MANAGING THE MULTIPLIER AND YOUR COMPANYS IMAGE

1
MANAGING THE MULTIPLIER AND YOUR COMPANYS IMAGE
or
Why did you pay so much for that
business? Chapter 18
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Managing the Multiplier

• 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?
• Quite a lot, and the following factors are the
  tools with which we have to work.

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Managing the Multiplier

• 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 dont like your industry, use the
  business you have to acquire another business
  with a better multiple image.

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Managing the Multiplier

• PATTERN OF EARNINGS. We have already seen the
  importance of this in Bullingtons article.
• Where are your earnings going?

Earnings s
Time
-
Are these earnings going up or down? Remember
Analysts aren't seers!
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Managing the Multiplier

• PATTERN OF EARNINGS, contd.
• The turnaround that doesnt turn!

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Managing the Multiplier

• PATTERN OF EARNINGS, cont'd.
• The We never pay taxes syndrome

Earnings
-
Time
Congratulations! Now how are we going to value
your wonderful company?
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Managing the Multiplier

• PATTERN OF EARNINGS, contd.
• After a BIG BATH

Earnings s

Time
-
If there is adequate explanation, this Big
Bath may not hurt the multiple of this company
much.
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Managing the Multiplier

• PATTERN OF EARNINGS, contd.
• The Hockey Stick pattern

Earnings s
Time
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Managing the Multiplier

• When you see a Hockey Stick pattern of
  earnings, what do you look for?
• 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.

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Managing the Multiplier

• PATTERN OF EARNINGS, cont'd.
• The IDEAL pattern

Earnings s
Time
Here you dont have to be clairvoyant to
see where this companys earnings are going
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Managing the Multiplier

• EARNINGS PER SHARE. 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 that sell for less than about 5 may
  not be marginal - thus driving down 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., 20-75.

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Managing the Multiplier

• 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 firms management to visit Financial
  Analysts meetings. This is a chance to impress
  these analysts (opinion makers) with how
  professional the management team is.

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Managing the Multiplier

• 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 a merger.

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Managing the Multiplier

• 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.

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Managing the Multiplier

• DEBT/ EQUITY RATIO As important as this is in
  the internal management of the firm, it will
  probably not affect the multiplier unless it is
  at one extreme - too much debt or a Clean
  balance sheet - meaning no long term debt.
• DIVIDENDS Most developing firms do not pay
  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.

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Managing the Multiplier

• 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 whats going on should be
  appropriate. Mutual Admiration Society
• FINANCIAL ANALYSTS MEETINGS - Can be very
  important in getting institutional stockholders
  managing expectations
• FINANCIAL PUBLIC RELATIONS - Important for
  getting stories in magazines and papers.

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Managing the Multiplier

• 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!
• The 30 second or elevator speech

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A Word about Harvesting

• Harvesting is the ultimate objective!
• Over-emphasized by many re New Economy
• Not emphasized enough re Middle-market firms
• Valuation is what its all about!

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MANAGING THE MULTIPLIER AND YOUR COMPANYS IMAGE
Why did you pay so much for that business?
Because you thought it was worth more thats why!