FIN 673 Times are Changing always!

Transcription

1 FIN 673 Corporate Valuation and Financial Strategy Techniques and Strategies for Changing Business Realities Professor Robert B.H. Hauswald Kogod School of Business, AU FIN 673 Times are Changing always! Objective: develop a conceptual framework for corporate finance in the context of corporate change a shifting corporate paradigm: markets, information, technology corporate form needs to adapt and change interaction of strategy and finance: changing firm structure From business strategy to corporate finance corporate valuation as a prerequisite for decision making flexibility: the firm as portfolio of real (growth) options Perspective: corporate finance for businesses in transition financial and organizational restructuring 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 2

2 Why FIN 673? Three puzzles in corporate valuation and strategy lifecycle of the firm: different financial strategies for different stages of firm development the value of financial strategy: hot air vs. sound analysis? e.g., costs vs. benefits of M&A? the acquisition premium puzzle: why pay more than the market price - irrational exuberance or honest mistake? The course is NOT about financial statement analysis or financial accounting security analysis Change: new paradigm, new finance, new firm? 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 3 Administrativa: Robert Hauswald (administrativum: heaviest known element, very dangerous!) Office hours: before/after class, by appointment let me know if you want to see me and why hauswald@american.edu speediest service better than office hours Phone, Fax: , Cases: order directly from Harvard (to keep cost down) Course URL on my website: link on the left lecture notes, readings, homework assignments download before class 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 4

3 Requirements Pre-requisites: 614 Grade: 50% individual, 50% joint effort Individual effort: deepen your understanding midterm (40%): personal product case study class contribution (10%): names, get to be known Group effort: learn together 4 cases: executive summaries (2 pages), write-ups (2 pages exec sum. + max 6 app.), presentations (20%) final project (30%): recent transaction in the form of a case study with teaching note (see syllabus and URL) 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 5 Cases and Presentations Workgroups: 3 to 5 students per group, peer review prepare cases in advance and lead discussion: write-ups due at the beginning of class 2 pages of analysis (executive summary) plus maximally 6 pages of appendices for write-ups presentations: be professional (play the part), prepared ( show, slides, material) and convincing grade: Presentation, Professionalism, Style, Integration, Orginality, Analysis, Perspective, Form Group project: recent capital transaction (M&A, IPO, restructuring, buyout, bankruptcy) apply valuation and financial strategy concepts 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 6

4 Readings and Materials Course reading and materials: DePamphilis, Mergers, Acquisitions, and Other Restructuring Activities, 5th ed., Academic Press 2010 Arzac, Valuation for Mergers, Buyouts and Restructuring, 2 nd edition, Wiley 2008 Weston et al., Takeovers, Restructuring and Corporate Governance, 3 rd ed., Prentice Hall 2001 Copeland et al., Valuation, 4th ed., Wiley 2007 Cases: buy directly from HBSP at lecture notes: posted on course website Financial Times subscription Bloomberg: financial information and analysis Leisure: Babarians at the Gate 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 7 How to Succeed Come to class no absence except for emergencies: courtesy of Contribute to class discussion success of learning experience relies on you Do you work: reading, case preparation read cases ahead of time Practice the techniques: valuation, event study technical course: sound analysis precedes sound strategy Be curious and creative be a resource to your classmates! 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 8

5 Assignment 0: FT, Group, Bio Sketch Financial Times subscription: sign up Sign up for group and select case presentations Course portrait: submission by RE (subject line): 673 bio sketch undergraduate degree: GPA and major/minor(s) course objective career objective professional experience and internship professional achievements job market status group number! 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 9 The Life-Cycle Approach to Financial Strategy The new and young: targets venture capital: staged finance, exit options, IPOs example: The up-and-coming: predators aggressive growth: acquirers example: The fat and lazy: creating and releasing value mature industries: horizontal M&A, divestitures, buy-outs example: The obsolete: targets mature industries, agency conflicts example: 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 10

6 Definitions Merger: two firms integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage Acquisition: one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businesses Takeover: the target firm did not solicit the bid of the acquirer Leveraged Buy-Out (LBO: acquisition financed mainly by debt; usually involves acquisition of public firm by closely-held entity Industrial organization of transactions Vertical: upstream vs downstream Horizontal: anti-competitive 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 11 Firm and Capital Lifecycle Sources of Capital Equity Sources Public Equity Debt Sources Mezzanine Capital Private Debt Corporate Capital Venture Capital Family and Angel Investors Commercial Banks Finance / Leasing Companies Seed Start-Up Growth Expansion / Diversification 1/13/2011 Private Equity and Start-up Valuation Robert B.H. Hauswald 12

7 Identifying Promising Start-ups, Assets and Targets: Search What makes good investments? Where is the fit? How do we know? 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 13 Capital Transactions: The Good, the Bad, and The Ugly How to create value for parties? entrepreneurs, targets: VCs, acquirers: Typical stages of the transaction What could go wrong? Who gains, who loses? What are the challenges? 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 14

8 The Information Asymmetry Problem Sellers likely know more about the firm than buyers: firm in play sends bad signal Buyer faces adverse selection: overpaying Seller cannot commit: credible signaling Buyers reducing information asymmetry will only be uniquely valuable to them to the extent that they can keep the information private avoid dissemination to seller and other buyers Seller only accepts high bids: valuation 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 15 Acquiring Assets: Bidding The price is right? how much to bid? depends on what? Auction theory: selection of ideas highly technical: pick and choose focus on common value auctions Information distribution in auctions winner s curse bidding against better informed parties Lessons for deal execution 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 16

9 Valuing Assets: Corporate Finance Creating value through capital transactions what is the pre-requisite? Valuation techniques DCF: NPV, APV misses the value of flexibility Real options: VC, M&A transactions create options on synergies real options analysis: based on options theory 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 17 Integrating Targets: Execution Integrating assets: execution merging companies: from culture to self-interested strategic behavior of employees Capital transactions are options on synergies not very well understood by analysts options should only be exercised when they are in the money When does it make sense to spend additional resources to unlock synergies? 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 18

10 Financial vs. Corporate Strategy Illustrates several core themes of the course valuations and cost-benefit analysis M&A, restructuring and corporate partnerships assessing stock price reaction: the market is always right? 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 19 Course Themes: Concepts Focus on Capital Transactions throughout firm s life private equity (VC, buyout), M&A, corporate cooperation Real options: early investments and M&A deals are opportunities not obligations best analyzed in terms of options Capital transactions as options on synergies acquirer has the right but not the obligation to invest and realize gains from transactions Restructuring as default options asset disposals firm has an abandonment option 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 20

11 Course Themes: Applications Valuation and acquisition of young firms lack of hard information: so what? Large scale acquisitions emerging markets and real options Success and failure of M&A recent transactions and their fallout Restructuring undoing the damage utter failure Guest speaker: the practice of M&A 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 21 Course Themes: Techniques Modern valuation techniques: real options growth and synergy options: M&A abandonment options: distress and restructuring IPOs: information economics paying for information or rent seeking? Auctions: bidding for assets getting the best price vs. avoiding overpaying Event studies: assessing success and failure the market is always right 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 22

12 Corporate Finance Causality runs from economics to finance economics of the firm: expertise, competition business model and corporate structure business and financial strategy: capital structure Firms get into trouble: what changed, should change? technological progress meets incompetence or worse Impact of corporate strategy on financial strategy financing: corporate and capital structure design governance: ownership and control valuation: what is it worth? 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 23 Introduction to Options Options will play a major role in this course be prepared Carefully review options chapters in textbook Definitions and Jargon Payoff profiles Put-Call Parity Capital structure policy: equity and bankruptcy as options Two option pricing models: binomial lattices (trees ): work horse on Wall Street closed-form formula: Black-Scholes-Merton 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 24

13 Getting Proficient in Bloomberg You need to learn the ropes premier financial information and analysis system prepare for information acquisition in financial services Overview and getting started Bloomberg s chicken and egg problem Crucial commands and system structure Online courses and Bloomberg certification enhance your job market value Data acquisition 1/13/2011 Finance for a Changing Economy Robert B.H. Hauswald 25