Corporate Valuation 2001-8 Institut for Regnskab, IC Pontoppidan Problems Last lecture: beta building This lecture –uncertainty: Courtney –Risk:Penman

Corporate Valuation 2001-8Corporate Valuation 2001-8

Institut for Regnskab, IC Pontoppidan

Problems• Last lecture: beta building• This lecture

– uncertainty: Courtney– Risk:Penman– IPO’s:McCarthy– IBO: Wright & Robbie – CKM ch.15 and 19

• Negotiation on saturday 09.00! In and around H211

• Exam !!! Only reports ?! Indicate personal contribution !



Strategy under UncertaintyFramework for uncertainty and its implication

for strategy• 4 levels of uncertainty• 3 generic strategies (Postures)• 3 types of action (Moves)The tradition has been to find the most likely

outcome and create a strategy based on this, where the uncertainty got buried in the cash flow forecast. But this creates an either-or attitude to uncertainty.

Instead the “residual” (after trends and analysis) uncertainty is characterized in 4 levels



Uncertainty-each with its own strategic “logic”• clear-enough (value chain, Porters 5, DCF)• alternate futures (options, game theory)• range of futures (no expected value, robustness)• true ambiguity (indicators of drivers +

analogies)The 3 generic strategies (postures) are• shaping• adapting• reserving the right to play (special form of

adapting on level 2-4)



UncertaintyThe 3 types of action (moves) are• big bets• options• no-regret moves (always positive)e.g.L1 adapters: where and how to competeL2 shapers: try to increase the probability that a

favored industry scenario will occurL3 shapers and adapters: reserving via

organizational capabilitiesL4 shapers: provides vision that coordinates



Risk• Fundamental /Equity risk consists of operating

r. and financial r.• Operating r. consists of operating r.1 and

growth r., which splits the risk determinants into financial statement drivers (expressed as risk on commen equity + growth risk)

• Growth in investments - heavily influenced by the double risk from sales. This double risk illustrates risk interaction, generating “fat tailes”/ extreme returns (+/-)



Risk• In the ROCE both the o.r. and f.r. can be

leveraged

• distribution of value gives VaR-profiles

• further to fundamental irsk the investor bears price risk due to market inefficiency and liquitity risk

• foreward looking risk premium in US is app. 3,5%



CKM ch 15 Dot.coms• Characterized by high growth, -uncertainty

and -losses• “investments” are immaterial and hence

running through the income statement• estimate the possible/ probable future position

and work backwards• weight the scenarios with probabilities and test

the sensitivities for these weights• cash flow risk is hence taken care of and

should NOT be added - use industry-average beta and general market risk premium

• the winner takes all/ best of breed



CKM ch 19 Emerging markets• Extra risks

– macroeconomic uncertainty– political risks– illiquid capital markets– capital restrictions

• 3 approaches (to supplement each other)– probability weighted scenarios– countryrisk premium in cost of capital– local multiples

• local cost of capital when restrictions differs• local risk free rate ?

• beware of the accounts with regard to– local rules– hyper inflation: real/ nominal rates ?– FX impact



IBO: Investor led buy-out’s• 3 basic categories of investors

– industry / “trade”– institutional investors (IBO)– management (old or new) MBO/ MBI

• industry knowledge and synergy means lower uncertainty and higher gains for industry investors i.e. highest buyer value

• today the investor categories do mutate– venture funds– institutional investors + management (BIMBO)

• buying whole companies or parts– carve out, spinn off, split, breaking

• due diligence often VERY important and diffenent for the differet categories



IPO’s: Initial public offering• How much is “left on the table” - 20% ?

• Oversubscription = sold out first day !– Add extra selling ?– Price too low ?

• Banks earn fee with no risk ?

• Is it sellers against share buyers or together with ?

• Impossible to forecast the “temperature” in the market ?

– 100 % increase the first day ??????????– Other valuation models ?



Saturday 9.00 - 17.00 ?In

Agenda09.00-9.45 1st. Round. A’s -B’s are observers9.45-10.30 1st. Round B’s -A’s are observersapp. 10.30 - 12.00 guest speaker PWC

12.00-13.00 lunch (the bistro is open)13.00-13.45 2nd. Round A’s -B observe13.45-14.30 2nd. Round B’s -A observe

14.30-15.00 break15.00- 17.00 short negotiation presentation from

each TEAMA’s: Inditex,LM,Harboe,Lundb.B’s:Vestas,Martin,Virgin

Documents

Corporate Valuation 2001-8 Institut for Regnskab, IC Pontoppidan Problems Last lecture: beta building This lecture –uncertainty: Courtney –Risk:Penman