

Overall, from the conversations that I have been having with Chairmen and Chief Executives of non-financial businesses, we are in for a tough time but things are manageable.

At the peak of the last cycle, the markets were never going to slow down because the internet and technology had created a new paradigm. On this occasion, the markets were never going to slow down because banks had found a way of eliminating risk from lending. The prosaic reality of life seems to be that economic cycles are still with us as they always have been and that sectors which appear to be walking on water during the rise of the cycle are likely to suffer the most during a correction.

Samuel Johar is Chairman of Buchanan Harvey & Co., a board level search and evaluation firm.


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