What CFOs Need to Know About Inflation, Tariffs, and Capital Markets

Read a transcript of the discussion below.

PAM YEE: Excellent. I'm going to get us started. I know some people are still joining, but welcome to today's webinar on macro trends. My name is Pam Yee. I am the Americas leader for Bain's CFO practice. I'm a partner based in Washington, DC.

If you've joined us before for one of these—one of our virtual events, this is part of a larger series of virtual and in-person events that Bain hosts for CFOs throughout the year. And if you've joined us before, you know that we normally pick a current topic relevant to CFOs. And I would say there's probably no more timely or relevant topic for CFOs today than the state of our global economy.

So today, we all know we are in very much a real, 24-hour news cycle with daily changes, it seems, on tariffs, policy, consumer confidence as well. And for CFOs, we've picked this topic, especially because we know that that uncertainty makes it incredibly hard for you all to plan, but also harder to help steer your companies on strategic topics like M&A and capital allocation.

Given the large number of questions we received, just in preparing for this session, we decided to make this a Q&A format. So I will start with a set of questions we hear often that we've received as part of the run-up to this event, and then we will take some questions from the audience. So you are welcome to submit these questions—any questions you have throughout the dialogue or now, even, through the Q&A function on the Zoom window there.

So let me start and introduce our two speakers today. I'm joined today by Karen Harris and Tim Ingrassia. Karen is the Managing Director of Bain's Macro Trends group. She is an expert on global economic trends and a member of the community of Chief Economists for the World Economic Forum. She's also actively engaged with the Council on Foreign Relations, the National Committee on US-China Relations, and the Economic Club of New York. You likely have seen some of Karen's insights, either on Bain publications, but also in The Wall Street Journal and the Financial Times, and the Harvard Business Review.

And our second speaker today is Tim Ingrassia. Tim is the Co-Chairman of Global Mergers and Acquisitions at Goldman Sachs. He brings over 30 years of experience in M&A and strategic finance. He's advised on some of the most complex and largest and high-profile transactions across industries. And in addition to his client work, he also serves on Goldman's Investment Banking Division's Client and Business Standards Committee. So fantastic speakers, Thank you to Tim and to Karen.

OK, let's get started because we have a lot of questions. I'm sure we will have questions come in as well. And I'm going to start with what I will say is the broadest view of the macro environment. And I will say most of the questions we received—most of the questions that I get on a daily basis from our clients is some variant of just, what the heck is going on, right? How do you make sense of all the economic uncertainty that we have?

And maybe Karen, I will start with you there. Just, at the highest level, your response to that broad question of, what the heck is going on, given what feels like a lot of uncertainty. Is anything certain right now?

KAREN HARRIS: Most broadly, what we see happening—and this is outside of the strict economic sphere—is that the Trump administration is trying to reformulate the global trading and economic system from one where the US has a large current account deficit, is the consumer of last resort for—or the first resort for—many companies and economies, to one that achieves three strategic aims.

Those are balanced and what he terms, fair trade, and re-diversification of the US manufacturing base, and improved national—or an emphasis on—national or domestic security. And all of those aims are interlocking.

Tariffs are certainly one tool he is using, but we find that lens helpful because for example, it looks fairly puzzling for a US president, his first day in office, to declare that he is going to put tariffs on our two closest neighbors who are involved in a robust trade agreement.

And in our view, that is more of a signpost of pushing, A, pushing the US border, in effect, to the North of Canada and the South of Mexico. It's a security aim. And it's a club, essentially, to get Canada and Mexico in line with US policy and trading policy towards China, in order to achieve some of the other aims.

And this is not an endorsement of the effectiveness of these policies. It's an observation that that's the strategic intent and that this is an administration that has very strong intent, as stated directly from Trump, from Scott Bessent, the secretary of Treasury, and others in this, but that the policy to get there is very volatile and uncertain.

And so we see tariffs for less than half a day on Columbia over an immigration issue. We will see attempts to achieve that—we will see that, perhaps, tariffs won't work. And we may find ourselves in an environment where there are increasing capital controls, as another way of getting at trade balance, for example—some very dramatic changes.

But all of that is with a line of sight to a big break in the system, a set of strategic intents, a high tolerance for chaos and volatility in the near term. And I guess one last comment for the CFO crowd is he will not, in our view, be constrained by markets, at least not quickly, in this particular period.

In the US, equity concentration is a driver of spend, not only for the top 20% of consumers. That's not the audience that Trump is speaking to here. Of course, a stock market correction because of that correlation, will have a very near-term impact on economic performance. It could certainly drive a slowdown, possibly a recession, given that that group of 20% consumes over 50%—it was accountable for over 50% of US consumption. But that's not the target market.

So the self-soothing that's going on where, surely, markets will constrain him, or that there is so much chaos, there's no tolerance for it, I think is misguided, given the clarity, at least now, of the intent that's been stated.

YEE: Yeah, I've heard you describe that, Karen, as you can't predict what he's going to do day to day, but he's told you exactly what he wants to do. The strategic intent and the goal, the outcome, if you will, that he would like is clear. Tim, maybe you comment to that. And just what are you seeing in capital and deal markets as well? I mean, are you seeing companies get buyers and sellers? How are they reacting to the uncertainty?

TIM INGRASSIA: It's an easier question for me to answer because I don't have to predict outcomes. I can simply observe that the volatility, the daily volatility, the uncertainty, the unpredictability that has been imposed makes tomorrow a better moment than today for lots of decisions.

There is a sense that the uncertainty level is high right now, and at some point, the uncertainty level will be muted or normalized as we work through whatever this impact of change may be, or change on change or advance and retreat, whatever else might occur.

M&A is a very interesting space for a couple of reasons. The first is that almost all M&A requires a volitional seller, someone who's chosen that now is the moment for them to sell the future value of a business.

And sometimes that's based on, I simply have to do it. I have an activist. The founder died. Change in management. Change in business dynamics. A need for capital in another part of my portfolio, that I simply need to raise capital, and a way to raise capital is M&A.

So that's the bread and butter of M&A. That's always going to be with us. One of the best predictors of M&A is capital spending. They follow the same cycle for the same reasons, when people need money, when people invest money to generate returns.

But the peaks of the M&A market are almost always a byproduct of sellers choosing that moment, as opposed to a different moment, to transact. And right now, we're just at a moment where for most sellers who fall into that volitional category of M&A, it just feels like you'll understand the future better. You'll understand the ground rules better months from now, weeks from now, years from now, as opposed to racing into a deal right at this moment.

So we had been anticipating a more material uptick in M&A this year, largely because we're still indexing below pre-COVID levels. And there is a backlog of M&A from a slower last couple of years, when inflation and other issues, high interest rates and other issues, muted activity.

We now think that will still occur, but it will occur more slowly. So think of this year as treading water to slightly better than last year, as opposed to what I might have told you three or four months ago, was expected to be a much more material uptick in activity this year.

YEE: I'd like to touch—Tim, you mentioned capital, and M&A following capital or the need for capital and capital expenditures. Karen, one of the things I've heard you talk about before is just a shift of cap from chip to capital rationalization, from what we've been in an environment of years of capital super abundance. We'd love if you could expand on that, that shift and what that may do to where constrained capital will flow.

HARRIS: Sure. Structurally, the environment of that trade imbalance is, definitionally, also one of capital imbalance. It's an accounting formulation. But we've seen the growth of the financial economy that's vastly outstripped the growth of the real economy for decades.

So if we start in the early '70s, at the end of Bretton Woods, we had total financial assets globally as about a three to four times ratio for real GDP. By 1990, that was six and a half times. By the financial crisis, that was closer to 10 times. It popped up to 12 to 14 times during the height of COVID stimulus. And now it's probably still in the low double digits. So that is a quadrupling of the financial economy relative to the real economy.

And the creation of that imbalance came from a variety of sources. One is the basic—is, of course, the end of Bretton Woods, regulatory changes, technology, financial engineering—but also structurally, an oil-based economy, where countries that had big reserves of oil also had a high savings rate because there's only so much money they could spend or chose to spend, which created big sovereign wealth funds, and probably most critically, the export-led growth strategies that started in Japan and then the Asian Tigers, and has really been perfected by China, which is a strategy of suppressed household income, subsidized capital going into a manufacturing flywheel.

Vast oversimplification, but part of that strategy necessitated managing the currency appreciation—keeping a lower currency rate, foreign exchange rate—to keep exports competitive, which necessitated buying financial assets in other countries, largely the US—to some extent, Europe.

And this created pools of capital for investment. There are, again, a few other factors that are unwinding there. The end of a fully fossil fuel-based economy means more even distribution of energy. But more importantly, US onshore has rebalanced where oil has come from, with the US as such a large supplier.

Demographics have meant that that group of savers that were the pre-retirement baby boomers are now, if not spenders, at least not accumulating wealth, depending on the wealth that they've accumulated. And so all in all, we are seeing the unwinding of that rapid growth of financial assets that we saw that characterized the globalization era.

If Trump is successful in balanced trade, then we also see less capital being accumulated. That is a necessary balance there, which is why I say if tariffs don't work, capital controls are another weapon or tactic that might be explored.

With that slowing growth of global capital, what does that mean? Well, supply and demand—it says if we have the supply that is more limited at a time when demands for capital from supply chain restructuring, reshoring, automation, that is absolutely critical for US, Europe, and China as their working populations decline, energy transition, investments in utilities for generative AI—the shopping list is long, and the supply of capital is not expanding at the same rate—that just tells us that we'll have a structurally higher interest rates in this next cycle, regardless of policy.

That's not to predict a specific level. But we're looking at higher rates and maybe an economy that looks more like the mid '90s in terms of where nominal rates hit, with the inflation versus interest—with real rate component of that uncertain. That will be a policy choice about how hot central bankers want the economy to run versus how much real rates sit on top of that.

So we're moving from a world that was structurally deflationary in globalization, in massive onboarding of capacity and structured the suppression of labor and wage rates as production moved to China and so forth, to one that is structurally inflationary, which creates a different set of policy constraints and opportunities.

It's much easier, for example, to have zero inflation where inflation is pushing upwards because you have the real rate component. Now, there are other knock-on effects of that. Again, advocating but observing that in a structurally deflationary world, it's very difficult. There's the pushing on a string monetary policy and negative real rates that results from that.

So it's a very different world, but definitely one where we expect to see structurally higher rates than we saw in the prior cycle for all of those broader and longer term reasons.

YEE: Yeah. Tim, would love your reaction, whether you agree on Karen's view, I guess, on long term—on where we're headed from it, from a rate and inflation standpoint, and then would love your comment on private capital as well.

INGRASSIA: Yeah, there's so much to unpack in all of that. And I've had the luxury of joining the merger department at Goldman Sachs in 1986. And so setting aside cycles and peaks and valleys, the characterization of my entire career in finance has been increasing globalization, where the single biggest winners of increasing globalization were US large caps.

We were better at globalization than any other economy in the world—the companies of any other country in the world. So that's one observation. That is clearly changing. We're going from globalization to regionalization. And maybe it gets even smaller than regionalization. That's a big change.

Second is over that entire time period, again, subject to whatever the cyclical moment was, largely decreasing cost of capital, largely decreasing interest rates.

I think most of the world didn't focus on just how impactful the great financial crisis was—the Great Recession in '08, '09, and how long low rates were required to move risk onto government balance sheets and take advantage of a lower cost of capital.

And so we've got this sense that those curves that kept going, in terms of cost of capital and interest rates going down—what is normal? Is normal a 2% 10-year treasury? Is it a 3% 10-year treasury? Is it a 5% 10-year treasury? Those have real implications for valuation.

And if you thought about a 35, 40-year trend of declining cost of capital, the implication of that is future cash flows are worth more. And so you've got appreciating asset values, asset values that appreciate faster than growth in earnings, multiple expansion, for lack of a better phrase. And we may be entering a phase where we go the other way.

Now, US was better at globalization that almost anyone else. But US is worse at thinking about currency as the last dial in how to think about values and cash in cash flows because we've been spoiled by being the largest economy in the world where everything is priced in our currency.

And I think the other wild card here is people are going to have to get better at thinking about not just what is the cost of tariffs. What's the implication of tariffs and interest rates on currency if you're operating in multiple jurisdictions, or if you need to sell or to purchase things from outside of your home region or your home country?

So again, I think there's going to be new tools, new thoughts. And I'm always an optimist. And the core of the global economy is US employment and the US consumption.

Great thing about the US is most people spend all the money that they make. There's some exceptions to that. Elon Musk can't quite keep up, I guess. But most people spend all the money that they make. And so if we don't have an interruption in demand for labor and supply of labor, I think the economy is just far more resilient than any of the sky is falling crowd might believe.

We're still very optimistic. We're just not as optimistic as we were four months ago. But we're still very optimistic about the US economy, and because of that, frankly, the global economy.

Now, let's roll that over into M&A. If I think rates are going down, I actually have an advantage as a buyer negotiating a deal today and funding it at lower rates in the future. So that was an incentive to move faster.

If I don't think rates are going down, that last push for the buyer to lean in doesn't exist in quite the same way. So now we're back to strategy and timing, availability of assets.

You talked about private capital as well. I think we've also had a material change in the capital markets that's worth paying attention to as well. When I started, there were 8,000 US public companies. Now there are 4,000 US public companies. The growth of permanently private entities—most businesses that PE owns will be owned privately forever. They won't be sold through a strategic and they won't be taken public.

So you've got the growth of whole new categories of capital. And that breaks one of the other rules that I've always observed in my career, which is that cash flows downhill towards the lowest cost of capital. Private equity is not the lowest cost of capital. It's a high cost of capital.

And that's a really interesting observation, that we've interrupted that run of cash flows, finding the lowest cost of capital, because for huge swaths of the economy, they are burdened with future cash flows being owned at a high cost of capital. That has some implications as well, that will have to think through over time.

YEE: And maybe I can follow, just on something you touched on, which is the impact on M&A right now. And specifically, are you seeing a shift in cross-border M&A? So there's always a timing of when—when you believe is the right time for a seller to sell, if you will.

But specifically—and we have a lot of people in the audience as well who are not US-based, but they're multinationals. They are selling to US consumers. Karen, would love your thoughts here, too. But are you seeing any shift in either the speed—the flow of cross-border M&A or other deal activity?

INGRASSIA: Yeah, so we used to measure cross-border as flows from one country to another country. And if you look at that definition, the peak of cross-border M&A as a percentage of total M&A was 2016. And since that time, largely because China out has effectively trickled to almost zero—I mean, it's not quite zero but it's almost zero—that's come down pretty dramatically.

But if we redefine cross-border and say, let's just look at cross-region. Germany buying in France counted as cross-border. But we might all decide that that's not really cross-border. It's still in the same neighborhood.

We've seen really stable activity for the last couple of years. And I think it will continue as stable. I mean, the challenge is companies want to grow. If you're in Canada and Canada's GDP is growing at 1.5% a year, but your job is to grow your EPS at 7% a year, you're going to find a way to spend money where you can access new places to grow, take your expertise, skills, whatever else it may be. But I just think more of that will be intra-region rather than cross-region.

HARRIS: Tim, it's interesting, the comment that you're making about intra versus cross. And we agree, in principle, that there'll be much more—that companies will think in a much more limited way about where they can and should operate. But part of what Trump and, frankly, Xi in China is trying to do is create different risk profiles for different regions, out of strategic necessity.

And I'm curious—one of the things that we're hearing—and you talked about the uncertainty. And we operate in a longer time frame, so we're not looking in year, necessarily.

But a lot of the companies we work with have bets on the table in places that look or there are options that look out of the money. And if you're a European company, for example, and the US market is important to you, it feels like a mistake to let a window go by, to not be behind that walled yard that Trump is trying to create, for example.

And so I wonder if we'll see an uptick in M&A, even if the average of the broader market indicators might not indicate that, because—out of strategic necessity, as companies need to rearrange to create resiliency that they need to divest; they're looking to buy options. Have you seen anything like that so far?

INGRASSIA: No. Look, from your lips to God's ears, it all sounds like it makes sense. We're not seeing as much of it as we were. That doesn't mean it won't happen. It doesn't mean it shouldn't happen, because it all sounds very logical.

Look, for the big holes—we measure M&A in dollar terms. We tend to. And the M&A market is below where it was in 2019. So I also like to look at last normal. COVID was weird. It'll be studied for a long time. We'll never do it again the same way that we did it the first time. But COVID was weird.

So if you look back to last normal—I'll call 2019 the last normal. And we are indexing below 2019 in dollar terms.

But if you think about measuring things in dollars, time value of money, businesses grow. Earnings grow. Market valuations grow. The value of the stock market has doubled since 2019. We're indexing at 85% of 2019 M&A levels.

You could argue that that means that we're actually operating at half of 2019's levels. So that outbound investment—one company buying another company, future cash flows changing hands—its footprint is as small as it's ever been.

We measure M&A as a percentage of GDP. We measure M&A as a percentage of public market caps. We are operating at, by far, the lowest level that we have in 40 years, in dollar terms divided by things like GDP.

And there's a bunch of reasons for that. Some of it is demand for internal capital spending. But the biggest holes are health care, large health care deals, tech, large tech deals. Tech has regulatory challenges, but mostly, tech is now dominated by an internal AI investment cycle. The top five tech companies will spend $1 trillion on CapEx over the next five years.

Tech is no longer a human capital game or even a software game. It is a physical capital game where there is a race to build moats. And those moats are metal and chips and data centers and on and on and on and on. But $1 trillion—there aren't three governments in the world that could commit to spending $1 trillion. But collectively, five companies can commit to spend $1 trillion.

So some of the energy in tech—and there's always exceptions. You saw the Google–Wiz deal. There's always exceptions. But they're consumed with what's changing in their world and the need for capital against that.

And look, health care had a hell of a run. But health care has got its own uncertainty. And the imbalance between US profitability and the global value of health care earnings in the United States versus the rest of the world doesn't lend itself to cross-border transactions in the same way that other sectors might because if you're good at something here and you earn a 95% gross margin, it doesn't mean that you can earn the 95% gross margin someplace else on the same product. So those two, independent of all of the macro things we've talked about, have their own challenges.

We talk about regulatory relief in the Trump administration. And I think both tech and health care don't know what their regulatory relief will be. Banks are getting a ton of regulatory relief, so good for us. But I think it's just not as obvious, in some sectors, how that will play out.

HARRIS: It's interesting that—if we play forward, that the implications on tech, that is one of the places where the world is pretty bifurcated from a regulatory point of view, that China and the US are trying to create—to decouple what you can do with technologies.

There may be applications for AI, but where that data can get stored and how intermingled it can be will have big—I don't know if I'd call them moats, certainly not in the way that you were meaning from an investment point of view—but real walls. And that, again, has implications for where and how people need to operate.

What's fascinating—and I know Pam has another question for us. But what's fascinating for me, listening to what you're saying, contrasting 2019 to today, is to do nothing—if you believe that, as we do, that the global system is shifting, that it's moving from globalization to post-globalization, that we have structurally higher rates, that there will be much more interference in terms of legal, from tariffs and other non-tariff interventions to change that economy—that if you don't shift your strategy, then you're doubling down that you were right when you put that into place, whether that was three or five years ago.  

So that's saying, our predictions for the way the world is going are stable enough that we are just going to leave our chips on the table and keep moving. And I just find that hard to believe that most CEOs really feel that way. So you mentioned upfront that uncertainty about the environment. But I think developing some conviction around that longer term narrative will give you—there are some  marching orders that come into place now, regardless of that volatility.

INGRASSIA: Yeah, no, I think that's right. Let me introduce one more topic that, certainly, the public company CFOs on the call will be familiar with, which is a trend among investors, driven largely by activists, to believe that the single most important thing is focus, and that focus outweighs growth. Focus outweighs diversification. And focus outweighs cost of capital and cost of capital advantages.

And so we live in a world where J&J is told that putting pills in a small plastic bottle and selling them in the front of a CVS is too wildly different than putting pills into a little plastic bottle and selling them in the back of a CVS. And therefore, they should spin off their OTC business, and they get smaller.

And the weighted average cost of capital of the system goes up because the benefit of focus or the benefit of investors diversifying is going to outweigh the obligation of managers to grow. And that creates challenges for the M&A market because now you've got CEOs who believe they can only buy things that fit perfectly.

And by the way, maybe 100% of it has to fit perfectly. Buying something that half of it fits perfectly, but half of it doesn't fit—well, I don't want to have to deal with the tail risk or whatever else it might be. And so I think that's had an impact on M&A and M&A volumes as well.

We cheat. We count spinoffs as M&A. That's silly if you think about it, because the definition, to me, of M&A is a buyer and a seller negotiating and agreeing on a value. There's no other side to a spin-off. You just—here, shareholders, take it.

And you might have been right in what you think it will trade at. You might have been wrong in what you think it will trade at. It doesn't matter. You're just separating and giving it away. So when I look at the M&A statistics I always take the spin-offs out.

But I think that issue—because of course, the other issue of fitting perfectly is that's where you run into regulatory challenges. Fits perfectly, is a synonym for, some antitrust regulator somewhere in the world probably should pay attention. And that's a global market, now—regulatory approvals.

We represented Hutch on the port deal, selling it to BlackRock, where the first time in my career there was a negotiation with the president of the United States prior to the announcement of a deal, as opposed to what's always been history, which is you announce your deal, and then you file for approvals. You go get the blessing before the fact. That's a big change.

But he's not the only one who has to approve that deal. There's lots of regulators around the world who will need to approve that deal. So we'll see.

YEE: That example, Tim, you bring up is doing differently. And again, it's probably unheard of, at least. And I don't deal in the same markets that you do. But to hear of going to the president first, if you will, or if not first, at least, early on.

But I want to pick up on that thought and Karen, yours too, because I think one of the most surprising things that we heard from CFOs in preparing for this session is that this idea of waiting—waiting, do nothing, or at least staying the course—because 60% of the CFOs that we surveyed before this indicated that they're not making significant shifts in capital expenditures. And 40%, they were not going to shift their capital allocation either.  

And I was surprised by that. Would love to know both of your reactions to both of those facts. And are we really in a wait, stay the course, or is there—and maybe I'm leading you a little bit. But maybe, is there a more prudent or wiser or more aggressive thing that CFOs should be considering now?

HARRIS: Well, I can start. I mean, from Bain's point of view, from a strategic point of view, one thing we've observed in decades of research is that companies that make bold moves during times of uncertainty are the winners coming out of that. I mean, how many companies wished they had made acquisitions in 2008 and '09? That vintage was phenomenal in terms of returns. But at the time, it felt disastrous.

And Tim, earlier, said he's optimistic about the US, and I feel the same way. It's hard not to believe in the resilience of this system that is so self-hedged, where most of—we have such an advantage in this country—in that most economic activity takes place outside the capital.  

Now, the capital is trying to get more involved, as Tim pointed out. They'd like to be on speed dial. But it does—it's a different dynamic that's taking place. China has some of that, too, in a large market, where there's an enormous amount of experimentation and competition happening within certain sectors that are creating phenomenally efficient companies.

But in terms of freezing in place right now, maybe this week, that feels right. But parsing through, as I said, I think the strategic intent is clear. And there's some pretty safe long-term bets that if you want to be in the US market, you need to be in it or adjacent to it.

Our view is that we'll end up with a renewed agreement that doesn't have the same border—that doesn't have the sort of tariffs we're seeing threatened with Mexico, eventually. But how long that will take? Unclear. Depends on your labor costs and other components, which side of the border makes more sense.

But there are real moves to be made right now that—against that intent. And it's tough for CFOs that have to be cautious about capital. We've gone from a world where you can have a three- to five-year plan to one where you need an eight-month and an eight-year plan and a way not to get bankrupt or run out of cash in between those two.

And that's a tough operating environment. But it's not one that favors doing nothing, unless you've made great choices, which some of our clients and companies we work with have, in which case just enjoy the fruits of that foresight. But for the most part, I think there's a lot more opportunity in making bold moves now than there is sitting still.

INGRASSIA: Look, the only way to grow is to invest. And there's lots of different ways to invest. You can invest in capital, in plants or facilities. You can invest in people. You can invest in advertising. You can invest in R&D. You can invest in companies. But the only way to grow is to invest. And most management teams believe their job is to grow.

So it's not going away. Which decision people make and which day they make the decision—as I said, it shouldn't be a surprise that the decision making gets bunched together. We look at $6 trillion of M&A in 2021 and say, oh my god, that could never happen again, except that it's happened every six years my entire career.

And if you drew the line, peak to peak to peak to peak to peak, of the M&A market, it exactly matches the growth of money supply in the world—exactly. It's uncanny that—and it's just—and by the way, if you drew a line trough to trough to trough, it grows at about that same—at about that same rate.

So there's a bunching of decision making. Karen, I loved your observation that there's something to be said for zigging when others zag. So I'm sure that's—I'm sure that the data probably bears that out. But M&A isn't going away because people have to invest and they have to grow. And look, it's a source of capital when you sell things, and people need capital to do other things.

The efficiency of a capital market system that continuously allows values to move or to change hands, so that someone who thinks they've got a better use of capital can go do that—the person who thinks that your business is better in their hands can do that—I think it's part of the magic of the US capital market system in particular, but the broad Western capital system that says, you can be paid for the future before it's happened.

That's all valuation is, it's a marker for valuation before it's happened. That's pretty efficient when you think about it. And that efficiency is not going to go away.

YEE: Well, thank you both. I'm going to shift to some of the questions that we're receiving now. And again, to anyone listening in, please feel free to use that Q&A function. And I will steer your questions to Karen and Tim from the Q&A.

I'm going to start with one that came in through the Q&A here, on just thoughts—we've been a little bit, as we are wont to do sometimes, US-centric here in our discussions so far. Thoughts on how all this, in fact, impacts China? I think the other country people are looking at is China, right? Thinking about its economy, its large economy, also its potential policy reactions that might come. And I know we can't predict it, but would love your thoughts on China relative to US and European companies, especially.

HARRIS: This kind of situation—it's not a mystery. The Chinese government talks about it itself. It recognizes that its domestic demand has been is a source of weakness, and that is the necessity from an export-led perspective.

They announced on Sunday a set of eight initiatives that are currently not funded, but show a direction to try to support the consumer. Clearly, the demolition of the property market has cut the props out from under that domestic consumption over time. The degree to which that can be done is not clear. Again, that's a pretty tough policy shift for China.

They have 64% of the world's manufacturing capacity. And right now, we have a capital utilization at a low that we haven't seen since 1990. So what is China going to do. It's going to try to find markets. It talks about the Global South—where that capacity can go. The question is how much pushback it will get.

The US has begun to mirror the restrictions China puts in place—100% tariffs on electric vehicles. China has long had 100% tariffs on cars coming from abroad into China. Not those made domestically. And so that makes the US market trickier for end products.

The degree to which companies in other places can pivot away from inputs from China, I think, is—that's not a fast process. But for end markets, we'll see pressure on the Global South, and already some pushback from what we hear from our clients in Brazil, who say, hang on. If you're going to allow China to bring in goods at de minimis levels, circumvent tax, dump on us, then you will destroy our industry. We also want some pushback. So it's not clear that the Global South will absorb everything, and they can't currently replace the US.

This puts Europe in a very tough position, because the one market that is affluent and somewhat unprotected is Europe. And how they decide—how the EU decides to coordinate its policy will dictate the degree to which European companies stay competitive or Europe does what the US did with Japanese cars and say, come on in. Make everything here. Share your trade secrets with us.

But we give up on US sedans. We don't sell sedans from US carmakers anymore. We sell SUVs and light trucks. And so that is—I think that is the dynamic. It's the inverse of the US dynamic.

I will say that one of the reasons we are less apoplectic about tariffs than the mainstream media is there is a vast difference between the impact of—a tariff is a tax, and in this case, it's a tax on access to the US consumer.

And all of the discussions about Smoot-Hawley and what a disaster it was to neglect to notice that the US was the China of the Depression era. It was the manufacturing center, looking for demand abroad, largely in the UK, which was far less affected by those tariffs and by the Great Depression than the US was. And so I think China recognizes all of the challenges it faces, but will struggle to pivot against this strategy.

What we are likely to see, practically, is margin compression from Chinese companies, which makes them yet more formidable in the global market and potentially some exchange rate adjustment, as we did the last time around. The degree is unclear.

And I guess the last point I'll make is that the global consumer is much less robust than they were in 2018, the last time we had tariffs. The ability to push price is even more limited on the back of the kind of inflation we saw post-COVID. So I would just be—I think there's a lot of challenges facing China. But the individual companies there—again, this is sharpening the sword and fire, to mix a terrible metaphor. I don't know about swords. I do know about fires. But anyway—Tim, I don't know if you have anything to add to that.

INGRASSIA: No, a lot of challenges. And the other big global implication is China was such a consumer of the world's natural resources that their impact on commodity and commodity pricing was dramatic.

As growth, basically, slows, stabilizes, or reverses, I think there are some implications in the commodity markets that may be significant. We've already seen a lot of that. So that's the other thing to keep an eye on, I think.

YEE: I've got another question, maybe—again, more specifically to the economy. What about the UK? I know we can, somewhere—can't lump it now with the rest of Europe—somewhere between the EU and the US. Thoughts on the UK. Tim, you smiled, so I'm going to start with you.

INGRASSIA: Well, look, the UK's vision of itself is that they are bigger and more important, globally, than they are. And I don't mean that with any disrespect. It's a country with a storied history, footprint, relevance. But they're only so big.

From a regulatory perspective as they moved out of the EU, they've become one of the impediments to getting deals done. They can block a global deal based on whatever decision they make with respect to the UK, and it's not always easy to just carve out the UK from a deal. So it's become one of the many regulatory hiccups.

We watched Sony buying a global music label—artists without a label. It was a relatively small deal, $450 million deal. I'll get the numbers wrong. $12 million of revenues in the UK? UK blocked that deal, for two years, from closing because they had to study the impact on the UK consumer of music.

I don't even know if there is a UK consumer of music, as opposed to a global consumer. Everybody listens to Spotify. But it took two years. So that's got real implications.

I do think the UK has made a decision that their partnership with the United States is more important than their partnership with Europe. And I think there will be some benefits and implications to that, with respect to my business, M&A, that may overwhelm some of those regulatory challenges.

But let me put it this way. Everybody in the UK understands currency and currency moves. And I commented earlier—nobody in the US understands—you could drop yourself on Main Street of any town, including New York City, and ask people what the exchange rate is. And if you didn't run into a tourist, to them, exchange rate is going to Macy's, and can you get the sale price or the full price for the blouse that you bought?

YEE: I'm going to shift topics. Tariffs have come up a bunch in our conversations so far. We know that CFOs—and this came, definitely, to the fore during the pandemic. Really, CFOs have taken a more active view on thinking about supply chain strategy and how to make your supply chain resilient and where to look for supply—the surety of supply as well.

Just given tariffs are ongoing trade tensions, shifting policies that might happen—any thoughts for CFOs as they think about how to influence supply chain strategy and supply chains?

HARRIS: So I think we have some bad news for CFOs, which is supply chains, which, during globalization, were a source of capital, are now a use of capital. And that is what supply chain diversification is going to look like, that they're—the risk-averse strategy is no longer the 5,000-kilometer supply chain that ends in China, where the cheapest and most efficient, warm, beating hearts were there, and the cheapest ecosystems.

We are building in inefficiencies, duplications. But that is an important—it's a critically important piece of corporate strategy now, depending on the markets that you serve and where those are.

I think where we'll see particular pressure—we already know just some of the blind spots that we're hearing about. Obviously, coming out of China, that is—last year's—that's Trump 1's news. Places that have a little bit more pressure—Vietnam. The entire herd ran to Vietnam. And now there's a balance of trade surplus Vietnam has with the US that puts it on the corporate radar.

I think that Mexico is probably a better option than it feels right now. And as an aside, Claudia Sheinbaum, I think, has managed this process really well, given Mexico's negotiating position.

But there isn't a next China. There isn't an obvious place to go. If you are in Mexico with your supply chain, upstream will be—if Mexico falls into line with the pressure that Trump is exerting, that will mean the 7.5% of auto components that come from China may get priced out. There may be some substitution needs and so forth. So watching where those concentrations happen will be important. India will not be as efficient as China for some time, but is an interesting option.

But we're just adding cost in. But it's real options and real insurance to keep the business going, so it's a necessity. But it's definitely a drain on—it's a use of capital now.

INGRASSIA: Yeah, one of the many interesting shifts in valuation over a number of years was this move to enterprise value and EBITDA multiples. And if you think about it for a moment, reducing working capital is a direct transfer to equity value. If I said some company is worth eight times EBITDA and you can pay down debt by reducing working capital, at the same eight times EBITDA, you just increased your equity value by the exact amount of the reduction in working capital.

So whether there were other costs of that decline in working capital, you felt like you got paid immediately for the benefit of the reduction in working capital.

I agree. It's not going to be a source of capital coming out of the business. It's probably capital going into the business. But I think we've all also been trained that maybe the shorthand of EBITDA valuations was limited. And we need to be looking at the value of a system and the value of the equity, not believing that company X is worth more because they've got $100 million of inventory that sit on their supplier's books instead of on their books. They're still the one paying for that inventory eventually.

So, some of the games which companies have gotten caught in, including inefficient financing against—kiting—I guess we don't call it, kiting—what do we call it? Factoring receivables, is probably a better phrase, et cetera. It's just math. Do the math. If the math makes sense, do it. If the math doesn't make sense, believing that you're getting the flow-through because of the EBITDA multiple may not be quite as efficient anymore.

YEE: With that, we are at the top of the hour. Let me close with a thank you—a hearty thank you—to Karen and Tim for their time and for their insights. And thank you to our CFO community for joining today and for the questions. I'm sure we did not touch everything. We would love your feedback. You'll see a survey triggered in just a second before you go.

But any feedback, any questions that you have—additional questions you have, any feedback you have—we'd love to hear it. Please reach out to your Bain contact as well to make sure you're included in this ongoing series of main events, if you enjoyed it as well. Thank you.  

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