Professional Documents
Culture Documents
NYU/Bouygues
The New European Capital Market Capital markets in USA and Asia Venture Capital and Corporate Venturing Why shareholder value matters Why the cost of capital matters How the market values acquisitions and divestitures Where the money comes from
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Giddy/Bouygues
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The New European Capital Market Capital markets in USA and Asia Venture Capital and Corporate Venturing Why shareholder value matters Why the cost of capital matters How the market values acquisitions and divestitures Where the money comes from
www.giddy.org
Giddy/Bouygues
Banking and Capital Markets: Europe vs. USA Banks vs. Markets l Relationships vs. Transactions l On Balance Sheet vs. Off l Domestic vs. Regional vs. Global l Debt vs. Equity l Bricks vs. Bytes
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Banks vs. Markets Where are investors going? l What do todays shareholders expect? l Where are corporations going? l Where is your banker going?
l l
Common theme: The end of entitlement (which implies the end of special responsibilities)
www.giddy.org U.S. Capital Markets and the New Economy 8
Giddy/Bouygues
Lower barriers to entry more price competition Frequent re-calculation of benefits: What will you do for me next? Shareholder pressure weakens traditional relationships, obligations In business, the effect is toward alliances, contract manufacturing, out-sourcing Stability requires new communities, the more broadly-based the better
www.giddy.org U.S. Capital Markets and the New Economy 9
Financial Innovation and the Shorter Product Life Cycle More financial innovation l But most innovations fail l Fewer geographic barriers to entry l Fewer information barriers to entry
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Excess returns
Time
Copyright 2000 Ian H. Giddy
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Giddy/Bouygues
Innovation as Value Creation Innovations are costly to develop and produce, and easily copied, so l For an innovation to succeed, it must create differentiated value for issuer, investor, or risk manager, by:
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u Unbundling:
create simple, more primitive instruments to isolate risks, or u Bundling: create tailor-made instruments to reduce costs, minimize taxes, or circumvent restrictions or imperfections.
Copyright 2000 Ian H. Giddy
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On Balance Sheet vs. Off All my assets are for sale, all the time l Maximize ROE by increasing capital turnover become originators instead of lenders Market value of transactions in Europe
l
(1990-present) Euro bn
70,0
61,7
60,0 50,0 40,0 30,0 20,0 10,0 0,0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 (YTD)
5,4 5,7 1,6 9,1 5,3 6,9
33,1
35,4
38,8
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Giddy/Bouygues
markets
services
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$4,495.99 $1,370.95
Large Company Stocks
1
Treasury Bills Inflation 0.1 1925 1935 1945 1955 1965 1975 1985 1995
Year-End
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Giddy/Bouygues
Passive vs. Active Investors Its an internet information age l Domestic shareholders want global returns asset managers must beat benchmarks l Corporations or financial institutions which cling to underperforming assets will have lower ROE and share prices l Which makes them vulnerable to restructuring or takeover Europes new market for corporate control
l
Copyright 2000 Ian H. Giddy
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expect results or sell their shares; friendly holdings become too costly, opportunity costs become explicit u Venture capital, private equity funds attract investors by offering higher returns u Market-based returns now expected by investors and lenders, and required of managers; local differences persist, but diminishing
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Giddy/Bouygues
Bricks vs. Bytes Its a Nasdaq world, and its moving at internet time l The old economy needs the new economy to meet shareholder Check expectations Checkyour yourown own banks banksonline online and andmobile mobile To B2B, or not to be? financial financialservices services l E-business or m-business? l Equity, not debt, is financing the new economy
l
Copyright 2000 Ian H. Giddy
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Whither European Financial Services? The Anglo-Saxon model of transparent financial markets is coming, at internet speed l All assets must meet the test of the market global shareholder return standards l Otherwise
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Giddy/Bouygues
Example: Deutsche-Dresdner What is Deutsches strategy? l Does the Dresdner acquisition advance that strategy? l What does it take to succeed in investment banking?
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Assets
Liabilities
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Giddy/Bouygues
Sales
Customer-Driven Securities
Corporate Finance
Goal: Originate deals and sell them in the capital market as quickly as possible
Capital Markets
Copyright 2000 Ian H. Giddy
www.giddy.org
The Asian Bet High growth disguised speculative financing structures l Governments shielded companies and banks from capital market discipline l Too much debt l Too much foreign-currency debt l Closely held ownership relying on reinvested earnings
l
Copyright 2000 Ian H. Giddy
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Giddy/Bouygues
The Asian Bet High growth disguised speculative financing structures l Governments shielded companies and The excesses The three three excesses banks from capital market discipline n nToo Too much much debt debt l Too much n Too ndebt Too much much labor labor l Too much debt n Too nforeign-currency Too much much capacity capacity l Closely held ownership relying on reinvested earnings
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Copyright 2000 Ian H. Giddy
www.giddy.org
Corporate Finance
CORPORATE CORPORATEFINANCE FINANCE DECISONS DECISONS
INVESTMENT INVESTMENT
PORTFOLIO CAPITAL
FINANCING FINANCING
DEBT M&A
EQUITY TOOLS
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Giddy/Bouygues
l l
How fast can we grow? What criteria for spending money? Acquisitions? Divestitures? How should we finance our growth? What kind of equity? How much (cheap) debt should we have? What kind of debt should we have? Maturity? Fixed/floating? Currency? Asset-backed? Hybrids, such as convertibles? How should we manage our financial risks? Whats our plan for creating shareholder value?
www.giddy.org U.S. Capital Markets and the New Economy 25
Growth companies
Copyright 2000 Ian H. Giddy
Mature companies
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Giddy/Bouygues
Earnings
0 Gearing
Copyright 2000 Ian H. Giddy
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The New European Capital Market Capital markets in USA and Asia Venture Capital and Corporate Venturing Why shareholder value matters Why the cost of capital matters How the market values acquisitions and divestitures Where the money comes from
www.giddy.org
Giddy/Bouygues
General Motors is not in the business of making automobiles. General Motors is in the business of making money. Alfred P. Sloan
Possible goals: Size, market share, profits l Three equivalent goals of financial management:
l
u Maximize
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Giddy/Bouygues
Invest in projects that yield a return greater than the minimum acceptable hurdle rate.
u
The hurdle rate should be higher for riskier projects and reflect the financing mix used - owners funds (equity) or borrowed money (debt) Returns on projects should be measured based on cash flows generated and the timing of these cash flows; they should also consider both positive and negative side effects of these projects.
Choose a financing mix that minimizes the hurdle rate and matches the assets being financed. If there are not enough investments that earn the hurdle rate, return the cash to stockholders.
u
The form of returns - dividends and stock buybacks - will depend upon the stockholders characteristics
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FINANCIAL MARKETS
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Giddy/Bouygues
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Yes 70, with none over 64 Outside directors meet w/o CEO Annually Appointment of 'lead director'' Yes Governance committee Yes Self-evaluation of effectiveness Every two years Director pensions None Share-ownership requirement 3,000 shares
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Giddy/Bouygues
Overpaying on Takeovers
l
The quickest and perhaps the most decisive way to impoverish stockholders is to overpay on a takeover. The stockholders in acquiring firms do not seem to share the enthusiasm of the managers in these firms. Stock prices of bidding firms decline on the takeover announcements a significant proportion of the time. Many mergers do not work, as evidenced by a number of measures.
u u
The profitability of merged firms relative to their peer groups, does not increase significantly after mergers. An even more damning indictment is that a large number of mergers are reversed within a few years, which is a clear admission that the acquisitions did not work.
www.giddy.org U.S. Capital Markets and the New Economy 35
Bouygues Bouygues
sheet models u Dividend discount & corporate cash flow models u Price/Earnings ratios u Option models
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Giddy/Bouygues
Bouygues Bouygues
Value of Assets n Book n Liquidation n Replacement Value of Liabilities n Book n Market Value of Equity
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Relative Valuation
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Giddy/Bouygues
Year 1 FCFF
Year 2 FCFF
Year 3 FCFF
Year 4 FCFF
Discount to present using weighted average cost of capital (WACC) Present value of free cash flows
Copyright 2000 Ian H. Giddy
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Return on Assets
exceeds
Cost of Financing
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Giddy/Bouygues
The New European Capital Market Capital markets in USA and Asia Venture Capital and Corporate Venturing Why shareholder value matters Why the cost of capital matters How the market values acquisitions and divestitures Where the money comes from
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Goals of Acquisitions Rationale: Firm A should merge with Firm B if [Value of AB > Value of A + Value of B + Cost of transaction] l Synergy l Gain market power l Discipline l Taxes l Financing
Copyright 2000 Ian H. Giddy
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Giddy/Bouygues
Fallacies of Acquisitions
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Size (shareholders would rather have their money back, eg Credit Lyonnais) l Downstream/upstream integration (internal transfer at nonmarket prices, eg Dow/Conoco, Aramco/Texaco) l Diversification into unrelated industries (Kodak/Sterling Drug)
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Do Acquisitions Benefit Shareholders? Successful Bids Technique Tender offer Merger Proxy contest
n
Bidders 4% 0 na
Note: Abnormal price changes are price changes adjusted to eliminate the effects of marketwide price changes
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Giddy/Bouygues
Do Acquisitions Benefit Shareholders? Unsuccessful Bids Technique Tender offer Merger Proxy contest Target -3% -3% 8% Bidders -1% -5% na
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Giddy/Bouygues
Synergies
Control
Top line
Bottom line
Financial restructuring
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What is Corporate Restructuring? Any substantial change in a companys financial structure, or ownership or control, or business portfolio. l Designed to increase the value of the firm
l
Restructuring
Improve capitalization
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Giddy/Bouygues
Debt Equity
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Restructuring
Figure out what the business is worth now Fix the business mix divestitures Fix the business strategic partner or merger Fix the financing improve D/E structure Fix the kind of equity Fix the kind of debt or hybrid financing Fix management or control Use valuation model present value of free cash flows Value assets to be sold Value the merged firm with synergies Revalue firm under different leverage assumptions lowest WACC What can be done to make the equity more valuable to investors? What mix of debt is best suited to this business? Value the changes new control would produce
www.giddy.org U.S. Capital Markets and the New Economy 50
Giddy/Bouygues
Getting the Financing Right Step 1: The Proportion of Equity & Debt
Debt
n
Equity
Achieve lowest weighted average cost of capital May also affect the business side
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Getting the Financing Right Step 2: The Kind of Equity & Debt
n n n n
Short Shortterm? term?Long Longterm? term? Baht? Dollar? Baht? Dollar?Yen? Yen? Bonds? Bonds?Asset-backed? Asset-backed? Convertibles? Convertibles?Hybrids? Hybrids? Debt/Equity Debt/EquitySwaps? Swaps? Private? Private?Public? Public? Strategic Strategicpartner? partner? Domestic? Domestic?ADRs? ADRs? Ownership Ownership& &control? control?
Debt Equity
n n n n
n n n n n n n n n n
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Giddy/Bouygues
l l
How fast can we grow? What criteria for spending money? Acquisitions? Divestitures? How should we finance our growth? What kind of equity? How much (cheap) debt should we have? What kind of debt should we have? Maturity? Fixed/floating? Currency? Asset-backed? Hybrids, such as convertibles? How should we manage our financial risks? Whats our plan for creating shareholder value?
www.giddy.org U.S. Capital Markets and the New Economy 53
Ian H. Giddy
Stern School of Business New York University 44 West 4th Street, New York, NY 10012, USA Tel 212-998-0332; Fax 917-463-7629 ian.giddy@nyu.edu http://giddy.org
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