Unformatted text preview: MANAGING THE MULTIPLIER AND YOUR COMPANY'S IMAGE or "Why did you pay so much for that business?" VALUATION
The value of the firm is a function of two things: the EBIT and the Multiple of these earnings. We have studied all semester those factors that go into earnings, but what can be done about "Managing the Multiplier"? y Quite a lot, and the following factors are the tools with which we have to work.
y y First, the INDUSTRY. To what industry does your company belong? How did you get in this industry? Some industries sell for traditionally low multiples mundane metal working companies while some sell for high multiples biotech or certain computers. If you are going to spend a large part of your life in an industry, why not have it be in a high(er) multiple industry company rather than a low multiple industry. If you don't like your industry, use the business you have to acquire another business with a better "multiple" image. VALUATION
y PATTERN OF EARNINGS. We have already seen the importance of this in Bullington's article. Where are your earnings going? Earnings $'s + Time Are these earnings going up or down? Remember: Analysts aren't seers! VALUATION
y PATTERN OF EARNINGS, cont'd. The turnaround that doesn't turn! Earnings + Time Ouch! VALUATION
y PATTERN OF EARNINGS, cont'd.. The "We never pay taxes syndrome" Earnings + Time Congratulations! Now how are we going to value your wonderful company? VALUATION
y PATTERN OF EARNINGS, con'td. After a "BIG BATH"
Earnings $'s + Time If there is adequate explanation, this "Big Bath" may not hurt the multiple of this company much. VALUATION
PATTERN OF EARNINGS, con'td. The "Hockey Stick" pattern: y Earnings $'s Time VALUATION
When you see a "Hockey Stick" pattern of earnings, what do you look for? y Answer: A similar pattern of Inventory balances changes from the Balance Sheet. (Remember,"The higher the Ending Inventory, the higher the Gross Profit." The company that is for sale suddenly "found" inventory that had been written off over the years.
y PATTERN OF EARNINGS, cont'd.. The IDEAL pattern: Earnings $'s Here you don't have to be clairvoyant to see where this company's earnings are going Time VALUATION
y EARNINGS PER SHARE. (Public companies only.) This idea here is to make the number of shares outstanding be such that you get an "appropriate" stock price in general. If you have so many shares outstanding that your earnings are pennies per share, then your stock will be a "penny stock". This may give you a high multiple, but there probably will not be any depth to the market for your stock. Also, stocks you may not be able to "margin" stocks that sell for less than $5 thus hurting demand. Conversely, if you have earnings that are so high that your stock sells for, say, over $75/share, you will be hurting the market for your stock. For optimum P/E, it is suggested that your stock sell somewhere in a "usual range", e.g.., $2075. MANAGING THE MULTIPLIER
y MANAGEMENT: We have already looked at this factor, so there is not much need to revisit it here. When a firm is public, however, it is possible for a firm's management to visit Financial Analysts meetings. This is a chance to impress these analysts (opinion makers) with how professional the management team is. VALUATION
y STATE OF THE STOCK MARKET: It is important for management to be aware of the state of the stock market and, in particular, its industry segment in order to know when the stock is "high" just because the "market is high (low)". Taking actions when the market is down is like swimming against the current. If the market for your stock is really down, maybe it would be a good time to take a "Financial bath". If the market for your stock is really "high", maybe it is time to issue more stock or to use the stock for an acquisition. VALUATION
y LISTED STOCK VS. NASDAQ : There is a sizable body of discussion as to whether it is better to be listed on an exchange, and be the captive of a specialist or to be on NASDAQ. In the NASDAQ market you need at least one "Market Maker", an investment banker who will make a market in your stock. Stocks with a lot of interest have dozens of "Market Makers." If you are listed with an under capitalized Specialist, your stock may really suffer in times of heavy selling. The job of the Specialist is to make an "orderly" market. VALUATION
y y DEBT/ EQUITY RATIO: As important as this is in the internal management of the firm, it will probably not affect the multiplier of a publicly owned firm unless it is at one extreme too much debt or a "Clean balance sheet" meaning no long term debt. DIVIDENDS: Most publicly held developing firms do not pay (any significant) dividends; if they did, people would think that they have "leveled off" and are not growing any more. This could be disastrous for their stock price. VALUATION
y CORPORATE IMAGE: A function of many subjective things: COMPANY NAME Does the company name adequately reflect the industry you want to be in? CORPORATE LOGO & STATIONERY Get a really professional corporate emblem; not home made kind. ANNUAL (and Qtrly.)REPORT Great chance to tell stockholders what's going on; should be appropriate. FINANCIAL ANALYSTS MEETINGS Can be very important in getting institutional stockholders. FINANCIAL PUBLIC RELATIONS Important for getting stories in magazines and papers. VALUATION
y And finally, CORPORATE UNIQUENESS: What makes your company "special"? What distinguishes your company from the others? If you ask a business owner "What makes your company different?" and you do not get a good reply, what are you going to think about this company? Beauty is in the eye of the beholder! When somebody asks you what makes your company different, be ready with a good answer. In fact, "knock their socks off!" MANAGING THE MULTIPLIER AND YOUR COMPANY'S IMAGE "Why did you pay so much for that business?" Because you thought it was worth more; that's why! ...
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- Spring '07