question yeah it's funny you know you both mention each other from the last few days very teacher does know he teaches I think two semesters not just the summer so okay folks um second last class no reminder needed but I'm going to give it anyway your final project is due on Monday at five use the close of trading price as of Friday when you do the final know which means that between now and Friday your recommendation can change your stock can drop 30% it can increase 30% so that's you know out of your control your value and price though they they no don't try to change I'm going to continuous basis from now through Friday you're going to drive yourself crazy um the second thing is please do send get the numbers into that Google shared spreadsheet the master sheeet by Sunday because I will download that sheet and make that the basis for Monday's class so today's class we're going to talk about changing value you see haven't we been talking about value we've been talking about valuing things all the way through this class value companies but today I'm going to you know but we've been talking about it as investors is looking at companies today we're going to break the door open and jump into the company say is there thing are there things we can do in a company to change its Val so if you think about what your job is as a CEO CFO somebody in a company your job is to increase V if you think about from a Consulting perspective why McKenzie or ban and if you're in the truest sense of the word no you might be doing something specific but the question asking what can we do to increase Val so if you're interest interested in the business side or the Consulting side this session kind of links up valuation to those particular choices so today I want to start off by asking you a few questions about value enhancement you guys have the tools to essentially slam duck these questions so here's the first question when companies take all kinds of actions they call all these actions value enhancing and of course analyst go along so as I go through each of these actions I wanted to think about will it change the value of a company right you know the proposition you need to remember to do this the it proposition if it does not affect the cash flows and it does not affect risk it cannot affect value let's start with the stock split stock right now in V doing a stock split this morning I read in CNBC this is amazing news for the company you know we should be buying the stock now and know stock split increase value decrease value no effect on value and tell me why what is the change the number of units in the company right so what what what is that CNBC story all about you know because it's not a fool writing the story what are they talking about increases liquidity pricing choice if effectively this is why we draw that contract could splits have a pricing effect absolutely the pricing effect could know show up as a 3% jumper for a 5% jump it could even you know send out pricing signals about this so it could have a pricing effect but no value how about advertising Goodwill think of how much time I mean yesterday I was talking to these the group of accountants and we're talking about what percentage of the time and these are the big four accounting firms what percentage of appraisals are these fair value reestimates and how much time they spent on Goodwill and it's impair first what does that mean impairing Goodwill what you know under what conditions do accountants have to first Goodwill is created when you do an acquisition it's what you pay over and above the book value right so what what is this impairment thing Matthew um it encourages the spreading of that Goodwill over time oh that's not that's what it used to be that was advertizing Goodwill it was an autop pilot you took it and wrote it up today you can have Goodwill that stays as goodwi for the rest of Eternity right that that they screwed up right and how do accountants come to that conclusion what do you think they do they claim to do valuation but I'll tell you what they do they look at the pricing let's say you bought you know shares in tech companies at the peak of the small tech company boo they're down 30% right now so the accountant has to figure out a way to show a 30% drop in what you held impairment happens because the pricing reflects the fact that you made a mistake so can impair in goodwi so sometimes this number can be billions of dollars does it affect value justtin what do you think expensing but expensing by but is it a real expense it's a non-cash expense is it like depreciation though because depreciation even though it's a non-cash expense affects cash flows right why because depreciation is tax deductible so the real question is is Goodwill impairment affect my taxes if it does it could affect value and 95% of Goodwill impairment is not tax deductible in much of the world this is one of the most useless exercises known to man because by the time the accountants tell you you've screwed up you every everybody knows you've screwed up right it's two years after the fact it has no effect on your cash flows it definitely doesn't change your operating risk as a company the real question is and it's not a question that I have an answer to Is Why are we wasting our time why are we spending so much paying accountants to impair something that nobody cares about it's a make work for accountants act and I'm okay with that accountants need jobs too but but the truth is this is the and this is why when accountant say well I'm impairing Goodwill what's the right cost of capital my reaction is who cares make up a number move on get the check box going impairing Goodwill doesn't affect value does it affect price I actually did take a look at Goodwill impairments and what the price reaction is no price reaction either investors basically said we know that already what about changing depreciation methods from some kind of you know straight line to accelerate it or accelerate but you know only in your reporting books companies do this all the time this dance of know 54 to life for life for but only in the reporting books why do they do it again what's what do they want to show in the reporting books higher earnings or lower earnings they want higher earnings so basically they go to straight line but if your tax books are unchange this is a dance that really doesn't affect cash flows doesn't affect risk does it affect stock prices even in investors Traders are not that naive you change the depreciation method you report 5 cents higher earnings per share Nobody's Fool For Beyond like 15 seconds this was in in the dot buo one of the things that companies established status quo companies and they felt they were being left out of the game so what they started doing New York Times did this DJ did it they create what we called tracking stock what does tracking stock do it took the do portion of the New York Times and created shares again you think that's great the only thing is if you buy these shares they still the the business was still owned by the New York Times you got no corporate governance rights but you got a piece of a do SLI you you can see why companies did it right from a valuation perspective you the New York Times you own this online part of the business you issue tracking stock against that online business business that's all you've done does the issue of tracking stock make you a more valuable business it's the same business right but could it affect the pricing hey you're in the do boom you put anything.com people pay a 50% premium I will predict that there will be AI tracking stock because if you're paying 10 times revenues and I have a company trading at one and a half times revenues I am tempted right Walmart AI I don't even know what that means now you have no control over what they report but this is coming it is as old as time there's a pricing effect the answer there is none of those actions you know how much time companies spend on things that don't affect value that could affect the price so today we're going to talk about that contrast between price enhancement and value n second question this is I think this is one where I want you to start thinking about preconceptions let's suppose you've been appointed as a CEO for a multi bus company it's in trouble so you want to shake up the company they're in four and I give you the four businesses they're in I give you the return of capital in each business the cost of capital of each business you as a CEO want to take an action that'll enhance your value for your shareholders and you think about selling off one of the businesses which of these four businesses is would you sell off blood and why returning it's a terrible business right but I actually think I would sell a which is my best is this is not what corporate strategy classes get rid of the bad businesses but what's the eff of value of divesting something it's the price you get relative to the value of that business does everybody know D is your bad business yeah so when you go to sell they say you're selling me crap I'll pay you crap for crap you know why if you have your best business and it's in this you know SE sector where people are overpaying your chance of getting a pricing higher than the value is actually greatest on your star businesses it goes against the grain but the effect and value doesn't come from selling bad stuff it's what you receive in in in respons is said in thinking like shortterm rather than no this is longterm what's value see ultimate how do I value a business I look at the long-term value and in a sense you might actually argue that the pricing impact is going to if you're thinking shortterm will those businesses will be priced even lower than the value because you're reacting to bad news and bad news and bad news so pricing is driven by short term but that that shortterm will work in your favor in the best businesses they work against you in the worst businesses but then you have cash and then a lot of pering buiness after the sale no but but in a sense there's nothing you can do what what what's your alternative you're in a bad business you can't get out of it you're still earning some money you can't get your invested Capital back remember you can't liquidate the assets and give me back the book Capital so in your sense trapped you're right you're trapped in a bad business you shouldn't try to grow that business you don't want to be the CEO of this declining company but it's better than selling off your wor businesses for well below what they worth because that or at least just keep them don't sell them for less than it's wor if you want if you decide you don't want to devest anything I'm okay with that but it should be the price versus the value question yeah and that I think that's part of the reason CEOs don't like to do it you end up at the head of a company that is Slow Grow gr bad businesses and nobody wants to be the CEO of that but the truth is from your invest from your shareholders perspective you want to sell something you want to sell the business where you get the higher price yes the reason you're willing to hold on business is the cost of Capal risk assessment in a sense the cost it's it's a bad business I accept it's a bad business but I can't get out of the business right you're in the airline business what the heck are you going to do right you're going to sell the airline business people are going to pay you you know BAS basically the fact that it's a bad business I think this know the liquidation Choice comes from the fact that people think you can get book value back when you liquidate a compan and with bad businesses I can almost guarantee you that that's not going to happen one final question yes go ahead m is that like why B like there there's desperation behind it right they need the cash now if they don't get it they're going to go out of business but if were thinking sensibly they might you know that might be exactly why that's the only valuable part right who wants a store that nobody comes into right so there I don't even think they had a choice because if they tried to sell the store on the real estate people have laughed them right so there it became obvious but sometimes it's not that obvious and you sell off this bad business for well below what you could have made by keeping it and collecting the cash flows and finally let's talk about dividends and BuyBacks there you know I've heard from you know CFO saying will I make a higher Net Present Value by taking a project or will I make a higher Net Present Value by buying my own stock and here's what drives it right you buy your stock at a market price if it's lower than you think the intrinsic value is you're effectively buying so they take the differ and I have to explain that the second Net Present Value is a fake Net Present Value and here's what I mean by that the first one need take a project with a positive Net Present Value actually creates value it's an operating increase the second one it looks like you have a Net Present Value that's positive but it's really a wealth transfer do you see what I mean by wealth transfer you basically are buying back shares from some of your shareholders your remaining shareholders benefit because you've transferred the wealth the company itself hasn't become more value cash return dividends and BuyBacks cannot create value they're cash return doesn't mean that it doesn't make sense to to do that but don't do it because you think it'll it's good for your company and increasing your value you just transferring wealth and be transparent about who you're transferring it from you might say look I don't care about those people who sell their shares back I care about the people who remain I'm okay with this wealth transfer but cash returns at best can create value transfers so let's let's let's go back and finish the acquisition part and let's face said I if you were if you're going into m&a that was not the yes go ahead terms of divid it depends so tell me first most of the strong feelings are about things that they shouldn't have strong feelings on right what's the strongest feeling on that this cash it's but there's nothing wrong with signaling the truth right if you're overweight and you wear loose clothes you might signal I'm overweight but it's a good thing to Signal because you you want more room I think that signaling the truth is never wrong so if you're in a low growth business signaling that you have low growth actually is good I think what um if you look at what Google and Facebook have done just in the last quarter announcing divage they signal it we're mature and that's a good signal to send because they want a different investor base in them if you're signaling low growth when you have high growth opportunities then I have a problem but the problem there is not with cash you know with BuyBacks and dividends so it's the managers choosing to return cash when they have all these other needs that they've got dicated to so that's but from a shareholder perspective you can make Arguments for one versus the other so C you be the shareholder when you when I pay dividends what happens you receive the dividend you don't have a choice you pay taxes you don't have a choice and if you're you know older and you have lower income you might say I'm okay with it because my taxes are low I need the cash it's good to get the check in the mail or I don't know how it's even deposit right into my bank account but if you're younger and you don't need the cash and you going to look at the divid and say this is cash I don't need I'm paying taxes on something I don't need the difference between dividends and BuyBacks is BuyBacks go to that group that sells the shares back and want to collect the capital gains the rest of them just get this unrealized capital gains and as long as unreal ized capital gains don't get taxed and there's talk about doing that but if you're going to say look I prefer buyb so you can already see that companies acquire investors who like what they do so a Verizon over time you accumulated a group of shareholders like dividends doesn't mean they're irrational they might be older they might be Pension funds so if you ask me should I pay dividends or buy back stock I said given your history and you all this cash pay it as a special dividend or increased dividend but if you're a company that that's never paid dividends you got to tiptoe into the space right Google and Facebook if you look at their dividends it's like 0 2% of the price if they had paid a dividend versus 5% of the price you'd have a revolt on your hands because I'm a Google and a Facebook shareer the last thing I want is Big dividends coming into my account I have to pay taxes on so the dividend versus buyback is really about what would shareholders in your company prefer and if they prefer one over the other give more of them no but from the company's perspective there's actually no difference between the two yes I when you have company that's Stu is underperforming and then you have positive MPV projects like it's not a opportunity cost for to decide you spend your cash one no but be very careful when you know when you underperform is when you deliver less than expectations right the the what your stock does and what the quality of your projects are is actually uncorrelated that sounds like a weird thing because what your stock does is how do you perform relative expectation I'll give you an example let's suppose you're a company that historically has taken projects that earn 25% Returns on Capital when your cost of capital is %. I pric it on that basis let's suppose your return on Capital goes from 25 to 20% you still have positive Net Present Value projects right but you know what's going to happen to your stock price it's going to go down so we have to separate what happens to the stock price which is based on this expect ation game and what happens on individual projects because you're measuring two different things but that positive Net Present Value rout doesn't change based on what happen to the project you can't change the fact that your business is in fact getting less attractive and the market price is going to reflect that change so price what happens in the market is relative to expectations Invidia is suppose I think earnings report comes out this evening I mean you know how high expectations are about this report it's terrifying and if I'm ready this is something I'm going to have to fight not just this earnings report as people's expectations go up they're going to price you high that's the good news the bad news is you now have to meet those expectations so I think separating out how good are my projects from what's happening to my stock is a good way to think about why that Divergence can happen so last session we were talking about Acquisitions and if any of you are planning to go an m&a you probably left that session pretty depressed right lots of bad stuff coming there's a glimmer of hope I'll talk about that but let me finish up the discussion of the seven deadly sins and Acquisitions we talked about Synergy we talked about where it can come from it can be operating Synergy or financing Financial Synergy if you want to Value Synergy you got to go through a three-step process first you got to Value the two firms involved in the merger separately as Standalone firms you cannot value Synergy by just looking at the Target company so when you see a banking valuation claiming to Value Synergy and all you see is the target company in there no way you cannot do it you value the two companies standing along Second Step you just add those two numbers together present values are added so if I value the first company at 100 billion the second company at 50 billion I add the two together I get 150 value what is that that's my what the value of the combined company would be if there were no synergy and then third step I throw in Everything But the Kitchen sinking so lower cost I'll bring in higher margins higher growth lower cost to Capital and in step three I value the combined company with all of the benefits of synergy you've talked about and if there is synergy in step three that value you get should be higher than the value you got in step two that difference is the value of synergy so let me give you an example from way back in time one of the biggest consumer product merges of of all time Proctor and Gamble then the largest consumer product company in the world bought Gillette sixth largest consumer product company in the world and talk of synergy fill the air so the First Column I have my valuation of equity in proor and gamble in second column valuation of equity in Gillette 221 plus 60 billion is about two so you are not Synergy the combined value should be 281 Val so just basically two stattic Cor valuations I you know I don't know what to call the compliant company I decid to call it PNG Gillette piglet no that's not the name they pick they stayed with PNG I think piglet would be a better name but piglet with no Synergy is 281 billion and then I took everything managers claim they would do and assume they could do it instantaneously you know how optimistic that is in most cases when companies claim they will cut cost by 200 million and McKenzie's actually looked at the you know you know what percentage of companies actually cut cost that much probably 10% most companies come in lower so I'm going to assume that when you tell me you're going to cut cost by$ 250 million not only do you mean it you will deliver and you will do it overnight that's a second assumption in the real world cutting cost can extend over two or three or four years because it takes a while so think of you this is the best case valuation of synergy the 250 million lower cost just shows up as higher operating income it just translates directly into my operating income the slightly higher growth rate you're saying why only slightly high you're the biggest consumer product company you buy the six largest you're not going to get a big jump in your growth rate you're just way too big so I put in a slightly higher growth rate by about 0.92% that no percentages can be deceptive that is an extra few billion in in growth each year going to build up over time there's the value my combined company with the Synergy built in assuming the Synergy starts in the you know what that difference is that's my value of synergy there's a Canard that in finance we don't value Synergy at all that's not true I'm valuing Synergy at 17.2 billion so this must be a good March right what determines because Proctor and Gamble is the acquire what will determine if as a Proctor and Gamble shareholder you come out as a winner or a loser from this de Justin what you pay right you know what Pro gamble paid as a premium for chette 25 billion this is why merges fail it's not because good stuff doesn't happen but if you pay for all of the Good Stuff Plus 30% more how do you end up winning on this B I talked to somebody at PNG who was involved in this deal said why do you guys go through it he said because that's what we had to pay to get the deal done and that is at the heart of the problem why is getting the deal done the endgame I thought was getting a good deal done but this is something that happens once the deal starts to you know the wheels get greased the bankers get involved and everybody's pushing you don't want to be the skunk at the party saying maybe guys we should back out of this deal it's a prom but it's a prom that you see over and over again let's take a more explicit example of synergy this was when Best Buy was still kind of growing I mean it's run into its own brick and mor retail proms when it was a growing electronics company and it was let's say it's planning to buy Zenith there was a time in the US where you walked into homes you saw Zenith TVs they were all over by the time this was done Zenith the only thing people the only asset it had was a lot of losses that had accumulated over time it's a bad place to be they say what about the brand name what's I mean if you're 25 you walk in and you see a zenth what's a Zenith right I mean it's not exactly a recognizable brand it's not a Samsung it's not a Sony so there's no brand name value all you have is an nool 2 billion let's assume you can get the tax okay your Best Buy you buy Zenith and the only asset you get is a$2 billion n if your marginal tax rate is 36% what's the value of synergy what what's the value of Xenith to you 36% of 2 billion which is 720 million right let's say though but remember that the IRS doesn't make you a check for 720 million you need to have income to so let's say you only half a billion in income as Best Buy and that's what you expect have as as taxable income for the next five years now what happens to the present value or the value of this the 720 will come in five installments and you've got to discount them back today at what rate what's a question we need to ask about discount rates where is the risk how much what's the risk that you will not be able to get the tax pay it's not in the two billion that's you know that it's not in what will happen to Zenith there's nothing there it's in whether you as Best Buy will have enough tax income to cover you know what you should be using as a discount rate either the cost of equity if you think about taxable income or the cost of capital I can live with either but that's what you would use to get the pr and this is why when Bankers just take the n and multiply by the tax which is often a practice they said that's your tax benefit they might be missing the point that might be the tax benefit you have immense amounts of income today but it's definitely not your tax benefit if you have to wait over time so bottom line is synergy is a nice sounding buzz word but if you're going to pay for it you have the obligation to be explicit about where the Synergy is coming from and try to B it's common sense because if you don't you're going to do what Proctor and Gamble did pay whatever the extra is because there's Synergy out there talk about pricing if you take an m&a class often when they do pricing you know they look at transaction multiples say what's a transaction multiple you know how when you do PE ratios you take every company and you could get the PE ratios with transaction multiples you look at only a subset of companies that have been acquired in m&a transactions I want you to file that away think statistically does that create bias so here's what I do I come to you remember I'm still trying to get you to pay more than 60 million so I come and say you know forget all this DCF stuff forget Synergy forget control you should pay 100 million because people pay five times ebit in other transactions and I show you a list of 15 other transactions where people had paid what do you think about that it's pricing right pricing is okay what is it about this pricing though that makes it a bad pricing Justin you take the deals that have been done and basically you're looking at what acarus paid and we know acarus had these premiums on you create a subset it's not that it's bad it's pricing but it's pricing with a real bad sample of buy a sample you know when I see this in m&a I said just go back and show me the pricing for the entire sector don't pick and choose transaction multiples because then I'm set up to pay more than I should then I say okay okay I don't I know you don't like it what if I do five times AIT in year five pushing off a bad decision five years might make a present value effect but still a bad choice so when you look at pricing you got to be careful about how so ask question which statistical what's that sample am I getting sampling bi why did you pick this multiple remember the person who's selling you this multiple tried four and picked this one it's good to keep them off balance have you tried value you how about e to sales right get them off the script because you want to see how much of this is scripted so I'm at the end of my tether I've tried everything you're refusing to pay more than 60 million so I hit you with what I think is the word that will convince you that this is a good deal I tell you that this this deal is it creative I think this word should be banished from business and finance what does that mean when I say it's a creative I'd love if that were the re that's a good thing but a creative is actually a much more much simpler testad like it increases the earns per it increases ear that's it so let me ask you a question what kinds of Acquisitions increase your earnings per share the creative acquisition the we going right let's go think in terms of PE ratio your let's say your PE ratio is 20 as a company and you're looking at Target companies what has to be true about the target companies for a deal to be accretive that the P ratios have to be less than yours or higher than yours so basically anytime you buy companies with P ratios lower than yours the deal will be a creative any it's just pure math right is doing a deal with debt going to be more clearly right so basically you're saying if I use dead and buy companies which have lower P ratios than mine I'm going to be a good company in what universe is this a great idea a creative delu Terrible Things No so if anybody brings this is an A Creative they cast them out send them to an island know let them be play you know be a character on Survivor or something know do something to just get rid of of them cuz this is not where you want the conversation to go so when you look at pricing I'm okay with it but don't do a bias pricing and you know when and those buyas samples will always show up as numbers and don't don't don't use words like a creative dud now to give McKenzie credit and this was before McKenzie went off the tracks in terms of you know they got caught up in this strategic baloney stuff in the last five years when they they actually looked at it creeda versus deluded deals and followed through and discovered that delu of deals actually created more value in the long term than a creative deals so this creative delive has become essentially a false false signal so don't be a laming don't go along because everybody's pushing in that direction don't go with that pricing because you've used the transaction multiples push back ask questions because it's too late after you paid the price at this point you're refusing to budge right what are you you're probably at the top not even the CFO but somewhere in the finance so I say you know what I know you're a very sensible person and I have to tell you your CEO really really really wants to get this deal done you see but that shouldn't play a role come on you want to keep the CEO happy and the CEO really wants to get the deal done and you're the last person blocking the deal this is not good for your future or where you're going to end up but this is something that I think has to be factored in the CEO wants to get the deal done he or she thinks it's worth a hundred million I I can almost guarantee you you're going to end up paying a 100 million if you don't agree they'll just fire you replace you with somebody else you're a bank that says you shouldn't do this they go to a different bank and this is why I think it's easy to blame the Bankers because they're the one but the reality is this push towards bad deals starts at the top and you say why would the CEO want to do a big deal because it's not his or her money you want to build an Empire as a CEO you want to be the CE of the biggest company in the world go you guess what you're going to be buying other companies just to make your company bigger you would like to spend more time in Aspen you're probably going to try to buy a company in Colorado move your headquarters to words where you'd like to ski you say that's very Petty CEOs do all kinds of things for self-interest but Mass them I'm doing this because so when you look at you know CEOs and you look at where Acquisitions originate one of the things you find in common I talked about serial acquires you know what the one thing that you see in common is a CEO at the top who's an acquir because as they move the companies they move to become serial acquir and those CEOs who are heads of Serial aquiring companies tend to be overconfident people they're the people remember in high school these are the people who think they know everything they're actually pretty stupid right but they they're the big person on campus that throw their weight around they may State opinions with no facts no but people bend to them I would love to tell you bad things happen to these people because you want bad things to happen to the people but they're the ones who end up as CEOs of companies cuz that Bluster and overconfidence it's amazing how high it can take you and the only thing that bring them brings them down is their own overconfidence CEOs make decisions on on things that you look it really that's why you bought this company and there's one more thing and I think this was brought up in the last session what if all if I don't do this my competitor will do it it's defensive Acquisitions right if you're in a business where the only way you can survive is with defensive Acquisitions my advice to you is this is not a good business to be in shrink and go away let other people make the mistake of saying the only way I can be an airline is by buying other airlines go for it it's other people's money so as you go through you're going to see this process play out because many of you even if you don't end up in m&a are going to see this process world around you recognize how much of this has nothing to do with the numbers so egos overconfidence in investment bankers all I mean there's a tremendous amount of force that's going to push to get the deal done and I'm not going to tell you it's going to be easy to be the person pushing back but at least get your thoughts down on paper say this is what I think about the deal CU you don't want to be the person who five years after the Time Warner AOL deal say oh you were in that group that pushed the deal he said no no no I was the person who said you shouldn't do the deal so that's part of the process yes defens get market then you have like a but first let's pause that what market share by itself not the proposition market share by itself doesn't do anything for my cash flows or my risk so complete the story what is market share supposed to bring that's good for you I mean like you can have like better margins you can charge no no wait but you you have to have pricing power right in the airline business do you think having higher market share has brought pricing power think back I I've been watching the airline business and you know why it doesn't show pricing power because new Airlines keep popping in where these essentially seem to be know they I don't care I this is a business where people have gone for higher market share hoping that they will get pricing power and it never manifest so if you did get pricing power I'm okay with that because that's a real effect it's a Synergy effect I'm willing to build an end but I'm saying don't do it on without checking to see if higher market share will give you pricing power because if it does I'm okay with that's not a defensive acquisition that's a very you know growth oriented acquisition where you're essentially saying if I do this my margins will go up yes like for example public not 99% it's not that bad or the deals will go through at lower prices right because remember the the the the if you did this right you know proon gamble if it had bought Gil paid a $15 billion premium that would been a good deal so I'm sorry in which case you walk away but then you could but if you were more selective because you have a lot of money you can go around checking other other companies you might have done five other deals smaller deals maybe the problem here was you went after a big company and you paid a premium on the market price so we'll map out where you're likely to succeed with Acquisitions it's not that dire but there are certain kinds of deals that are more like to fail when you apply this test than others and we have to look at what kinds of deals those are like for example when you look back I remember when Facebook wired Instagram and everybody and that I never understood that toor how much they pay for Instagram one billion right Facebook was order1 billion doll company was Instagram a public company or a private business was a private business we'll talk about why those kinds of Acquisitions you don't find the same kinds of bad deal problems okay You' ESS described the kind of path where we can actually win through Acquisitions Microsoft bought what 45% of open AI I don't even know what they paid for it probably three billion four billion some tiny amount it's turned out to be a great deal for Microsoft right we'll talk about why some deals can create you know have the structure but it's not going to be 99% of deals but it's going to mean the types of deals you see will start to change question come on at the end of thisy what's the value of intellectual property where does it have to show up cash flows and growth and if it's something the no there's nothing really different about IP as opposed to a physical asset right I think that's not the issue it's not that you're buying intellectual property so you're paying market price plus that's really at the core of the problem so if you buy intellectual property at the private business level you're far more likely to get a good deal than if you're buying intellectual property in a public company where the market price already reflects it and to pay a pre which brings me my final point about accountability HP is a master of bad deals right this is a company that made this an art form so this was about you know 15 years ago they buy this you know and this was actually a company called autonomy it's a UK based software consulting company they paid 11.1 billion for the company at the time of the acquisition I tried to build up to how it got so this was my buildup because all you observe is the price before and the so I started the book value the company which was 2.1 billion before HP showed up so this is autonomy's Book value so they get targeted and this is HP is paying 11.1 billion the first thing you do after an acquisition is you call the accountants in to reappraise the value of the existing asset so they do that book value dance and they reappraise the value by adding another 2.53 billion they claimed to have found 2 and a half billion in undiscovered value the book value went up to 4.6 billion now from the 4.6 billion they added a premium to the deal to to essentially get to 5.9 billion that's a market value they paid a $5.2 billion premium over the market value and of course they use the usual word synergies strategic considerations this was when kly furina was the was the CEO or was it Meg wman you know was the CEO of of U of HP two years later the deal falls apart it falls apart for lots of reasons HP claimed it fell apart but at the time of the deal it was justified you know and this was one of the few deals where everybody looked at deal and say you guys are paying way too much even the equity research chel who usually go along with the management say this is an amazing deal so this was Leo poer who ended up being the CEO of the company at the time the deal was announced he was in front of a group of equity research analysts and I'm going to read his words because I don't want to misread them because these are the words he used he said so an analyst asking why did you pay 11.1 we have a pretty rigorous process inside HP that we follow for all our Acquisitions which is a d. c.f mod I have a sense that if you asked him can you expand on that acronym he would not have known so some eight said go out there and say Ed a DCF model as if that you know that's covered right you use a DCF model you must be doing everything rationally you know after this class that that's not necessarily the CH and referring to discounted cash flow standard valuation methodology which sets my it's not an valuation methodology it's a philosophy of thinking about what drives value but we'll let that go and we try to take a very conservative view okay I thought you have to use expected cash flows but I guess you missed that part of the DCR and then he went on he should have just stopped because he couldn't stop himself he said just to make sure everybody understands autonomy will be on day one a creative to HP oh my God this is such a relief now that you've told me it's going to be a creative just take it from us we did the analysis at Great length and great detail lots of great in there and we paid a very fair price and we give a great return to our shareholders too many grades here should get a little suspicious a year later the deal falls apart they write the 11.1 billion down to 2.3 billion this is the Goodwill impairment for the ages so when it happened I decided to assign play I said Somebody's I mean when you make this big a mistake it wasn't the janitor who made the mistake somebody is responsible who is it so I went through the pie at the time that HP this deal fell apart HP claimed was because of accounting irregularities at autonomy that that's why they overpay so I said okay know let's let's go through the step so I started by looking at the Synergy that they paid for and it turned out that there was no Synergy the revenue growth was not the margin can improve so I said some of this is just bad management right so who the primary culprit is you know Leo apoa the secondary culprit of course are the deal Bankers so let's start by stripping them off their fees I mean you told me those four you know 5.2 in any real world business if you told me there's a $500 benefit and I get nothing I would say now give me back the fee I paid for it it's not going to happen none of this is all I mean I wish this would happen but it doesn't right second they blame the accountants and I said okay you're right the accountants did play with the numbers not by as much as you claim well the the accountant I think was deoe let's make Dee kind of disgorge some of the money that they've collected for auditing an accounting fees 1.3 bil the remaining write off came from just basically the company being mismanaged after the deal to the point that people left and staff left they lost human capital so you get from 11.1 billion back to 2.3 billion there are plenty of people the bankers the management of both companies the accountants to blame you know how many of these people actually had to give back none of them and that's to me what the problem is in the process you want to stop the screw-ups in m&a start punishing people when they do bad deals because as long as you do that you're you don't do that you are going going to see more bad deals go through so here's what I'm going to do I'm going to give you that glimmer of hope on acquisitions by giving you choices and you have to tell me with each one if you're an acquir which one gives you a better chance so think as an acquir you want to create value for your shareholders you have to do acquisition because that's the way you grow would you rather be a soul bidder or an a bidding war in an acquisition so bit right and we look at the evidence what happens when you have a bidding war is so bit is it's damaging and we talk about why people don't take their advice and say if you're in a bidding what just drop out second would you rather buy a public Target or a private Target tell me why what is it about public versus private now and keep the size is the same two two companies both1 billion companies one is public one is private what is it about the process that makes your odds better with the private company no but but let's say keep all the operating details because in a sense might be I mean there might be Goods but that should be operating details I said price doesn't move while you with a public company what do you have to start as your bottom line and build up from the market price what's in the market price who knows right markets build in all kinds of stuff with a private company what do you start with you start with negotiated values remember the thing we did with the new companies you start with public market prices and you build up the odds are already against you because you're starting with a number that already might be reflecting all the amazing things you can do would you rather pay with cash or pay with stock assuming you have both on hand it's a tricky one with depends depends on what I said if the acation will have like a higher positive npv or but the npv can't change based on the npv is based on how much you pay right not how you pay for it yes what you value your stock if you think your stock is overvalued you're say I'm going to be tempted to pay with stock so if Invidia right now feels it's overvalued want to acquire a company say let's pay with stock but as you said like overvalued or the value based on what on B I mean let's say you have a sense of intrinsic value for your stock right right so if you think your stock is being massively overpriced relative to intrinsic value and say it's cheap currency I'll pay with stock we'll see why that's not always a slam dun because it's a signal you send when you decide to pay with stock and you have cash on it so think like the acquire the bidding company shareholder and I say look I'm going to pay with stock your intenna start quiver right if you're paying with stock it must mean you think it's over valued this is Game Theory so what do I do I push up the premium and because as say You must be paying with over so we'll see what the net effect is it's you know it depends on whether you're buying a small company or a big company would you rather go for a small Target relative to your size or a large Target merges of equals or merges of unequals where do you think the odds are in your fa small and for lots of different reasons you bring two companies together it's like a marriage of elephants right it's going to be very very very difficult for the two elephants to move anywhere now and we there are all these issues cultural issues two companies very different [Music] cultures that's the problem is as you get bigger you have to buy bigger and bigger targets and maybe that's the reason Acquisitions actually Cisco in the early 90s created value from acquisitions by the time you got to the late 90s it was struggling because as a $200 billion company think of how big a deal think of how big a deal has to be at Apple for it to even be noticed right it yes subsumed in the logic comp would you rather go for a merger driven by cost synergies or growth synergies what do you think the odds are greater it turns out the cost synergies your odds are better we talk about what is it it is about the process that makes cost Synergy because it's a purely empirical one there's no Theory reason but in cost synergies what you going going to do you're going to cut cost right growth synergies you're talking about projects you might take and markets you might conquer cost synergies you got to be concrete we're going to close 200 stores and it's easier to follow through so in fact the evidence suggests that this is soul bidder versus multiple bids the way to read this and this was the way old Finance papers used to Show Excess returns shows you how charts were so extraordinarily primitive so one of these is for so don't look at the base one of these is the return so basically when you see the numbers go up your stock goes up after the deal and the other one stock goes done one of these is the winner the other is the loser of the of the bidding war who do you think won the bidding war the the so one of these is the the winner of the bidding war is the one where you see below the line the loser of the bidding war so when you're in a bidding war and you drop out invest is he C thank you God they dropped out but here's the problem once you get into a bidding war becomes a pissing contest between two CEOs right neither one wants to walk away from the table saying no I'm losing I want to win I would love to tell you female CEOs don't have this issue it turns out that once you become CEO the the I mean everybody gets testosterone I mean see they must come in and pump testosterone in you get this Macho got to win at all costs so this seems to be a phenomenon that comes about because you rise up the ranks and you can't lose anymore second buying small versus big cash versus stock I mean let's face it you know if you look across these graphs you know so this is the the blue is the the small and across the board you can see small com small Acquisitions do better than big Acquisitions where I've defined small and large relative to your size but whether you should pay with cash or stock seems to vary depending on whether you're going after a small Target or a big Target if you're going after a small Target it looks like you know and and you can see across different amounts the mode of payment here is all cash stock you can see that paying with cash is you know with small targets delivers better results with you know and if you're buying larger deals so it seems to vary depending on whether you're buying a small company or a big company you can see why you have two large companies to get come together and I'm paying with stock you worry a lot this is Guy paying with overvalued stock understand small companies better to pay with large companies better to pay with small exactly so small companies seem to be okay receiving your stock they don't overthink it the larger the company becomes the more this game theory kicks in so again if you ask me should I pay with cash or stock I'm going to say how big is the the Target because I don't want to get into this game cling war of you pay you say you're going to pay with stock and the premium goes up even more and you end up in this Loop by the time you're done with the loop you end ended up overpaying and and here's I think the biggest lesson you look at buying public companies versus private companies and I've added another piece in here of not private companies but subsidiaries of public companies divisions public companies are the worst so you can see that across the board right in terms of returns so you know in every one of these it's the worst but it turns out that subsidiaries of other public companies is the best private businesses are good but buying divisions of public companies is even better than going after private companies why do you think that might be just the information public but not like you can separate it out remember I showed you the companies you want the the divisions you wanted to devest and many of you attempted of let's get you're the new CEO you want to get rid of the the bad stuff right and what do you want for it just get rid of it you can almost see the guy at Ford in 2009 saying what in trouble I am now the new CEO get rid of this Jaguar landr it's not doing very well how much should we charge just give it away and guess who benefited from that TARTA Motors has spent a decade reaping the benefit of Ford CEO say get rid of the bad stuff so if you're acquiring companies look for companies where you have a new CEO preferably one with a big ego who wants to get rid of the bad stuff then act all complaint I've been watching Shogun do the Japanese thing B you know you're the great one you know I know you know amazing things no you get some amazing deals when companies decide to restructure because they're being advised by strategists not by people are looking at do the number work strategist said get rid of bad businesses at what price they have no idea just get rid of it and in the process you're giving away businesses for well below what they're worth so the bottom line is you know you can structure deals and actually make vet and and when you look at growth and cost synergies this is from a McKenzie study that looks at what percent of the time companies deliver on growth promises now so if you compare cost synergies versus growth it's no contest companies more likely to deliver on cost synergies and on growth synergies because theyve planned for them before they do it so can you grow a company with Acquisitions and create value yes but you got to be disciplined focus on small companies private businesses assess value try to negotiate but that discipline is going to get more and more difficult to maintain as you succeed and become larger right because the process itself would start to FL on you because your your targets have to become bigger because you become bigger so you're going to find this process that you you can have companies that look like stars now Cisco became a case study in Harvard in the late 90s as how you can grow value through Acquisitions and that should usually be the kiss of death it's like being on the cover of Time Magazine right your Harvard case study has been and spend the next decade destroying value through acquisitions you have to know when to stop and I think that's partly what is so difficult in the process yes V Amazon has been Acquisitions what what what acquisition does Amazon made other than hold [Music] Foods I'm sorry that's I mean even Whole Foods was a tiny company if you think about it I don't think You' even noticed Whole Foods when they bought it because it was like $15 billion company in a trillion dollar company I'm Amon has never bought a large company so I'm not even sure I mean Amazon is not the kind of company that is grown through Acquisitions it's a company that's grown primarily through organic Investments they built a logistics business entirely from scratch right they built an entertainment business entirely from scratch and maybe that's the lesson great companies don't get to be great companies by going out and doing big Acquisitions they get to be great companies because they pick good inv Investments they build them up I mean it's that old thing know advice that grandmothers give which is if you build something you will but if you go let somebody else do it for you you're not going to get the same upside because then you have to pay that person up front so you can grow you can you can do whatever you want to do but if you're not disciplined the thing is going to blow up David you example how do grow synergies how I'm sorry how to do growth synergies growth synergies basically let's let's take a case of a brand name company in the US buying a brand name company in India because they think it's a big market and they think they can take their products and sell them in let's say it's a beverage company right historically the Indian beverage Market has been relatively immune to foreign competitors partly because those competitors were kept up so you think you can draw so if you if that is your plan then I'm going to ask you to be explicit I'm going to ask you now which of your beverages you think will will sell in India what parts of India how much are you going to try and you're going to say but that's still fuzzy but I think that is part of what delivering growth synergies requires is being explicit upfront on what form the go growth synergies will be and it can't be just India is a big market right it's got to be that you've thought through a portion of the market before you go buy that beverage company so it'll take the form of by buying that company the combined company is now going to grow more because I can now sell my beverages that sold primarily in the US and India it's a big market and you put that into the revenue the growth the margins and come up at the higher value but I challenge you in an acquisition to actually find Synergy being explicitly value it's amazing it's fuzzy it's thrown in there the acquiring company never gets into the picture it's all about the target company so so for Acquisitions to work discipline is the word you're looking for and discipline is stuff to maintain as you get larger and more successful you know and I think we need to plan for Synergy and this is my Point with David before you pay the price and then hold PE people accountable preferably the person who's pushing hardest for the acquisition say okay and you know what if the numbers don't come in based on what you're projecting out there you're the first person to lose the job you'll be amazed at how quickly forecasted numbers come down if you are going to be responsible for delivering those numbers if you're in a bedding W just drop out it's easy advice to give but you got to overcome the ego effects and someone as I said and finally you know I think that you know I don't know why this process hasn't created a contingent where half the deal Fe should be withheld for 5 years after the deal gets done you say no Banker will work for me good don't use Bankers then why are you using Bankers in the first place what exactly are they adding to the process other than a fee and getting you to do more bad deals so that's the Synergy but that's the m&a part any any questions on Acquisitions let talk about value enhancement first I want to draw a line between value enhancement and price enhancement by now you know the distinction between the two and I'm going to use two studies separated by five years to illustrate the difference the first study came from a paper called A Rose by Any Other Name and here's what they did they took I think 64 companies in the late '90s that changed their names you're saying what's a big deal companies change their names all the time they change their names in a very explicit way they added do to their names but changed nothing about their business now I could ask you an intrinsic value question does adding. to your name make you a more valuable company if you don't change your business cash flow is the same but here's what happened to the stock price it jumped Almost 100% plus this is amaz amazing we''ve wasted our time for 25 weeks talking about cash flows growth and risk just change your name right a kroger. aai that doesn't sound like a bad idea right you still sell groceries but you got AI in your name but here's the catch this is a study five years later of companies that changed their names you know what they did they took do out of their names what happened 1999.com was the place to be by 2004 people were in the other direction you play I mean this is like riding on the back of a tiger you try to keep the market happy you give it what it wants it'll turn on you sooner or later most of the time when CEOs are talking about value enhancement you know what they're really talking about price announcement because if they can make the price to go up by the end of the year they can collect their options and and bonuses there's a lot of price enhancement going on that's why you see a lot of stock split and tracking stock but value enhancement requires that you change something in the company and we know exactly where You' got to go to change value you can try to change the cash flows from existing assets and we look at the different Pathways you can try to get more value from growth by either growing faster if you're in a good business or growing slower if you're in a bad business you can try to lengthen your growth period which is a fancy way of saying maybe your competitive advantages can get stronger something you can do or maybe you can lower the cost of Gap I know it sounds incredibly precise but for Value to change it's got to come from changing one or more inputs into evaluation so in the next 15 minutes you're going to see every word you see in restructuring show up somewhere in these graphs because you truly talk about increasing value it's got to show up in one of those places let's start First St you're trying to get more cash flows from existing in every um restructuring the two words you'll often see is cost cutting and more efficient operations and assuming you mean what you say what I hear is lower cost higher margins so maybe that's the place you start maybe you're a company that's accumulate a lot of fat you notice how many layoffs there have been at Tesla in the last few weeks and I look at the title of the person and today somebody you know tweeted out that they lost their job their job was some to do with the with the charging stations I don't know what the title was but he was doing something I guess now maybe he was doing nothing because you know Tesla said you can leave I'm sure the charging station will be completely unaffected tomorrow but you're cutting cost and there you can cross the line if you cut costs that are too close to boat so that's your first St if you got assets that are not just losing money but expect to lose money forever stop he say why wouldn't somebody have stopped it already because people hate to admit mistakes I saw gon Carlos Stanton come up yesterday as a Yankee fan and I predicted he would strike out four times and he delivered on that promise I know how much the Yankees are paying him each year in any logical World they should cut their losses and get rid of him but Brian Cashman who is no man he signed stand he's not the the minute you let somebody walk away You're effectively saying I made a mistake so you know when you get these devest usually when a new CEO comes in they have no problem admitting to the old guys mistakes mistake mistake mistake because they want to clear the table to make their own mistakes the next thing I'm going to say is going to sound mildly or majorly unpatriotic depending on where you're standing is but I'm going to say it anyway I've never viewed it as the objective of any company to maximize tax is paid to the government I'm sure Bernie Sanders would disagree with me so I'm going to cover myself within the framework of the law you want to pay the lowest taxes you can right in a sense there's a lot of tax gaming going on for if you're a multinational you find a way to move income from high tax locals to low tax locals take a look at any European know multinational the are sub is almost always have the highest margins magical maybe it's got something to do with the 12 a half% tax rate but I'm sure this is all completely operational it could be you heard a transfer pricing you know what transfer pricing is Right within companies because you sell things and buy things across the business somebody's got to come up with the pricing across so when somebody says they're in transfer pricing you you know what they're really saying is my job is to move income from High tax locals to low tax locals with transfer pricing you can do that so to the extent that you can pull this off and even risk management you can argue by smoothing income over time you're reducing the overall taxes you're trying to reduce the T if you've over invest in the past you might say look I'm going to live off the fat for a while some people get you know some companies get into this autopilot we got to build a new Factory every year hey people are not buying the stuff from the old factory just hold off what does that do it creates a depreciation still you get the you don't have the capex so at least in the near term you can have a negative net capex because you have excess capacity and it's amazing what managing working capital can do to cash flows now when until Walmart came along the rule in and this came from accounting classes you were supposed to maintain a current ratio of two that's what I was start accounting I said a good current ratio is two what does that mean current asset should be twice current liabilities which means your working capital is always going to be a positive number it is going to drain your cash flows and Walmart came along and said who came up with this number why can't we make current assets roughly equal to current liabilities and they did this with the inventory management Walmart was one of the first companies that created just in time inventory so rather than let things stock up and they brought their inventory levels and they you're saying what's the big deal it saved them $2 billion in cash flows just by taking working capital and making it go from a drain on the cash flows to a neutral effect so basically you're trying to get more cash flows from existing ass that's the first stop so I'm going to take a you know take the second stop the second stop is looking at growth now if you look at more companies that want to make their themselves more valuable they want to just go for more growth and sometimes that works right in fact by now you know the conditions under which going for more growth is going to increase value if you're in a good business you earn more than your cost of capital by all means go outad and take more re investment if you're an airline don't go for more growth the more growth you go for the less valuable you become so you're going to try to create more value by either reinvesting more if you're in a good business or reinvesting less if you're in a bad business but I think there again you'll have to fight against the tide because many companies higher growth is always viewed as better than lower growth in fact a few years ago McKenzie looked at different ways of growing and ranked them from best to worst so they have a Hu and this one of the great data sets they have of every client they have and what they've done they looked at know value created by different growth strategy but looking at what a million dollars in investment in that strategy create this additional value and this is from best to wor the best growth strategy is to come up with a new product a million dollars invested grades between 1.75 and $2 million in additional value think this is great we should all go for new products there's a catch here right when it hits its huge Apple coming up with a smartphone and Microsoft coming up with a new Cloud product or chat GPT but it's really tough to get that hit the second best strategy is expanding an existing market so you know by introducing a new product there new service so essentially you're going that million dollar investment creates between .3 and 75 million in that the third is maintaining market share in a growing Market because the market is growing you don't have to cut prices you basically can grow by just maintaining and then you get to the bottom of the pile the two ways of growing that historically have had the toughest time delivering values one is competing for share in a stable Market why is it so difficult to create value if you're competing for share in a stable Market mad what do you think why do you think that is if you're competing for share market well I would say probably if you have customers that might be sticking that they have you know they but you have to go after other people's customers right and how do you get other people's customers to switch to you you're going to to price War so you win the Battle of a higher market share so in your Excel spreadsheet I give you higher Revenue growth but I knock your margins down try it in your company increase their growth rate by 3% lower the margin by 3% see what happen to the company and you should be not not you shouldn't be surprised at what's at the bottom the pile historically the most difficult way of trying to create value it's not impossible clearly you can see there successes is Acquisitions and you don't need me to repeat the last session we had so basically and as I said sometimes growing less is better than growing more and this is a table that I keep especially with companies that get too excited about growth it's a table you might have seen earlier in the class about you know companies that earn a return on Capital less than the cost of capital and this is all global companies in 2023 you look at the percent of companies that earned a return on Capital less than the cost of capital 70 almost 69% of global companies earn a return on Capital less than the cost of capital some of them might have good EX exuses but this is it is get and it's gotten increasingly difficult over time to create a business that earns more than the cost of capital globalization disruption all kinds of forces so growth mean start as a skeptic I'm not saying don't say no to growth but before you sign off on growth strategies ask about what will I have to reinvest and can I earn more than the cost of capit now in terms of you know when you think about the length of your growth bre in the Excel spreadsheet it's a number right 10 years 5 years but if you think about what you're looking at here it's your capacity to earn more than your cost to capital for an extended period I am not a corporate strategist and you probably guess that by now but I think this is the one place where I mean if you think about the essence of corporate strategy the Michael Porter f is it five forces six forces four forces whatever it is the essence of corporate strategy is figuring out a way to create barrier string to get away from that first econ 101 perfect competition World in a world where there's perfect competition nobody earns success returns and your job in business is to push away from that world to create an imperfect world we have barriers Str so I list out four possible barriers entry that you might already have as a company you might go try to build if you don't first of course is branding we talked about how brand name allows you pricing power how do you get a brand name I'd love to tell you it's marketing and advertising but with bken stock it was pure accident right hippies wore your your sandals you didn't get them they just chose it Kate Moss wor your sandals on that cover of work she wasn't pay for it she just know she could have worn boots for all you know and there's bken stock 20% of its value gone Barbie wore pink Buren stock I mean lot of brand name is just being in the right place at the right time you know you so You' heard of Celsius this new Buzzy Beverage Company I I was looking at their drinks there was like bubblegum flavored something and root I mean it was I mean it's not my deal but clearly it's got somebody's imagination it's this buzziest Beverage Company out there second it would be nice if the government would be your protector against competition right has it ever happened to a company pharmace companies that's the essence of patents right but there are companies where the government can act as your protector against competition but be very careful what you wish for because in return for that protection against competition they might take away what you hope to use because you have no competition for much of the last century phone companies and Utilities in the US were regulated monopolies what does that mean they and only they could provide Power of H this is amazing right but in return for giving you that regulated Monopoly what did government's demand in return how do you set phone company this is so long ago you probably don't remember but still true with utility prices you know that to get a rate increase ConEd has to go in front of a Regulatory Commission and what the Regulatory Commission looks at they look at your return Equity they seriously are the last people on Earth who actually believe in the cap because the cost of equity comes from this the bait and a risk free rate and if you earn more than your cost of equity the Regulatory Commission no you're already earning more than the cost of equity you lose pricing power if you're a monopoly let's face it everybody hates you right how do you get back at them you charge a higher price it makes you feel a lot better you hate me I'll charge you 20% more you're a regulated Monopoly everybody hates a phone company and when it comes to a price increase they give you a 3% price increase I'd rather be an unregulated comparative company than a regulated Monopoly switching costs you know by now you know I make a big deal about stickiness and know but the essence and I don't blame companies for do doing this is they you want to make the cost of switching into your product as low as possible I have AT&T every time I walk by a Verizon store you can almost see the Verizon guys sensing I have AT&T they're all lined up say come on in 5 minutes we can switch you to Verizon and they will 5 minutes switch you to Verizon they will offer you this 24 page document you can't even read the font you sign it and then you try switching out God help you we've already signed a 24 year contract first Bor is ours right and by the way we'll come and claim your house if you do this and we have all your data that we're not going to give to you and those voicemails you had no chance you'll ever see them I don't blame them though because without it I'll be switching back and forth from AT&T to Verizon to T-Mobile to play off the lowest player you want to keep the switching cost into your product low make the cost this is at the heart of the technology business which is you want to make that stickiness and finally if you have a cost Advantage you're going to be able to get a benefit over everybody else how do you get a cost Advantage most companies with cost advantages are owed those cost advantages why does a ramco have a cost Advantage is nothing to do with aamco's management it's because a Saudi government gave them all the rights to all of the oil under the Saudi Sands and there's your cost it cost you $6 to get oil out of the ground everybody else pays $22 you're going to make a lot of money without even trying but in some cases companies earn their cost advantages the Templeton funds were among the first funds to go into Asia and they had an advantage because they were able to collect the data learn the Asian markets well before everybody else caught on and for the first decade they were able to earn sucess returns because they were their first that that's long since fade so ultimately when you look at it so I'm going to end with the last way you can change value you can change cash flows you can try to get value you can try to lower your cost of Capital One way to do it is obviously change the mix of debt equ and if you've taken my corporate finance class we can you know and even if you haven't you can see the mix of debt and Equity but that's not the only way if you got mismatched debt short-term debt fun long-term assets don't get rid of the mismatch it lower your cost cap and there are two ancillary ways remember when we talked about Bas we talked about products and service which are discretionary having higher betes if you can find a way to make your product to service less discretionary you in effect lowered your saying how the heck do I do it I mean it's basically at the heart of you know connecting you to a product where you can't let go let's face it there are you know things that you have now that you think of as non-discretionary that you could really live without but it is what it is and if you have a lot of fixed costs try to bring them down so think about all four dimensions this is not about this this has nothing to do with your project so don't freak out but you could take the company of value and say if I ran the company or if somebody better ran the company what would the value be in my gu is there are levels you can adjust in your company no company is perfectly managed on every dimension even Nvidia there are things you could probably change that's going to become the basis of the value control and I will do it in the last session after I present your findings we'll talk about the value of control but I've set the stage together so I will see you on Monday and I hope you get your project done and to me and the numbers by Sunday