Stock value can fluctuate before the project is due.
Submit numbers into the Google shared spreadsheet by Sunday.
Lecture Focus
Topic: Changing Company Value
Understanding the actions that can enhance a company's value.
Relationship between investment decisions and valuation outcomes.
Key Questions on Value Enhancement
Does the action enhance value?
Remember the fundamental rule: If it does not affect cash flows or risk, it cannot affect value.
Actions and the Effects on Value
Stock Splits:
Creates more units but does not change total value; might affect liquidity.
Advertising Goodwill:
Does not affect actual cash flow; impairment issues were discussed.
Depreciation Method Changes:
Non-cash expense; no effect on cash flows or risk.
Tracking Stocks:
No change in total value; can affect pricing due to market perception.
CEO Challenges in Enhancing Value
Decision Making on Divestment:
When faced with options to divest, it's critical to consider the relative pricing versus intrinsic value.
Selling underperforming assets can often result in receiving less than market value due to buyer perception.
Cash Returns: Buybacks vs. Dividends
Dividends: Cash returned to shareholders, presents tax implications.
Buybacks: Seen as wealth transfer rather than value creation.
Managerial Preferences:
Managers should focus on shareholder preferences in choosing cash return methods.
Mergers and Acquisitions (M&A)
Deadly Sins in Acquisitions:
Valuation Process for Synergy:
Value both firms separately as stand-alone entities.
Add values to get combined company value without synergy.
Value the combined company with all potential synergies.
Cost Synergies vs. Growth Synergies:
Cost Synergies: Easier to realize, typically through concrete actions like cost-cutting.
Growth Synergies: More complex and often more difficult to quantify.
Case Studies
Procter & Gamble's Acquisition of Gillette:
Highlighted importance of understanding what synergies are paid for and how they impact shareholder returns.
Best Buy and Zenith:
Illustrates how acquiring distressed businesses can provide unexpected tax benefits but requires careful financial planning.
Key Takeaways for Successful Acquisitions
Avoid Overpaying: Recordings show that bidding wars often lead to poor acquisition value.
Evaluate the Business Environment: Factors like market perception and potential for growth should dictate decisions.
Be Mindful of Stock Payment: Payment form (cash vs. stock) and choice of target (public vs. private) can impact shareholder perception and future performance.
Framework for Value Assessment: Companies should continually assess their ability to create value, through both operational efficiencies and strategic growth initiatives.
Accountability for Decisions: Encourage holding decision-makers accountable for acquisition outcomes to prevent repeat mistakes in future deals.
Conclusion and Next Steps
Final assignments due soon; focus on numerical submissions.
Prepare for discussions on valuation, cost management, and strategic growth in future classes.
Engage critically with the concepts learned around enhancing company value.