CR ITIC AL F INAN CIAL ISS UES
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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.

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