Criticial Finance Issues: Financial Times Briefing

CR ITIC AL F INAN CIAL ISS UES

70

financial indicators of a business are deteriorating. This is a case of banks being

unwilling to lend just when you need the money: hence the old saying about a bank

wanting its umbrella back just when it begins to rain. Committed lines of credit can

be arranged for a fee. There are also other means of raising finance quickly on

assets, such as leasing assets or invoice discounting (raising money on debtors).

Shareholder value

Shareholder value is a target. It is enhanced by good operational, strategic and

financial management, undertaking profit improvement measures and making

wise capital allocation decisions as well as a host of non-financial measures.

Therefore you, largely, don’t do it – it results from doing other things… except that

there are conditions when executives can act to increase shareholder value. This

occurs where the financing or organisation of a company is sub-optimal and cor-

recting it releases shareholder value.

Returning shareholder funds

Some companies will return surplus funds to shareholders. This is not the same

as increasing borrowing and using the funds raised to issue dividends to share-

holders or to buy back shares. This latter case is merely a shift in financing from

equity to debt but the first case is where the business managers decide that they

do not have appropriate investment opportunities that will earn an adequate

shareholder return. Of course, in such circumstances, many executives ignore the

wellbeing of investors and seek out acquisitions in completely alien fields or per-

suade themselves that a poor investment is actually a good one and, as a result,

destroy shareholder value. On the other hand, returning surplus funds to share-

holders through a share buy-back scheme often increases shareholder value.

Focus

A conglomerate is a company that is an umbrella for a number of different

businesses and, to a greater or lesser extent, many large companies are con-

glomerates. There is a wealth of academic evidence suggesting that the majority

of company acquisitions destroy shareholder value rather than enhancing it, and

so reversing this agglomeration process will often create value. Inefficiencies arise

from the lack of focus in diversified companies, inadequate detailed understand-

ing by senior management of the wide range of businesses and from corporate

politicking. Such companies are frequently valued by the stock market at a dis-

count to their asset value.

Frequently a company can divest itself of a division or a business either

through a trade sale or a separate flotation and the result is that the two separate

company valuations exceed the original.