Strategic Corporate Finance: Applications in Valuation and Capital Structure

EXTERNAL CONSIDERATIONS AND CONSTRAINTS

Near-term financial impact, though not an objective, must be understood and within the bounds of a message that can be articulated to the financial markets or run the risk of market values that do not fully capitalize intrinsic value creation. We consider the impact with specific consideration given to accounting treatment, industry practice, rating agency treatment, and investor perspectives:

• Accounting Treatment. Changes in the accounting for financial assets and liabilities (e.g., FAS133) has greatly increased the degree of mark-to-market accounting and means that certain risk management strategies display greater earnings volatility. However, in many cases, it has been balance sheet and noncash earnings hedges that have been made less accounting friendly. Cash-oriented economic hedges generally receive more favorable treatment though there is some work required to get these hedges to qualify.
• Industry Practice. At the least, a significant deviation from past practice, or the conventions of established industry practice, is likely to demand greater communication, education, and justification to make analysts, agencies, and investors comfortable with the departure and to avoid a negative impact on external perceptions. Unfortunately, limited public disclosure makes peer comparisons on meaningful VaR metrics is almost impossible. Comparisons are more often made on hedge ratios, currency mix, fixed-floating percentages, duration, financial ...