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In other words, the value of the acquisition target company equal to the market value of individual cases, improve operational only when the acquirer is greater than the value generated by the premium paid, it can create value. Keep this in mind, it is easy to understand why most of the value created by the acquisition of all shareholders into the pocket of the seller: if a company paid a 30% premium,Provide comprehensive [link widoczny dla zalogowanych], it must make the acquisition target enterprise value of at least 30% or more, be possible to create value.
Although the performance increased by 30% or 40% increase sounds great, but the acquirer often was able to achieve. For example, Figure 2 shows the four major consumer goods sector transactions. Typically, the performance improvement to the acquisition target enterprise value increased by 50% or more.
Our example also shows why the enterprise is difficult to acquire and create substantial value through the acquisition. Assuming the acquisition, A company's value is three times B's. Even if a huge amount of this transaction, but the value of A company may only increase by 3% - described in Exhibit 1 to 1 billion dollars of value creation, divided by the A's worth 30 billion dollars.
Finally, it is noteworthy that we did not mention an acquisition for earnings per share (EPS) impact. While this indicator is usually considered, but no empirical link shows, the expected increase or decrease in earnings per share is a measure of an acquisition will create value or destroy an important indicator of value. Recent increase in earnings per share in the transaction and would reduce earnings per share in the near future transactions are likely to create or destroy the same value. Bankers and other financial professionals know this, but as someone recently told us,Provide comprehensive [link widoczny dla zalogowanych], however, still many people who \\, earnings per share does not mean anything. Asset stripping
Some executives often worry that a divestiture is to recognize business failure looks like, make your own business downsizing and reducing their market value. However, studies show that the exact opposite is true, the stock market for the announced divestiture announcement is always a positive reaction to 1. Stripped of the business unit will benefit. The results show that three years after completion of the transaction, was of the divested business will increase profit margins tend to 1 / 32.
These results indicate that the continuous application of the principle owners of the benefits of the best: the attractiveness of a business owner may be the best over time and change. In an industry or business life cycle, different stages of economic importance have informed decisions may become problematic. For example, invented a breakthrough innovation to the enterprise may not be suitable for development and application of it. Similarly, in a mature industry, as demand continues to decline, had long been competing firms in the industry may be excess capacity, so they may no longer be the best assets of the owner.
Divestiture ways to create value in the business at any stage of the life cycle of high-quality business and bad business for omissions. Clearly, the peel is usually not a good business intuition is a choice, but also for the management, may be difficult to resolve - even if another company may be the owner of the business better. Therefore, in the active portfolio management, the implementation of a discipline is meaningful. One way to do this is to hold regular review meetings devoted to business exit problem, ensuring that the theme of the agenda in the executive retention and ensure that each business unit will receive a \exit time. One advantage of this approach, you can force the executives have a \
Executives and board of directors tend to worry about, divestitures would reduce the size of your company, reducing its market value in the capital. This concern stems from a misconception that the larger companies than smaller companies market higher value. However, this view only very small-scale enterprise application, there is evidence that the market value of less than 5 billion company whose capital costs may be slightly higher 3.
Finally, executives should not worry about asset stripping will reduce earnings per share doubled (EPS). A company selling a business, and the business of price-earnings ratio (P / E) less than its retained business earnings, you can see, the company's total earnings per share will be reduced. But do not forget, stripped, lower-performing business units and investment in the growth rate of return on capital (ROIC) the potential to be significantly down the entire company's earnings. The business unit divestiture,Provide comprehensive [link widoczny dla zalogowanych], the company's business will be to retain a higher potential for growth and return on capital investment - and will receive a relatively high price-earnings ratio the market valuation of 4. Just as predictable by the core principles of value, as the financial operation itself will not create or destroy value. By the way, regardless of the sale proceeds received by the business is used to repay debt, or for the repurchase of shares, can be calculated. For the enterprise value, the critical asset stripping of the business logic. Project analysis and downside risks
Review of the financial attractiveness of project proposals is a common task executives. Provide support for the executives of some sophisticated tools - discounted cash flow, scenario analysis - paralysis of the top management tends to make them a false sense of security. For example, we know a company using advanced statistical techniques to analyze the project, the results always show that a project has negative net present value (NPV) of the possibility of zero. The company can not discuss the possibility of failure of the project, the project can only be made to discuss the possibility of varying degrees of success.
This analysis ignores the value of the core principles, which attaches great importance to the principle of return on capital and hidden in the back of the future cash flow growth - not only to pay attention to a project's cash flow, and pay attention to cash flow throughout the enterprise. Initiative to consider projects and enterprises decreased risk of future cash flows of a project analysis is crucial wise - and executives often do not do this.
Temporarily assume that you are a corporate executive, is to decide whether to implement a rose to 8,000 million U.S. dollars may also be down to -2,000 million, and the expected value of 6,000 million project. Generally accepted theory says that companies should accept all positive expected value of the project, without having to consider the rise and fall risk.
However, if the fall led to bankruptcy how to do? Perhaps this is an electric utility companies to consider investing 15 billion U.S. dollars to build a nuclear power plant (estimated at roughly 2009 nuclear power plant with two reactors) is worried about the situation. Assuming 80% chance that the plant can be successfully completed, on time and power, and its value (net cost of investment) is 130 million. In addition, another 20% chance of assuming that the utility companies will not have access to regulatory bodies for permission to begin operating new power plants,Provide comprehensive [link widoczny dla zalogowanych], then its value will be -150 million. This means that the net expected value of nuclear power plants over 7 billion U.S. dollars - seems to be a very attractive investment 5.
If the company's existing power plants will not be sufficient cash flow to pay its existing debt with new power plants if the failure will be back in debt, the investment decision-making becomes more complex. The economic consequences of the nuclear power plant will be spread to the rest of the value of the company - including existing debt of 25 billion U.S. dollars and 250 billion stock market value. Failure of the company will invest all options - not just invest in the nuclear power plant of 150 million - wiped out.
As this example makes clear, we can further expand the value of the core principles that can be said that a company should not assume their future cash flow at risk of risk. In other words, do not do any other business of the company's negative spillover effects of great things. In front of that rose to 8,000 million U.S. dollars may also be down to -2,000 million,[link widoczny dla zalogowanych], the expected value of 6,000 million project for the example,Provide comprehensive [link widoczny dla zalogowanych], this warning should be sufficient to guide management decisions. If the loss of 2,000 million U.S. dollars will threaten the entire company,Provide comprehensive [link widoczny dla zalogowanych], management should give up the project. On the other hand, if the project does not jeopardize the company's overall operations, they should be willing to take the risk of loss of 2,000 million U.S. dollars, to win the much larger potential gains.
Executive pay
Establish performance-based pay system is a daunting task, both for the executive team with the CEO and the board related to, or concern for human resources directors and managers of the top 500 enterprises of other executives, are so . Although the focus on executive pay has become a complete industry, but many companies continue to short-term basis, the total shareholder return (TRS) to the executive pay. However, the push for more power shareholder return is the company's industry and the wider changes in the market (or stock market expectations),Provide comprehensive [link widoczny dla zalogowanych], rather than the company's own performance. For example, many in the last century during the 80's and 90's executives to get rich through stock options in 2008, witnessed the wealth has been wiped. However, some of the root causes of price changes - such as a period of time before falling interest rates and the recent financial crisis - often with business managers what to do or not do not contact.
Rate of return by shareholders as the basis for executive compensation, reflecting the financial cornerstone of the third business - expectations \Growth in the stock market if investors start a company of low expectations, the company's managers should be relatively easy to beat them. But it also increases the expectations of new shareholders, so the company had to quickly improve performance, just in order to maintain and support its new share price. At some point, corporate managers should not hesitate to meet these escalating expectations become very difficult - if not impossible, It's like anyone in a constantly accelerating faster and faster on the treadmill will eventually stumbled down the same.
This explains why the process of change difficult to focus on shareholder returns as a performance measurement tool: good managers may be provided only very general shareholder return, because it is to keep the share price higher and higher than expected is very difficult. On the contrary, if the market for a company's performance expectations are not high, the manager may find that, at least in the short term, market expectations by improving the level of its peer companies, it is easy to obtain higher returns to shareholders.
In contrast, the executive compensation program should focus on business growth, return on capital and shareholder return performance relative to peer companies should be compared (this is important), rather than setting an absolute target. This method can eliminate the performance of the company is not driven by the specific rate of return shareholders a significant impact. This solution may sound simple, but until recently, has been incompatible with the accounting standards, in some countries, not in line with tax policy. For example, before 2004, some by the United States generally accepted accounting principles (GAAP) business, can not be included in their stock options as an expense in the income statement - as long as they meet certain conditions, one of the conditions,Provide comprehensive [link widoczny dla zalogowanych], options, performance Prices must be fixed. In order not to affect earnings, companies avoid the use of relative performance-based pay system, pay system because it requires the arrangements in the design of options for greater flexibility.
Since 2004, some companies have adopted based on the shares, and relative performance-based pay system. For example,Provide comprehensive [link widoczny dla zalogowanych], General Electric (GE) according to the company's shareholder return (TRS) TRS with the S & P 500 index relative comparison, performance bonuses paid to its chief executive. We hope to have more companies follow this trend.
Application of the four principles of corporate finance means against the tide sometimes. It means to accept the \It means relying on the data, thoughtful analysis, and competitive dynamics of an industry in-depth understanding. To do all this, it is not easy, but the rewards - for business stakeholders,Provide comprehensive [link widoczny dla zalogowanych], and create value for the whole community - is enormous. McKinsey's Richard Dobbs, Bill Huyett, and Tim Koller coauthored a new book \The Principles of Corporate Finance. Here are some of the practical application of these principles.