Strategic Corporate Finance: Applications in Valuation and Capital Structure

WHY SHAREOWNER VALUE?

Shareowner value is all the buzz in business and valuespeak once again permeates annual reports, mission statements and research reports. Why all the fuss? What about stakeholders?

Capital is a scarce resource that all businesses must compete for and efficiently manage. The limited supply of, and liquid markets for, capital require that its users maximize its value, that is, maximize shareowner value or face the flight of capital to more attractive opportunities.

One of the most basic and fundamental tenets of capitalism is the obligation to maximize shareowner value. An expectation of a return is created with every dollar raised and invested. A tacit promise to maximize value is made to shareowners with each dollar of profit retained rather than distributed. Thus, the litmus test behind any decision to raise, invest, or retain a dollar must be to create more value than the investor might have achieved with an otherwise alternative investment opportunity of similar risk.

If managing for value is embracing the interests of owners, what then of the interests of other stakeholders? Let’s start with a look at who these owners are, for they are not rich, young professionals on Wall Street; institutional investors represent the savings of everyday citizens. Our mutual funds, pension plans, life insurance policies, and many small investor holdings represent the vast majority of stock ownership. We invest our savings and bear risk, in the hopes of the best return ...