Agenda of today

1
Agenda of today

• Workshop
• Dialogue and coaching
• Exercise 15.2
• Lectures
• The Negotiation day (16 November)
• Problems challenges (chap 15, 19 4 articles)
• Uncertainty Courtney
• RiskPenman
• IPOsMcCarthy
• IBO Wright Robbie
• CKM ch.15 and 19

2
Important dates

• Draft report price
• Wednesday, Nov 13, evening
• Send email to Tom
• Negotiation on Saturday Nov 16th
• Final report
• Monday, Nov 25, 12.00

3
Negotiation day - time schedule

• In and around room M209
• 09.00-9.45 1st. round As (Bs observing)
• 9.45-10.30 1st. round Bs (As observing)
• app. 10.30 - 12.00 guest speaker PWC
• 12.00-13.00 lunch calculation (bistro open)
• 13.00-13.45 2nd. round As (-B observe)
• 13.45-14.30 2nd. round Bs (-A observe)
• 14.30-15.00 break and presentation prep.
• 15.00- 17.00 short negotiation presentation from
  each TEAM
• As Coloplast 1, BO 1, Vestas
• Bs Coloplast 2, BO 2, Wal-Mart, Micon

4
Final report

• inclusive of negotiation process and outcome
  description learning reflections
• describe in the introduction of your report, who
  has written the different sections of the report.
• 3 copies of the final report (enclose your
  valuation model on electronic media (floppy disk
  or CD) to each copy)
• Deadline Monday, Nov 25, at 12.00, hand in to
  Charlotte Løchte, c102

5
Strategy under Uncertainty (Courtney)

• Framework 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

6
Strategy under Uncertainty (Courtney)

• -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)

7
Strategy under Uncertainty (Courtney)

• The 3 types of action (moves) are
• big bets
• options
• no-regret moves (always positive)
• e.g.
• L1 adapters where and how to compete
• L2 shapers try to increase the probability that
  a favored industry scenario will occur
• L3 shapers and adapters reserving via
  organizational capabilities
• L4 shapers provides vision that coordinates

8
Risk (Penman)

• Value of company
• NOPLAT1 (1 - g/ROIC)
• WACC - g
• Equity risk consists of operating risk and
  financial risk
• Operating risk consist of ROIC / NOPLAT-risk and
  growth risk.
• Financial risk consist of Debt-risk and borrowing
  rate-risk in the WACC.
• ROIC/NOPLAT-risk (ROIC-tree, exhibit 9.8)
• EBITA/Revenues-risk (margin risk)
• Revenues/invested capital-risk (capital turnover
  risk)
• Tax-rate (Tax-risk)
• Operating liability risk

- MV(Debt)
9
Risk (Penman)

• Growth-risk uncertainty about a companys
  investment opportunities (and hence the revenues
  growth) adds to risk.
• Financial risk consists of risks concerning net
  borrowing costs (interest rate) times debt
  (financial leverage). If companies have
  fixed-interest-rate also risk regarding MV(debt)
  exist.
• Note that the different risks often interact.
• Further to equity risk the investor bears price
  risk due to market inefficiency and liquidity
  risk.

10
CKM ch 15 Dot.coms

• Characterized by high growth, -uncertainty and
  -losses
• Investments in acquiring customers are expensed
  and hence running through the income statement
  creating high net income losses.
• Make optimistic and pessimistic scenarios of the
  position of the company in 10, 12 or 15 years.
  For each scenario, evaluate
• What will the market share of the company be in
  its product markets? and what will revenues of
  the company be?
• What operating margins will the company have in
  the different product markets?
• What will capital turnover be?
• Given the above, within each scenario
• Work backwards to present, estimating revenues,
  margins and capital turnover for each year.
• Work further into the future (from scenario
  position) making explicit forecast and continuing
  value.

11
CKM ch 15 Dot.coms

• WACC use industry-average beta and general
  market risk premium in each scenario to calculate
  each scenario value
• Weight the values of the scenarios with
  probabilities and test the company value
  sensitivity against these weights
• It is more or less the probabilities that
  determines the value of the company.
• Cash flow risk is taken care of by using
  scenarios -that is why we should use
  industry-average beta and general market risk
  premium in the WACC

12
CKM ch 19 Emerging markets

• Extra risks
• macroeconomic uncertainty
• political risks
• illiquid capital markets
• capital restrictions
• 3 approaches (to supplement each other)
• DCF by discounting expected cash flow by using
  cost of capital inclusive of country risk
• Local multiples
• Probability weighted scenarios (modeling risk
  explicitly)
• Beware of the accounts with regard to
• local accounting rules
• hyper inflation real/ nominal rates ?

13
IBO Investor led buy-outs (Wright)

• 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

14
IPOs Initial public offering (McCarthy)

• How much is left on the table - 20 ?
• Over subscription 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 ?