Tag Archives: valuation

VCFS-4DC: VALUATION AND CORPORATE FINANCIAL STRATEGY FOR DIVERSIFIED COMPANIES

George A. Haloulakos, CFA, is a university instructor, author and entrepreneur [DBA Spartan Research and Consulting]. His published works utilize aviation as a teaching tool for Finance, Game Theory, History and Strategy.

Abstract

Value is the key performance measure in a market economy because it encompasses the long-term interests of all stakeholders in a company. In highly competitive global businesses – especially with diversified companies — it is essential for a firm to be effective in all three phases of managing cash flow — operations, investing and financing – to generate cash at a return exceeding its cost of capital. The concept of stakeholder management has broadened the responsibility of management to include financial stakeholders (i.e., equity owners and creditors) and non-financial stakeholders such as customers, employees and suppliers. This task is magnified for diversified companies whose corporate structure is based on a mix of different types of product or business groups having a variety of financial requirements. Corporate financial strategy for diversified companies based on a portfolio management style may benefit from a stakeholder approach in order to cope with a myriad of challenges including, but not limited to, achieving economy of scale, diversification and growth in difficult or less predictable environments. Two different eras – the “stagflation” period from the mid-1970s to the very early 1980s and the “globalization” decade of the 2000s – provided extremely competitive market conditions where diversified companies achieved mixed results with divergent stock price performance. The case studies reviewed here offer a study in contrast in how the stock market values diversified firms with different corporate financial strategies.

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What Do General Partners in Private Equity and Venture Capital Funds Bring to the Table: Intellectual Capital and Value Generation

Dr. Tamir Agmon is an invited contributor to The Business Thinker. He is a Professor of Financial Economics at the School of Business, Economics and Law at Gothenburg University in Sweden.

Much of the value in the world today is generated from intellectual capital (or intellectual assets). Intellectual capital is human made, based on ideas and is expressed as capabilities, systems, organizations, and other non-physical and intangible structures within firms that generate future cash flows. The growing industry of private equity funds and venture capital funds is one place where specific intellectual capital owned by the general partners is applied to generate value. The difference between physical (tangible) assets and intellectual (intangible) assets can be observed and measured in two dimensions; the past, how the asset was built using primary factors and labor, and the future, how the market evaluates the future stream of cash flows from an asset. The discussion of the difference between intellectual and physical assets is done in the paper in the context of an incomplete market with imperfect competition. Where the general partners of a private equity fund add intellectual capital to the existing assets in place in a target company, they do so in the expectations of generating additional value. The process by which additional value is generated by employing specific intellectual capital is demonstrated in the context of valuation model as practiced by private equity funds. Continue reading