January 15, 2010
Growth stocks regain favor after value's long run
Mark Jewell
Growth is in, value is out. And it's likely to stay that way this year.
Investors who loaded their portfolios with growth stocks were rewarded in 2009. Those stocks gained an average 37 percent, nearly twice as much as value stocks.
Growth's notable performance was largely fueled by technology stocks, the biggest part of the growth category. Experts say those companies will continue to prosper as customers ramp up tech spending coming out of the recession. But experts caution a tech rally as big as last year's is unlikely.
There's no pat definition for growth stocks, but typically they generate revenue and earnings at an above-average rate. Examples are Apple and Google. Value stocks generally produce steady earnings, often pay out dividends and are considered cheap based on their price-to-earnings ratios. Companies like Bank of America, McDonald's and Wal-Mart fall into this category.
The leadership shift to growth from value marks a break from historical patterns. All told, the annual performance of growth stocks surpassed value stocks just twice in the last decade. Also, value stocks normally do much better coming out of a recession, as more economically sensitive stocks like banks and utilities rebound at the earliest signs that the economy is expanding.
"Typically, the bigger the contraction during a recession, the bigger the snapback when the economy turns," says Stephen Wood, chief market strategist of Russell Investments. "That hasn't happened this time."
This recovery has been tepid. The economy is growing about half as fast as it usually does exiting a recession, says Wood. Though the stock market has climbed 70 percent since last March, unemployment remains at 10 percent.
Still it's clear that growth stocks were hot in 2009. Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.
That big gap was reminiscent of the late 1990s, when growth had its last big run. Of course that fizzled in early 2000 as the dot-com bust pummeled technology companies.
"What happened in 2009 is not what we should expect going forward," says Jim Swanson, chief market strategist at MFS Investment Management, which manages nearly $188 billion. "We need to look at it as an extraordinary year."
The reality is that certain industries play a pivotal role in driving the performance of growth and value stocks.
Tech stocks are the biggest part of growth, accounting for 30 percent of the value of all that category's stocks in the Russell 3000. Last year those tech stocks finished up an average 59 percent — tops among 11 sectors — boosting growth's overall performance. Two of tech's biggest names put up especially strong results: Shares of Apple and Google more than doubled.
On the value side, financial services stocks are the biggest piece, making up one-quarter of the Russell 3000's value component. While many large banks came back from the brink of failure, their stocks haven't returned to pre-plunge levels. In 2009, financials trailed the broader market despite finishing up 17 percent.
Utility stocks, another value staple, also weighed down the overall performance of the category. They gained just 12 percent last year, less than any other segment of the stock market.
Ultimately, investors trying to forecast whether growth or value will lead the market should closely watch the economy.
In each of the past four recessions since 1980, growth stocks fared better than value as the economy shrank, a Russell Investments study found.
That's because growth companies' competitive advantages — think of Google's search engine dominance, for example — tend to hold up even if the economy is lousy. Value stocks tend to fall more sharply because many are in industries that are unusually sensitive to economic cycles — think of banks that see loan losses multiply in a bad economy, or energy companies that see demand from industrial customers shrink.
When the economy began expanding coming out of past recessions, value stocks began rising faster than growth stocks, the study found.
That's not the case now, so the current market is breaking with the norms. Still, after value stocks led the market nearly all the past decade, Wood, of Russell Investments, figures growth stocks could be in favor for a long while.
But even if they are, don't rush in. Individual stocks don't neatly follow the trend of their broader category. And, perhaps more importantly, Wood says the performance advantage for either growth or value is likely to be narrow.
"2010," Wood says, "will probably surprise us in how normal it will be."
http://www.realclearmarkets.com/news/ap/finance_business/2010/Jan/15/growth_stocks_regain_favor_after_value_s_long_run.html
Tuesday 19 January 2010
Growth stocks regain favor after value's long run
Originally published Saturday, January 16, 2010 at 12:01 PM
Growth stocks regain favor after value's long run
Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.
The Associated Press
BOSTON — Growth is in, value is out. And it's likely to stay that way this year.
Investors who loaded their portfolios with growth stocks were rewarded in 2009. Those stocks gained an average 37 percent, nearly twice as much as value stocks.
Growth's notable performance was largely fueled by technology stocks, the biggest part of the growth category. Experts say those companies will continue to prosper as customers ramp up tech spending coming out of the recession. But experts caution a tech rally as big as last year's is unlikely.
Typically growth stocks generate revenue and earnings at an above-average rate. Examples are Apple and Google.
Value stocks generally produce steady earnings, often pay out dividends and are considered cheap based on their price-to-earnings ratios. Companies like Bank of America, McDonald's and Wal-Mart fall into this category.
Historical patterns
The leadership shift to growth from value marks a break from historical patterns. All told, the annual performance of growth stocks surpassed value stocks just twice in the last decade.
Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.
That big gap was reminiscent of the late 1990s, when growth had its last big run. Of course that fizzled in early 2000 as the dot-com bust pummeled technology companies.
"What happened in 2009 is not what we should expect going forward," says Jim Swanson, chief market strategist at MFS Investment Management, which manages nearly $188 billion. "We need to look at it as an extraordinary year."
In each of the past four recessions since 1980, growth stocks fared better than value as the economy shrank, a Russell Investments study found.
Advantage holds up
That's because growth companies' competitive advantages — think of Google's search-engine dominance, for example — tend to hold up even if the economy is lousy. Value stocks tend to fall more sharply because many are in industries that are unusually sensitive to economic cycles — think of banks that see loan losses multiply in a bad economy.
When the economy began to expand coming out of past recessions, value stocks began to rise faster than growth stocks, the study found.
But the market now is breaking with the norms. Still, after value stocks led the market nearly all the past decade, Wood, of Russell Investments, figures growth stocks could be in favor for a long while.
But even if they are, don't rush in. Individual stocks don't neatly follow the trend of their broader category. And, perhaps more importantly, Wood says the performance advantage for either growth or value is likely to be narrow.
"2010," Wood says, "will probably surprise us in how normal it will be."
http://seattletimes.nwsource.com/html/businesstechnology/2010797412_investgrowth17.html?syndication=rss
Growth stocks regain favor after value's long run
Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.
The Associated Press
BOSTON — Growth is in, value is out. And it's likely to stay that way this year.
Investors who loaded their portfolios with growth stocks were rewarded in 2009. Those stocks gained an average 37 percent, nearly twice as much as value stocks.
Growth's notable performance was largely fueled by technology stocks, the biggest part of the growth category. Experts say those companies will continue to prosper as customers ramp up tech spending coming out of the recession. But experts caution a tech rally as big as last year's is unlikely.
Typically growth stocks generate revenue and earnings at an above-average rate. Examples are Apple and Google.
Value stocks generally produce steady earnings, often pay out dividends and are considered cheap based on their price-to-earnings ratios. Companies like Bank of America, McDonald's and Wal-Mart fall into this category.
Historical patterns
The leadership shift to growth from value marks a break from historical patterns. All told, the annual performance of growth stocks surpassed value stocks just twice in the last decade.
Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.
That big gap was reminiscent of the late 1990s, when growth had its last big run. Of course that fizzled in early 2000 as the dot-com bust pummeled technology companies.
"What happened in 2009 is not what we should expect going forward," says Jim Swanson, chief market strategist at MFS Investment Management, which manages nearly $188 billion. "We need to look at it as an extraordinary year."
In each of the past four recessions since 1980, growth stocks fared better than value as the economy shrank, a Russell Investments study found.
Advantage holds up
That's because growth companies' competitive advantages — think of Google's search-engine dominance, for example — tend to hold up even if the economy is lousy. Value stocks tend to fall more sharply because many are in industries that are unusually sensitive to economic cycles — think of banks that see loan losses multiply in a bad economy.
When the economy began to expand coming out of past recessions, value stocks began to rise faster than growth stocks, the study found.
But the market now is breaking with the norms. Still, after value stocks led the market nearly all the past decade, Wood, of Russell Investments, figures growth stocks could be in favor for a long while.
But even if they are, don't rush in. Individual stocks don't neatly follow the trend of their broader category. And, perhaps more importantly, Wood says the performance advantage for either growth or value is likely to be narrow.
"2010," Wood says, "will probably surprise us in how normal it will be."
http://seattletimes.nwsource.com/html/businesstechnology/2010797412_investgrowth17.html?syndication=rss
Interpreting Financial Information
1. WHY INTERPRETE FINANCIAL DATA?
It helps to know your markets, measure growth, and make authoritative decisives.
2. WHAT ARE COMMON BENCHMARKS?
Sales revenues, profits, number of stores, and customers.
3. HOW DO YOU EVALUATE PERFORMANCE?
COST-BENEFIT ANALYSIS
WHAT IS IT? You weigh the expected costs of launching or running a business against the expected benefits. The costs involved are variable (diretly involved with the new activity) and fixed (these remain more or less the same, regardless of the new business).
RETURN ON INVESTMENT
WHAT IS IT? A method used to measure the benefits of the project over the length of time of a project (when this is time specific).
You divide the net profit expected for the first year by the amount of expenditure and express it as a percentage of the outlay.
BREAKEVEN ANALYSIS
WHAT IS IT? It provides a way of finding out how many sales are necessary to recoup the capital spent on the original investment. You need to know your contribution margin (the percentage of each sales dollar left over after variable costs are taken aways from overall profits).
TIME VALUE OF MONEY
WHAT IS IT? It describes the concept that a dollar received today is worth more than a dollar received at some point in the future because the dollar received today can be invested to earn interest. The harsh reality is that future benefits may be worth less dollar for dollar than if the capital outlay was put in an investment fund.
4. WHAT ARE THE WAYS TO VALUE A COMPANY?
HARD NUMBERS. These are based on existing figures and include equity book value (assets minus liabilities) and fair market value (the value established between a willing buyer and a willing seller).
SOFT NUMBERS. These are based on estimates of future benefits and therefore contain an element of subjectivity.
INTANGIBLE ASSETS. These include people, knowledge, relationships, intellectual property, brand names, loyal customer base, copyrights or trademarks, mailing lists, long-term contracts, and franchises.
It helps to know your markets, measure growth, and make authoritative decisives.
2. WHAT ARE COMMON BENCHMARKS?
Sales revenues, profits, number of stores, and customers.
3. HOW DO YOU EVALUATE PERFORMANCE?
COST-BENEFIT ANALYSIS
WHAT IS IT? You weigh the expected costs of launching or running a business against the expected benefits. The costs involved are variable (diretly involved with the new activity) and fixed (these remain more or less the same, regardless of the new business).
RETURN ON INVESTMENT
WHAT IS IT? A method used to measure the benefits of the project over the length of time of a project (when this is time specific).
You divide the net profit expected for the first year by the amount of expenditure and express it as a percentage of the outlay.
BREAKEVEN ANALYSIS
WHAT IS IT? It provides a way of finding out how many sales are necessary to recoup the capital spent on the original investment. You need to know your contribution margin (the percentage of each sales dollar left over after variable costs are taken aways from overall profits).
TIME VALUE OF MONEY
WHAT IS IT? It describes the concept that a dollar received today is worth more than a dollar received at some point in the future because the dollar received today can be invested to earn interest. The harsh reality is that future benefits may be worth less dollar for dollar than if the capital outlay was put in an investment fund.
4. WHAT ARE THE WAYS TO VALUE A COMPANY?
HARD NUMBERS. These are based on existing figures and include equity book value (assets minus liabilities) and fair market value (the value established between a willing buyer and a willing seller).
SOFT NUMBERS. These are based on estimates of future benefits and therefore contain an element of subjectivity.
INTANGIBLE ASSETS. These include people, knowledge, relationships, intellectual property, brand names, loyal customer base, copyrights or trademarks, mailing lists, long-term contracts, and franchises.
Monday 18 January 2010
Valuing the company
Valuing a business is never an exact sceience with no one right away of determining a company's price. These are the common ways of appraising a business:
A. Hard numbers
B. Soft numbers
C. Intangible assets
D. Market competition
A. HARD NUMBERS
These are based on existing financial figures and include:
1. EQUITY BOOK VALUE
The simple formula is to subtract a company's liabilities from its assets based on historical records.
2. ADJUSTED BOOK VALUE
This is the same formula but takes into account the fair market value of assets and liabilities, which may produce a more accurate picture as historical records may be very out-of-date.
3. LIQUIDATION VALUE
This is another variation on the balance sheet theme that calculates how much money is left when assets are sold quickly and debts are paid off.
4. FAIR MARKET VALUE
This is simply the value established between a willing buyer and a willing seller.
5. MARKET VALUE
This applies to a publicly traded company.
B. SOFT NUMBERS
Soft numbers are based on estimates of future benefits and therefore contain an element of subjectivity.
1. INCOME METHOD
This is a measurement of the future benefits such as sales, profits, or cost savings.
2. DISCOUNTED CASH FLOW APPROACH
This approach brings future anticipated income to present value.
3. INVESTMENT VALUE
This takes into account the special benefits that a buyer accrues from acquiring the new entity.
C. INTANGIBLE ASSETS
Increasingly, prospective buyers are putting a greater onus on a company's intangible assets, which include people, knowledge, relationships, intellectual property, brand names, loyal customer base, copyrights or trademarks, proprietary mailing lists, long-term contracts, and franchises.
Some intangible assets can be priced using traditional approaches such as:
1. COST-BASED VALUATION
How much would it cost you to duplicate some of these assets today?
2. MARKET-BASED VALUATION
What were the sale transactions of brand-named goods in the sector?
3. CUSTOMER-DRIVEN VALUATION
What is the value of a loyal customer? What does the average customer spend per purchase a year? How long has he been a customer?
D. MARKET COMPETITION
Research into the company and its place in its sector are also relevant. Is your business in a growth industry or a declining one?
A. Hard numbers
B. Soft numbers
C. Intangible assets
D. Market competition
A. HARD NUMBERS
These are based on existing financial figures and include:
1. EQUITY BOOK VALUE
The simple formula is to subtract a company's liabilities from its assets based on historical records.
2. ADJUSTED BOOK VALUE
This is the same formula but takes into account the fair market value of assets and liabilities, which may produce a more accurate picture as historical records may be very out-of-date.
3. LIQUIDATION VALUE
This is another variation on the balance sheet theme that calculates how much money is left when assets are sold quickly and debts are paid off.
4. FAIR MARKET VALUE
This is simply the value established between a willing buyer and a willing seller.
5. MARKET VALUE
This applies to a publicly traded company.
B. SOFT NUMBERS
Soft numbers are based on estimates of future benefits and therefore contain an element of subjectivity.
1. INCOME METHOD
This is a measurement of the future benefits such as sales, profits, or cost savings.
2. DISCOUNTED CASH FLOW APPROACH
This approach brings future anticipated income to present value.
3. INVESTMENT VALUE
This takes into account the special benefits that a buyer accrues from acquiring the new entity.
C. INTANGIBLE ASSETS
Increasingly, prospective buyers are putting a greater onus on a company's intangible assets, which include people, knowledge, relationships, intellectual property, brand names, loyal customer base, copyrights or trademarks, proprietary mailing lists, long-term contracts, and franchises.
Some intangible assets can be priced using traditional approaches such as:
1. COST-BASED VALUATION
How much would it cost you to duplicate some of these assets today?
2. MARKET-BASED VALUATION
What were the sale transactions of brand-named goods in the sector?
3. CUSTOMER-DRIVEN VALUATION
What is the value of a loyal customer? What does the average customer spend per purchase a year? How long has he been a customer?
D. MARKET COMPETITION
Research into the company and its place in its sector are also relevant. Is your business in a growth industry or a declining one?
Sources of Finance for financing growth
WHAT CHOICES DO YOU HAVE TO RAISE FUNDS?
1. DEBT FINANCING involves a loan that will accumulate future interest.
2. EQUITY FINANCING involves accepting a lump sum in exchange for selling the future benefits and profits of your business to investors.
WHAT MIX OF DEBT/EQUITY IS USED IN A BUSINESS LIFE CYCLE?
1. SEED STAGE
WHAT IS IT? When your business is just a thought or an idea
FINANCIAL SOURCES:
2. START-UP STAGE
WHAT IS IT? When the company has officially launched.
FINANCIAL SOURCES:
3. GROWTH-STAGE
WHAT IS IT? When a business has successfully traded for a period.
FINANCIAL SOURCES:
4. MATURE STAGE
WHAT IS IT? When its business has an established place in the market.
FINANCIAL SOURCES:
Key terms
Angel investor: a wealthy individual, often a retired business owner or executive, who hands over capital to a new business in return for ownership equity.
Venture capitalists: commonly large institutions seeking to invest considerable amounts of capital into growing businesses through a series of invesmtent vehicles that include state and private pension funds, university endowments, and insurance companies.
Commercial paper: a money market secuirty issued by large banks and corporations for short term investments (maximum nine months) such as purchases of inventory. These unsecured IOUs are consideed safe, but returns are small.
Factoring: describes a loan by a third party (factor) given in the form of cash (often within 24 hours) for accounts receivable. The borrower pays a percentage of the invoice.
1. DEBT FINANCING involves a loan that will accumulate future interest.
2. EQUITY FINANCING involves accepting a lump sum in exchange for selling the future benefits and profits of your business to investors.
WHAT MIX OF DEBT/EQUITY IS USED IN A BUSINESS LIFE CYCLE?
1. SEED STAGE
WHAT IS IT? When your business is just a thought or an idea
FINANCIAL SOURCES:
- Family and friends
- Private savings
- Credit cards: usually much quicker than waiting for a loan approval.
2. START-UP STAGE
WHAT IS IT? When the company has officially launched.
FINANCIAL SOURCES:
- Banking, typically the first option of small business owners.
- Small, community banks.
- Leasing: paying a monthly payment for renting assets like equipment or office space.
- Factoring: paying an advance rate to a third party (factor) in exchange for cash.
- Trade credit: when a supplier allows the buyer to delay payment.
3. GROWTH-STAGE
WHAT IS IT? When a business has successfully traded for a period.
FINANCIAL SOURCES:
- Angel investor: a wealthy individual who hands over capital in return for ownership equity.
- Venture capital funds: large institutions seeking to invest considerable amounts of capital into growing businesses through a series of investment vehicles.
- Initial public offering (IPO): the sale of equity in a company, generally in the form of shares of common stock, through an investment banking firm.
4. MATURE STAGE
WHAT IS IT? When its business has an established place in the market.
FINANCIAL SOURCES:
- Capital market securities such as common stock, dividends, voting rights.
- Bonds - loans that take the form of a debt security where the borrower (known as the issuer) owes the holder (the lender) a debt and is obliged to repay the principal and interest (the coupon).
- Commercial paper - a money market security issued by large banks and corporations for short-term investments (maximum nine months) such as purchases of inventory
Key terms
Angel investor: a wealthy individual, often a retired business owner or executive, who hands over capital to a new business in return for ownership equity.
Venture capitalists: commonly large institutions seeking to invest considerable amounts of capital into growing businesses through a series of invesmtent vehicles that include state and private pension funds, university endowments, and insurance companies.
Commercial paper: a money market secuirty issued by large banks and corporations for short term investments (maximum nine months) such as purchases of inventory. These unsecured IOUs are consideed safe, but returns are small.
Factoring: describes a loan by a third party (factor) given in the form of cash (often within 24 hours) for accounts receivable. The borrower pays a percentage of the invoice.
External Form of Growth: Could your business benefit from these?
Business can grow by:
EXTERNAL FORMS OF GROWTH
Could your business benefit from an acquisition or a merger?
Again, you need to take a good look at the business to understand just where it is at the present time.
SOME OF THE QUESTIONS TO ASK ARE:
FACTORS TO CONSIDER
So what would be the reasons for considering growth either through a merger or by an acquisition?
Among the forms of external growth are:
- Internal growth: By paying attention to the internal affairs of the company, and diversifying into new products and new markets.
- Go-it-alone option:
- External growth: Through mergers and acquisitions.
EXTERNAL FORMS OF GROWTH
Could your business benefit from an acquisition or a merger?
Again, you need to take a good look at the business to understand just where it is at the present time.
- What are the strengths that you can build on?
- What do you have that would make your company attractive to other companies?
- Are there areas of weakness in the business?
- Could these be strengthened by acquiring another company or merging your business with another?
SOME OF THE QUESTIONS TO ASK ARE:
- Should we obtain more quality staff with different skils?
- What do we know about our sector of the industry or service? Could we improve our business intelligence to our advantage?
- Is our business underperforming and, if so, in which area(s)?
- Can we access funds for further development without endangering the normal business cash flow?
- Could we access a wider customer base and increase our market share without outside help? How much would it cost in extra resources?
- Could we diversify into other products or service areas? What would be the long-term effects?
- Can we reduce our cost and overhead structure without damaging our product, service, or customer base? Would there be an adverse effect on performance and quality?
- What would be the effect if we could reduce the competition?
- Would "organic growth" take too long?
FACTORS TO CONSIDER
So what would be the reasons for considering growth either through a merger or by an acquisition?
- Bigger is better?
- Image enhancement?
- Market expansion?
- Product range expansion?
- Diversification?
Among the forms of external growth are:
- Mergers
- Acquisitions
- Joint ventures
- Partnerships
- Collaborations
Mergers and Acquisitions: When not to?
When not to merge or acquire?
- When a review of the business shows that internal processes can be improved and that growth can be achieved internally.
- When the costs of either option would not be commensurate with the increased turnover and profits.
- When the cost of raising finance for an acquisition would not be covered by the sale of unwanted assets.
- When there is a danger of losing the identity of your company in either option.
- When there would be no chance of creating a working management structure for the enlarged business.
- When the market would not be able to support the planned increase in production.
- When the merger or acquisition would lead to the danger of a loss of intellectual property.
Successful Mergers and Acquisitions
- Do a company "health check." Examine every possible facet of the business.
- Discover if there any areas for improvement and prune out any waste.
- Complete an up-to-date SWOT analysis.
- Ensure that your strengths and opportunities support an external growth strategy.
- Weigh up the likely contenders for a merger/acquisition.
- Decide which strategy will be best for the company, bearing in mind that an acquisition can be a costly and sometimes bitter affair.
- Try to prevnet plans for either form of growth being made public too soon; this could build resistance.
- Decide on the future direction of the enlarged organisation and management strategies before any move is made.
- On acquiring another company, there may be parts that do not fit into future plans; have a policy for disposal.
- Decide in advance the financial limits.
Merger and Acquisitions - What can go wrong?
What can go wrong?
The extent and the quality of planning and research done before the merger or acquisition deal is done will largely determine the outcome. Thee are occasions when situations will arise that are outside your control. It is worthwhile to consider the following situations and to prepare for them.
THE DEAL COULD FAIL OR PROVE TO BE VERY EXPENSIVE IF:
1. Agreement cannot be reached on who should run the business in the case of a merger or, in the case of an acquisition, how long the previous management team will continue to remain involved.
2. Word gets out in the press that you are interested in merging or acquiring a particular business and a "bidding war" breaks out in which other determined parties are interested in buying into the business.
3. Your own business performance suffers because you have to spend too long on the deal and the transition stages.
4. Key people in either organization leave because of uncertainty.
5. The expected savings in costs do not materialize.
In 1999, the management group KPMG studied 700 mergers and acquisitions. Their conclusions found that:
In 2003, a report issued by another group, Towers Perrin, indicated that there was a considerable increase in merger and acquisition activity, but surveys of companies concerned "still admit to a high failure rate."
In 1999, the management group KPMG studied 700 mergers and acquisitions. Their conclusions found that:
- 53% reduced the value of the companies.
- 17% produced no added value.
- Most "mergers" were acquisitions in disguise.
- 57% of "doomed deals" were caused by incompatible cultures in the companies involved.
- In 42% of cases, a clash of management styles or egos was responsible for the failure.
External growth - Acquisition
What is an acquisition?
Meaning "to gain possession of," the acquisition of all parts of another business is an alternative method to develop or expand your own business.
1. An acquisition is the most apposite option where you need specialist skills and knowledge or facilities for your own future development.
2. This is a way of filling "holes" in a company's current or future straegy; it can be very successful as long as there is a good understanding of what the knowledge gaps are and how they cna be filled effectively.
3. As is the case with mergers, the relevant questions should be asked and answered, and the correct business fit must be achieved.
Most acquisition involve businesses of unequal size with, usually, the larger or more powerful company purchasing or acquiring the smaller. In recent times, this has not always been the case, and examples can be found of relatively small companies buying out much larger ones, either to obtain resources or to gain additional assets to supplement those currently owned.
Such deals are usually financed quite heavily with loasn and other deals and are often followed by a very vigorous pruning of parts of the acquisition to repay the financing involved. This is known as asset stripping and is rarely intended to achieve growth of an established business, but rather functions as a financial dealing that will generate cash for further enlargement.
HOSTILE ACQUISITIONS OR TAKEOVERS
Many acquisitions are known as "hostile takeovers" where the management of the company being purchased actively resists the unwanted overtures of the predator company.
When talking about mergers, such phrases as: "teamwork," "sharing," and "mutual benefit" are appropriate; some expressions used when considering hostile takeovers might be:
Before any acquisition (or merger) it is essential to establish that what you think you are acquiring is real and worthwhile and to use a process such as due diligence. This includes complete studies of the business you seek to acquire, which should be carried out by specialist, univolved, third parties, who look at every part of the business and report on its viability to meet the requirements you have set before you take irrevocable action.
VALUING THE ACQUISITION
There are several valuation methods that can be used, and it is always best to seek professional expert advice before making the final decision. You will need to consider many relevant factors to obtain an overview of how healthy the business might be, these include:
THE FINANCIAL STRUCTURE OF AN ACQUISITION IS:
Company "C" shares ----> ----> ----> Company "A" shares ---->> Larger company "A" shares
Meaning "to gain possession of," the acquisition of all parts of another business is an alternative method to develop or expand your own business.
1. An acquisition is the most apposite option where you need specialist skills and knowledge or facilities for your own future development.
2. This is a way of filling "holes" in a company's current or future straegy; it can be very successful as long as there is a good understanding of what the knowledge gaps are and how they cna be filled effectively.
3. As is the case with mergers, the relevant questions should be asked and answered, and the correct business fit must be achieved.
Most acquisition involve businesses of unequal size with, usually, the larger or more powerful company purchasing or acquiring the smaller. In recent times, this has not always been the case, and examples can be found of relatively small companies buying out much larger ones, either to obtain resources or to gain additional assets to supplement those currently owned.
Many acquisitions are known as "hostile takeovers" where the management of the company being purchased actively resists the unwanted overtures of the predator company.
- "We have bought you."
- "Do as you are told."
- "Our way is best."
Before any acquisition (or merger) it is essential to establish that what you think you are acquiring is real and worthwhile and to use a process such as due diligence. This includes complete studies of the business you seek to acquire, which should be carried out by specialist, univolved, third parties, who look at every part of the business and report on its viability to meet the requirements you have set before you take irrevocable action.
Using the due diligence procedure to arrive at incisive answers to the many questions needed, to making the decision to acquire, represents the exemplary use of due diligence.
There are several valuation methods that can be used, and it is always best to seek professional expert advice before making the final decision. You will need to consider many relevant factors to obtain an overview of how healthy the business might be, these include:
- The history of the business
- The current performance
- The financial situation
- The condition of the premises
- Intangible assets
- Employees
- how much you think the business is worth, and
- how much you are prepared to offer, if you decide to proceed.
THE FINANCIAL STRUCTURE OF AN ACQUISITION IS:
External growth - Merger
What is a merger?
The dictionary definition of a merger in the business or commercial context is "the combination of two or more companies, either by the creation of a new organization or by absorption by one of the others."
The underlying logic of mergers is that the resulting enterprise will be stronger than the combined resources of the individual companies. This is described as synergy, and it offers more business possibilities. It also has the advantage that there will be less competition as a result of the merger, although this depend on the guidelines of a monopoly commission.
WHAT ARE THE MAJOR ATTRIBUTES OF A TRUE MERGER?
1. TEAMWORK
2. SHARING
3. NONDOMINATION
4. MUTUAL BENEFIT
THE FINANCIAL STRUCTURE FOR A MERGER IS:
Company "A" Shares -----> COMPANY "C" SHARES
Company "B" Shares -----> COMPANY "C" SHARES
IS THE TIME RIGHT FOR A MERGER?
Ascertaining whether the time is right for a merger depends on the state of your business relative to the market and to the competition.
The dictionary definition of a merger in the business or commercial context is "the combination of two or more companies, either by the creation of a new organization or by absorption by one of the others."
The underlying logic of mergers is that the resulting enterprise will be stronger than the combined resources of the individual companies. This is described as synergy, and it offers more business possibilities. It also has the advantage that there will be less competition as a result of the merger, although this depend on the guidelines of a monopoly commission.
WHAT ARE THE MAJOR ATTRIBUTES OF A TRUE MERGER?
1. TEAMWORK
2. SHARING
3. NONDOMINATION
4. MUTUAL BENEFIT
THE FINANCIAL STRUCTURE FOR A MERGER IS:
Company "A" Shares -----> COMPANY "C" SHARES
Company "B" Shares -----> COMPANY "C" SHARES
IS THE TIME RIGHT FOR A MERGER?
Ascertaining whether the time is right for a merger depends on the state of your business relative to the market and to the competition.
Come and have a drink with me!
Don't Trust Anyone Who Doesn't Drink
John Carney | Jan. 14, 2010,
Why do so many social and business functions involve drinking?
Because it's one of the easiest ways to properly evaluate who is trustworthy. In vino veritas and all that.
But don't take our word for it. Here's a new economics paper making the argument.
In Vino Veritas: The Economics of Drinking:
It is argued that drug consumption, most commonly alcohol drinking, can be a technology to give up some control over one's actions and words. It can be employed by trustworthy players to reveal their type. Similarly alcohol can function as a "social lubricant" and faciliate type revelation in conversations. It is shown that both separating and pooling equilibria can exist; as opposed to the classic results in the literature, a pooling equilibrium is still informative. Drugs which allow a gradual loss of control by appropriate doses and for which moderate consumption is not addictive are particularly suitable because the consumption can be easily observed and reciprocated and is unlikely to occur out of the social context. There is a trade-off between the efficiency gains due to the signaling effect and the loss of productivity associated with intoxication. Long run evolutionary equilibria of the type distribution are considered. If coordination on an exclusive technology is efficient, social norms or laws can raise efficiency by legalizing only one drug.
(Hat tip: Larry Ribstein.)
http://www.businessinsider.com/dont-trust-anyone-who-doesnt-drink-2010-1
John Carney | Jan. 14, 2010,
Why do so many social and business functions involve drinking?
Because it's one of the easiest ways to properly evaluate who is trustworthy. In vino veritas and all that.
But don't take our word for it. Here's a new economics paper making the argument.
In Vino Veritas: The Economics of Drinking:
It is argued that drug consumption, most commonly alcohol drinking, can be a technology to give up some control over one's actions and words. It can be employed by trustworthy players to reveal their type. Similarly alcohol can function as a "social lubricant" and faciliate type revelation in conversations. It is shown that both separating and pooling equilibria can exist; as opposed to the classic results in the literature, a pooling equilibrium is still informative. Drugs which allow a gradual loss of control by appropriate doses and for which moderate consumption is not addictive are particularly suitable because the consumption can be easily observed and reciprocated and is unlikely to occur out of the social context. There is a trade-off between the efficiency gains due to the signaling effect and the loss of productivity associated with intoxication. Long run evolutionary equilibria of the type distribution are considered. If coordination on an exclusive technology is efficient, social norms or laws can raise efficiency by legalizing only one drug.
(Hat tip: Larry Ribstein.)
http://www.businessinsider.com/dont-trust-anyone-who-doesnt-drink-2010-1
China Responds To Google: Go To Hell
China Responds To Google: Go To Hell
Henry Blodget |
Jan. 14, 2010,
China's initial public response to Google's threat is in, and it's what one would have expected: Go to hell.
Now the two can start negotiating quietly behind the scenes.
We still expect this war to be resolved in a compromise in which both parties declare victory and reserve the right to kill each other later. There's a substantial chance, however, that Google will be forced to actually follow through on its threat and leave the country. (Backing down at this point would be a disaster).
There's no chance, meanwhile, that the Chinese government will allow itself to appear to be pushed around by a pissant Internet company. So Google had to have expected this.
FT: One of China’s top censors on Thursday reaffirmed the state’s commitment to monitoring the internet, showing no signs of compromising in the face of Google’s threat to quit the country.
Wang Chen, head of the State Council Information Office and deputy head of the Communist party’s propaganda department, said internet media “must live up to their responsibility of maintaining internet security”, including censoring content.
“We must do our best to intensify self-discipline among internet media to guarantee internet security... Online media must treat the creation of a positive mainstream opinion environment as an important duty,” he said.
"A positive mainstream opinion environment." And we thought our media was bad.
http://www.businessinsider.com/henry-blodget-china-responds-to-google-go-to-hell-2010-1
Henry Blodget |
Jan. 14, 2010,
Now the two can start negotiating quietly behind the scenes.
We still expect this war to be resolved in a compromise in which both parties declare victory and reserve the right to kill each other later. There's a substantial chance, however, that Google will be forced to actually follow through on its threat and leave the country. (Backing down at this point would be a disaster).
There's no chance, meanwhile, that the Chinese government will allow itself to appear to be pushed around by a pissant Internet company. So Google had to have expected this.
FT: One of China’s top censors on Thursday reaffirmed the state’s commitment to monitoring the internet, showing no signs of compromising in the face of Google’s threat to quit the country.
Wang Chen, head of the State Council Information Office and deputy head of the Communist party’s propaganda department, said internet media “must live up to their responsibility of maintaining internet security”, including censoring content.
“We must do our best to intensify self-discipline among internet media to guarantee internet security... Online media must treat the creation of a positive mainstream opinion environment as an important duty,” he said.
"A positive mainstream opinion environment." And we thought our media was bad.
http://www.businessinsider.com/henry-blodget-china-responds-to-google-go-to-hell-2010-1
Jim Chanos: China Is Headed For A Huge Crash
Nov. 11, 2009,
The China bears could be dismissed as a bunch of cranks and grumps except for one member of the group: hedge fund investor Jim Chanos. Read the whole thing >
Chanos is reportedly attempting to short the entire Chinese economy. What's fueling the short case against China?
http://www.businessinsider.com/jim-chanos-china-is-headed-for-a-huge-crash-2009-11
- The $4.3 trillion Chinese economy is under-performing despite a $900 billion stimulus program.
- China seems to be cooking its books. For instance, it reports that car sales are surging while gasoline consumption is flat. Is that realistic? Or are state run Chinese companies just stock-piling cars?
- China may have too much capacity. The central planners built out productive capacity for a booming economy but China is stalling. In nearly every sector of the economy, China is in danger of producing huge quantities of goods with no buyers.
- China's economic and political posturing signals that its leaders have no idea what is in store for them. The result may be a surprising economic collapse, akin to what happened when the housing bubble popped in the US.
The practicalities of growth in your business
There are many resources that need to be considered when deciding to grow the business. Among these are:
FINANCE
It is unlikely that the business will have generated large reserves of cash that will enable expansion to be paid for from internal sources.
STAFF
Do you have sufficient staff to undertake the extra work, or will you need to employ more people?
PREMISES
Do you have sufficient rooms for the new production facilities and increased stock levels of both materials and finished parts?
MARKETING
Can your current marketing arrangements cope with increased sales and the new product or service?
Having posed some questions regarding the availability of finance, staff, and premises, it is necessary to know where to look for sources of supply of these.
FINANCE
It is unlikely that the business will have generated large reserves of cash that will enable expansion to be paid for from internal sources.
STAFF
Do you have sufficient staff to undertake the extra work, or will you need to employ more people?
PREMISES
Do you have sufficient rooms for the new production facilities and increased stock levels of both materials and finished parts?
MARKETING
Can your current marketing arrangements cope with increased sales and the new product or service?
Having posed some questions regarding the availability of finance, staff, and premises, it is necessary to know where to look for sources of supply of these.
The "go-it-alone" option for growth
One option for growth that falls between internal and external growth is the go-it-alone option.
- The major benefit of this option is that the business retains full control with all profits (or losses) retained in-house, as are all designs, manufacturing and marketing knowledge.
- It presupposes the business is in good financial and operational "health": and that it can supply all of the necessary resources to launch and supply into the market.
- Although the title of the option suggests that all the work is carried out in-house, this will depend on the manufacturing strategy that is operating within the company.
- Even though most businesses would like to keep control of all the processes involved in manufacturing their products or the services they offer, economics and common sense decree that some processes are best performed by outside contractors. This is referred to as a "make or buy policy" and will determine where work is performed.
- The work of the contractors is controlled to advantage through agreements and contracts.
Internal Growth through Diversification into other related products or services
Many small businesses can grow by diversifying into other related products or services. For example, an office stationery supplier might decide to add a range of computer consumables to its portfolio. This could result in existing customers now buying these items as well.
Diversification can occur in different forms, such as:
Before deciding on diversification, take the following actions:
It would be damaging if the customer orders are plentiful but the supply of the product or service is intermittent.
In early stages, diversification will rate highly in your risk assessment program, and in order to mitigate some of the risk, it is advisable to try to secure customer orders or commitments in advance of stepping up production.
Diversification can occur in different forms, such as:
- Selling similar or related new products to exisitng customers.
- Selling existing products into new markets, even overseas.
- Selling new products to new markets.
Before deciding on diversification, take the following actions:
- Thoroughly research both markets and customers for the new product or service.
- Decide on a clear development strategy.
- Do a trial run with a limited output of prototypes to test the market before committing to the new product or service.
- Ensure that the internal departments and outside suppliers can maintain a steady throughput to provide continuity.
It would be damaging if the customer orders are plentiful but the supply of the product or service is intermittent.
In early stages, diversification will rate highly in your risk assessment program, and in order to mitigate some of the risk, it is advisable to try to secure customer orders or commitments in advance of stepping up production.
Business strategy for growth
Business strategy is ... "....the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals."
This necessitates a thorough evaluation of a business to get a clear picture of its strengths, weaknesses, opportunities and threats (SWOT). This will provide important insights into the type of growth strategy that best suits the business for the immediate and long-term future.
INTERNAL GROWTH
The first thing to establish is whether you can increase your share of the market. To do this, you would have to take customers from your competitors or attract new customers. You have to understand your customer base and that of your competitors.
CUSTOMERS
Who are your existing customers?
Are there any that you ahve not yet targeted?
Are there any that no longer do business with you? Why?
Do any of them buy from your competitors? Why?
Do they have instant, alternative choices?
COMPETITORS
What are their strengths? Can you match them?
Have you lost customers to them?
What do they do better than you do?
OURSELVES
What is our sustainable competitive advantage?
What do we do that is better than our competitors?
What is our unique selling point?
How will growth affect our pricing, marketing and service levels?
Before increasing output by increasing the capacity of your processes, you need to ensure that there will be a market for your proposed additional producsts. Many companies have increased output in the anticipation that the market will follow, only to find that there is a downturn or that a competitor has already improved performance.
This necessitates a thorough evaluation of a business to get a clear picture of its strengths, weaknesses, opportunities and threats (SWOT). This will provide important insights into the type of growth strategy that best suits the business for the immediate and long-term future.
INTERNAL GROWTH
- Are there ways in which you can improve the efficiency of the business?
- The use of a system of statistical process control will show if your processes are working correctly.
- Could the quality of the product or service be improved?
- Adopting a system of Total Quality Management (TQM) may effect a change to your end product.
- Are costs as competitive as they can be?
- If these checks are carried out successfully, then it is reasonable to expect that the business will grow by its organic growth. This will make the business more competitive.
The first thing to establish is whether you can increase your share of the market. To do this, you would have to take customers from your competitors or attract new customers. You have to understand your customer base and that of your competitors.
CUSTOMERS
Who are your existing customers?
Are there any that you ahve not yet targeted?
Are there any that no longer do business with you? Why?
Do any of them buy from your competitors? Why?
Do they have instant, alternative choices?
COMPETITORS
What are their strengths? Can you match them?
Have you lost customers to them?
What do they do better than you do?
OURSELVES
What is our sustainable competitive advantage?
What do we do that is better than our competitors?
What is our unique selling point?
How will growth affect our pricing, marketing and service levels?
Before increasing output by increasing the capacity of your processes, you need to ensure that there will be a market for your proposed additional producsts. Many companies have increased output in the anticipation that the market will follow, only to find that there is a downturn or that a competitor has already improved performance.
Assess your options for growth in business
After you have completed a full assessment of your business in its current state and you feel confident that you have all departments and areas working efficiently and under control, it is time to look to the future.
Growth options can be divided into two categories, internal and external.
1. Internal growth or growth that can be achieved within your own business will involve
- What is your vision for the future?
- Does your business plan offer a realistic guide as to your future direction?
- Do you just want to consolidate your current position or do you want to find ways to make the business grow?
- Can you afford to do nothing?
- While you do nothing, your competitors will be growing and taking your market share - this will seriously damage your business's future.
- To ensure that your business remains a success, it is time to identify your options for growth.
Growth options can be divided into two categories, internal and external.
1. Internal growth or growth that can be achieved within your own business will involve
- increasing market share or
- diversification.
- by merging with or acquiring another company or
- by forming a partnership or joint venture with another business.
Gathering Information to create the budget
Once you have identified your objectives, you need to turn to the important process of gathering key information to enable you to create the budget.
ESTIMATING SALES AND REVENUE
As sales of products and services are the lifeblood of most companies, you will inevitably start with a projection of sales and revenue. This can be a tricky process because it involves guessing the future, but there are certain actions you can take to make a forecast easier.
The next part of your budget should include all the costs of operation involved in producing and delivering the product or service to customers. These are factors that need to be considered:
SPECIFIC PRODUCT COSTS
ONGOING COSTS
START-UP COSTS
CHALLENGING THE FIGURES
At this stage, you may feel confident about stating some figures (more typically expenditure because these are easier to predict) and more nervous about sales and profit figures, mainly because these are subject to
The following approaches may be helpful in allowing you to challenge the figures that you have initially compiled.
ESTIMATING SALES AND REVENUE
As sales of products and services are the lifeblood of most companies, you will inevitably start with a projection of sales and revenue. This can be a tricky process because it involves guessing the future, but there are certain actions you can take to make a forecast easier.
- USE PAST SALES
- DISTINGUISH BETWEEN PRODUCTS
- LOOK AT THE COMPETITION
- ASK SUPPLIERS
- READ SECTOR REPORTS
- STUDY INNOVATIVE PRODUCTS
- MONITOR CASH FLOW
ESTIMATING EXPENDITURE
The next part of your budget should include all the costs of operation involved in producing and delivering the product or service to customers. These are factors that need to be considered:
- DEFINE EXPENDITURE TYPES: 4 main types:-
SPECIFIC PRODUCT COSTS
ONGOING COSTS
START-UP COSTS
- DEFINE EXPENDITURE TIMING
- ESTIMATE PROFITS/LOSS
CHALLENGING THE FIGURES
At this stage, you may feel confident about stating some figures (more typically expenditure because these are easier to predict) and more nervous about sales and profit figures, mainly because these are subject to
- a number of variables such as the action of competitors or
- changes in the economy that you have not foreseen.
The following approaches may be helpful in allowing you to challenge the figures that you have initially compiled.
- "WHAT-IF" SCENARIOS: by working on the assumption that the final result is not as favourable to the company as you had hoped. To avoid becoming too negative, you could include two sets of figures, underlying which you place your initial set of projected figures.
- ZERO-BASED BUDGETING: the process whereby a company decides what target it wants to achieve, how this can be achieved, and what resources it needs to implement the result; also known as bottom-down budgeting.
- ACTIVITY-BASED COSTING: costing by activities that define any actions that a company takes regularly as part of its day-to-day operations.
Subscribe to:
Posts (Atom)