Mykeehis ) 2) Corporate Finance: Shareholder Value Maximization

  Corporate Finance: Shareholder Value Maximization

Do not manage earnings or provide earnings guidance. Shareholder value maximization is a practice that is long term in nature and thus the executives should focus on implementing strategies that focus on the future rather than short term gains. Profit guided significance increases the trading volumes of the stocks of a company which is only beneficial in the short run rather than in the long term. Earnings guidance is detrimental to the organization as it does not consider the value of the organization during the period. Additionally, they may result in cases where the organization does not invest appropriately to increase its short term profits. In the long run, the overstretching of accounting limits has devastating effects on the real value of the organization as they significantly affect the market value of the company. Profit guidance, therefore, does not affect the valuation of a company’s stock prices neither do they affect their volatility and yet they consume a significant amount of management time in their preparation compromising other operational efficiencies of the organization.

Make strategic decisions that maximize expected value even at the expense of lowering near term earnings. Most organizations appear to be shortsighted in their decision-making approach. Strategic organizational decisions should be targeted at maximizing the expected future cash flows of the organization. Selected strategies should generate the highest value for the organization, this is after due consideration of the market dynamics and technological aspects. The organization must also identify areas that need additional capital and those that require restructuring based on the expected value generated in the long term. If at all the organization has multiple ongoing projects, the key to shareholder value maximization relies on the ability by the executives within the organization to determine the right combination of the projects that will result in the highest expected value for the company. This then informs the prioritization process and investment decisions.

Make acquisitions that maximize expected value. Mergers and acquisitions play an imperative role in providing the business with a competitive advantage. While some mergers increase the shareholder value, others do not. Essentially, mergers are made for different reasons and shareholder value maximization may not be one of them. Most mergers are focused on the impact on the earnings per share, completely ignoring the long term impact on the value of the company. Using the earnings per share as the basis for making a merger may be detrimental to the organizations' value in the long term if due consideration is not made. Aspects such as the post-merger risks and the synchronization of the processes from the independent companies must be carefully evaluated. Where synergies are not easy to create, the management should unearth mechanisms to ensure that the shareholder value is not diluted, rather it is increased.

Carry only assets that maximize value. Organizations should always be on the lookout for individuals that are willing to pay a premium price that is higher than the cash flows generated for the individual business units. A failure to notice such avenues puts the value of the shareholder in jeopardy in the long run. Disposing of such assets can significantly reduce the capital spending of the company while providing it with an opportunity to reinvest the money in more profitable areas of the business. The decision on whether to outsource operations or do them internally is also another way in which organizations can reduce their costs. The focus should be to conduct processes that generate the highest value internally and to outsource those that have the least. Again consideration should be made depending on the priorities that the organization has in the long term. Failure to make these decisions puts a strain on the resources of the organization while generating the least value in the long term.

Return cash to shareholders when they are no credible value-creating opportunities to invest in the business. Prudent money distribution is an imperative part of maintaining investor relations and growing the business. Occasionally, the business will encounter instances where they do not have viable investment options and yet they have so much money. In such scenarios, the money should be distributed to the shareholders in the form of dividends or allowing them to plow their dividends back into the company by acquiring more shares. This option not only increases the shareholder value but also prevents the chance that the management will make ill-informed investment choices because they have some floating cash to experiment with. The repurchase of shares should, however, be guided by the evaluation of the management of the organization’s stock prices to ensure that this is done while protecting the interests of the non-tendering shareholders.

Reward CEOs and other senior executives for delivering superior long term returns. Senior-level executives are the heart of the daily operations within the organization. Performance incentives and rewards should thus be structured to enable them to deliver long term value to the organization. Improperly structured incentives will result in the executives driving the short term earnings of the organization without due consideration of the long term shareholder value. For instance, senior executives should be rewarded not just based on the pricing of the organization’s stock price but the due comparison should be made by evaluating the performance of the companies in the same market segment and developing a peer index which then forms a benchmark for rewarding executives. There is a myriad of other options that can be used to motivate the executives to facilitate the creation long term value for the organization.

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