Managing Shareholder Value

In company’s announcement,Management/Board will usually use the share-buyback strategy to inform its shareholder that it is a means of maximizing shareholder value.

So let’s look at some basics of Share buyback to understand the rationale of such announcement:

What is Share buyback:
Basically, it is the purchase by a listed company of its own shares.
In what way(s) can we institute a Share buyback scheme:
Can be using the following ways:

• The most common is when a company buys shares on the open market. A company has to get approval from its shareholders during the Annual General Meeting in order to buy back its shares.

• Another one which is less common, is that a company can announce a tender offer. This involves all shareholders submitting a price they would be prepared to accept for their shares. In both instances once the company buy backs the shares it will cancel them, so they will cease to exist. Therefore a company cannot flog the same shares back onto the market at a later date.

Is share buyback something new in the market?
Share buyback has been here for long time. However, it’s popularity catapulted over the past twenty years. In the United States alone, corporate expenditures on share buybacks as a percentage of earnings are ten times higher today than there were in 1980. In the late 1990s, for the first time companies spent more money repurchasing their shares than on paying dividends. Share buybacks are also flourishing globally. In recent years, countries like the U.K. and Canada have seen an increase in activity while other nations that previous prohibited buybacks, including Germany and Japan, have adopted provisions to make them acceptable.

Why do or what are the reasons for companies to buy back their shares?

• To deploy excess cash flow and return it to shareholders as the management deem that they are unable to utilize these surplus cash to earn higher than the company’s cost of capital. In recent years, it is interesting to note that the fund managers or investment institutions favor companies to return their surplus cash rather than sitting on it just in case they might need it for future acquisitions. The institutions believe that it should be their decision, and not the company’s, to hold part of their assets in cash, Read the rest of this entry »

Venture capital is one venue where shareholder value can be minimized as the risk will then be shared with other parties.

Let’s understand some basics of venture capital:

(a) What really is venture capital?

• Venture capital is a form of “ risk capital” where the capital is invested in a project/business with substantial element of risk relating to the future creation of profits and cash flows.

• Furthermore, this “risk capital” is invested as shares (equity) rather than as a loan and the investor requires a higher”rate of return” to compensate him for his risk.

• They have the characteristic of long-term in nature and “committed” capital, to help unquoted companies grow and succeed.

There is a significant contrast between a loan versus venture capital funding. Read the rest of this entry »

Market Risk:

1. In December 1994, Orange County’s Treasurer, Bob Citron, who was entrusted with a USD7.5 billion investment pool, invested a significant amount of money in derivative securities namely “structured notes” and inverse floaters” When interest rates rose, the rates on these derivatives securities declined along with the market value of those notes. This resulted in a USD1.7billion loss to the Orange County Investment Pool.

2. Gibson Greetings Inc. faced similar market risk during its aggressive purchasing of interest rate derivatives to take advantage of falling rates. When interest rates began to climb, Gibson sustained a USD20million loss on its derivative contracts. Read the rest of this entry »

Many companies are still not fully aware of the benefits of ensuring proper risk management. Recently there are many cases where shareholder value are seriously eroded because of a single person assuming too much power/authority.

Firstly, we really need to understand some of the following benefits managing Risk or Risk management:

• Once we have established a sound risk management culture into the organisation’s business framework, it promote productivity in the sense that senior management and line managers can focus more on their primary responsibilities instead of squandering resources on “fire-fighting” the challenges that may arise due to the lack of such practices,

• Its strengthen the business planning processes by allowing decision-makers to make contingency plans to avert possible “ mishaps” thereby producing more realizable opportunities for the organization on the whole and leading to increased shareholder value,

• It’s enhance shareholder value as it assist in reducing expenses as there are many direct and indirect cost of risk. Read the rest of this entry »

There is the increasing trend of listed companies going towards privatisation exercises.
Hence, it is important that we are aware of the reason for majority shareholders or founder shareholders of public listed companies to go private.

Listed below are some of the reasons :

• their company‘s share prices have been grossly under-valued by the public/share market;
• to avoid public scrutiny especially with the onerous corporate governance and disclosure requirements;
• the initial objective of listing no longer provide any tangible benefits;
• to avoid assets strippers/predators who seeks the opportunities in public listed companies where their share prices are below their net tangible assets (particularly in property development and stock broking businesses);
• high cost of maintaining those onerous corporate governance and disclosure requirements; Read the rest of this entry »

IPO/Listing is often the commonest key to unlock and maximised shareholder value.

Append below are some of the following obvious advantages of taking a private company into a public listed status:

• Enhances profile and standing of the company;
• Access to capital market;
• Flexibility in sourcing funds;
• Ability to get cheaper funding due to public listed status; Read the rest of this entry »

There are no right or wrong in pursuing inorganic growth vide M&A, as Managment/Board of those companies that are in the sunset industries are coerced by shareholder to look further.

Besides the above, the following are some of KEY REASONS for executing M&A:

1. Globalisation of business: Increased cross-border investments require companies in this region to remain competitive (e.g. minimise production cost and increase efficiency via maximising technology transfer). They may have to venture overseas to remain in business. Alternatively, companies may merge as a quicker way to grow bigger and stronger and to exploit synergies. Read the rest of this entry »

Very often, the Board of companies who have accumulated losses will issue right issues to its shareholders and start announcing/convincing them about the company’s future transformation they want to be

So let’s lookat at some of these strategies that can form the blueprint/excuses for transformation are:-

• immediate divestment of non-strategic businesses, Read the rest of this entry »

Earlier article there is the mention of hiving off as a mean to maximize/increase shareholder value. There is another corporate re-structuring/manuveure which is the opposite which is Hiving-down when a failed/restructured company want to create shareholder value.

So let’s look at what is Hiving-down?

It is the transfer of a business from an insolvent company owning it to a new subsidiary which is specially form for the purpose.

By doing so, there are advantages derived from it: Read the rest of this entry »

Besides inorganic growth vide Mergers & Acquisition,privatization,share-buyback and other strategies, one can also deploy a breakup strategy to enhance shareholder value. Incidentally, this break-up strategy is an attempt to make known to the market that your company’s worth is more than what has been assigned by the analyst. This is called “value transparency”.

The belief is that by valuing as a stand alone entity instead of as a “bundle” within a group of companies, the value should then become more obvious and might reflect a more favorable value.

Basically, breakup strategies can be in various forms as illustrated below: Read the rest of this entry »