Anno accademico 2017-2018 - Roma Tre...
Transcript of Anno accademico 2017-2018 - Roma Tre...
Anno accademico 2017-2018
Corso di Laurea Magistrale in Economia Aziendale
Curriculum “amministrazione e governance delle
aziende” (ex DM 270)
PRINCIPLES OF BUSINESS VALUATION
Managing a Post LBO-Acquired Company
Andrea Sagone
Managing Partner
Cross Court Capital
November 2017
“Managing a Post LBO-Acquired Company” Page 2 November 2017
Creating Value from an Investment through an LBO
Countless ways to create value in a Post-LBO acquired
company
— upon completion of the transaction
— use of less expensive funding
— increasing the company’s leverage
— at exit of the transaction
— “multiple arbitrage” pretty much out of the reach of a
company’s management
— after completion of the transaction (i.e. “post LBO”)
— improvement of the target’s operations (“operational
improvements”)
“Managing a Post LBO-Acquired Company” Page 3 November 2017
Creating Value Through Operational Improvements
Enhancement of the company’s economic and financial
performance (Operating Cash Flow and Capital
Efficiency)
Implementing a different, and more tailored, corporate
governance model
which inherently allows to effectively extract value
through greater alignment of stakeholders’ interests
Deleverage, over time, of the company’s capital
structure
— company’s sustained cash flow generation from operations
— extraordinary monetization of assets held on its balance sheet
“Managing a Post LBO-Acquired Company” Page 4 November 2017
IMPROVING OPERATING CASH FLOW AND CAPITAL EFFICIENCY
“Managing a Post LBO-Acquired Company” Page 5 November 2017
Operating Cash Flow and Capital Efficiency
Operating cash flow
— “Economic” or “profitability” profile of a company are at the
basis of cash flow generation
— Growth
— Profitability
Capital efficiency (i.e. capital discipline)
— reducing working capital requirements
— reducing the level of in-productive capital expenditures
“Managing a Post LBO-Acquired Company” Page 6 November 2017
Key Financials
“Managing a Post LBO-Acquired Company” Page 7 November 2017
Improving Operating Cash Flow: Growth
Position the firm for better growth than previously
achieved (new strategy)
Improving the company’s competitive position
— enhancing its sale force effectiveness, allowing to increase
penetration on new and existing clients
— penetrating into new markets (products/services, geographies)
Growth may bring:
— market share increase
— economies of scale (or margin contribution)
Finally, top line growth may also be achieved through
(add-on) acquisitions which allow the company to
achieve synergies
“Managing a Post LBO-Acquired Company” Page 8 November 2017
Improving Operating Cash Flow: Profitability (1/3)
Operating profitability is usually improved by increasing
gross industrial margins
— driven by unit costs and prices
Aside from gross industrial profitability, margin
increases are driven exclusively by cost reductions and,
consequently, cost saving programs:
— Analysis of supply chain will allow to carry out the company’s
operations in a less expensive way
— Usually savings are easier to achieve in the area of general and
administration (structure costs), marketing and promotion costs,
while harder in the cost of goods or selling costs (mainly
because they are external to the company)
“Managing a Post LBO-Acquired Company” Page 9 November 2017
Improving Operating Cash Flow: Profitability (2/3)
— This does not mean that it is not possible to achieve reductions
in external costs, but the approach is quite different:
— extensive negotiations, creative thinking, and sometimes re-
engineering of the product, allowing for savings in the
amount or type of raw materials used in the company’s
products
Personnel cost savings are usually extremely painful
and “un-social” for any company, as negative publicity,
union and local (or national) political representatives,
and strong ties of the company’s prior shareholders to
its territory create inertia
— In a post LBO-acquired company, new owners will have less
ties with the company’s personnel and unions, local politicians
and at times even religious officials
“Managing a Post LBO-Acquired Company” Page 10 November 2017
Improving Operating Cash Flow: Profitability (3/3)
enhancements in the company’s management control
systems and reporting
— better industrial accounting, such as activity-based costing, will
allow for more precise measurement of results and potentially
more in-depth analysis of cost saving opportunities
— Better reporting systems translate into more information and
data, often leading to improvements through greater focus
(through strategic marketing) of a company’s operations
— Important accounting and auditing initiatives: The full audit of a
company’s financial statements promotes transparency in the
firm which in turn means better understanding and reliability of
the company’s accounts
— The implementation of a new ERP information system (for
example SAP, Oracle, JD Edwards etc.) often requires much
work, effort and financial resources in any firm
“Managing a Post LBO-Acquired Company” Page 11 November 2017
Improving Capital Efficiency
Reducing Operating Working Capital (see lesson 1!)
Capital discipline: reducing the level of in-productive capital
expenditures (“capex”)
— Reductions should not impact the fundamental portion of capex that a
company requires in order to maintain its asset base in good-working
condition, nor
— negatively affect production capacity expansions needed to maintain
the company’s ability to grow its business
Selective investment criteria:
— Investment proposals will need to be assessed by return rate
benchmarking, payback analysis, make-or-buy or capital turnover
metrics
— Companies accustomed to investing in zero or low yielding
investments, will benefit significantly in terms of capital goods
spending reductions
“Managing a Post LBO-Acquired Company” Page 12 November 2017
CREATING VALUE THROUGH CORPORATE GOVERNANCE & MANAGEMENT CHANGES
“Managing a Post LBO-Acquired Company” Page 13 November 2017
Creating Value Through Corporate Governance
A new, well-designed corporate governance model will
induce value creation
— A typical example is the case of an LBO of a previously family-
owned business, investor will promote the separation between
management and property of the company
— The optimal governance model will have the effect of:
— aligning interest between the management rights and
property rights, while
— limiting agency costs (these, mostly regard large
managerial organizations)
“Managing a Post LBO-Acquired Company” Page 14 November 2017
Creating Value Through Management Changes (1/2)
After implementation of the new governance model, the
first step to align interest is bringing on board the best
management possible in the respect to the business’
budget constraints
— A CEO will usually begin working with a fund or an investor at
the time a deal is originated: management buy-out (“MBO”) or
buy-in (“MBI”)
— A well-defined management agreement is written up and
counter-signed by the CEO and new shareholders
— Full roll-out of the management team of the company: Usually
private equity funds not only have the ability of attracting better
and more qualified management, but usually have access to a
trusted, experienced, diversified managerial pool
“Managing a Post LBO-Acquired Company” Page 15 November 2017
Creating Value Through Management Changes (2/2)
Management roll-out initially requires the implementation of the
CEO’s direct-reports (top management) mainly the CFO, COO,
CSO
The CFO would almost always be implemented by the financial
investor and be a figure with the outmost trust and professional
integrity and independence: the finance function needs to be in a
position to correctly report, monitor and control
All managers in the company need to be hired (or confirmed)
through transparent and meritocratic procedures in order to signal
competence
Once management is in place, the entire top-level management
team, would need to be the object of a management incentive
scheme (MBO – “Management by Objectives”)
“Managing a Post LBO-Acquired Company” Page 16 November 2017
CREATING VALUE BY DELEVERAGING
“Managing a Post LBO-Acquired Company” Page 17 November 2017
Creating Value by Deleveraging (1/3)
The reduction of the financial debt burden utilized for
financing the purchase price payment of an LBO-
acquired company, will be the starting point— creating value for equity holders even on the assumption of stability in
the market value of the company’s assets (EV)
— the increase in equity value, as a consequence of deleverage, will also
be accompanied by the gradual reduction in the risk-profile of the
company, which will ultimately translate into lower cost of capital
— the company will then have greater access to cheaper and wider range
of financing sources, otherwise unavailable in the presence of a high
risk profile of the firm
— the company will thus become more flexible, gaining access to new
financial and industrial options (re-capitalization, acquisitions, mergers
etc)
“Managing a Post LBO-Acquired Company” Page 18 November 2017
Creating Value by Deleveraging (2/3)
Deleveraging will normally occur through the company’s operating
cash flow generation
At times the company will be able to find new and less-expensive
sources of such as, for example, is the redemption of mezzanine
financing with senior financing
Margin ratchets: Reduction of leverage will bring in many cases to
a reduction in the base line spread rates paid by the company
Full re-financing, at attractive rates, will also bring value creation
for equity holders, but manager will need to consider numerous
correlated effects (fees charged by banks, lost tax benefits, better
return on retired cash as compared to investment in the core
operations of the firm etc)
“Managing a Post LBO-Acquired Company” Page 19 November 2017
Creating Value by Deleveraging (3/3)
Asset sales may also be used for de-leveraging
purposes, as assets are sold and cash reimbursed to
debt-holders
— In this instance the overall asset base of the company would be
reduced
— It is obvious that only non-core or non-strategic assets will be
have to be targeted, as the capital released would need to have
an opportunity cost which is lower than the cost of redeemed
debt
“Managing a Post LBO-Acquired Company” Page 20 November 2017
IN REAL LIFE….
“Managing a Post LBO-Acquired Company” Page 21 November 2017
Timeline of value creating initiatives
VERY SHORT TERM SHORT TERM
▪ T + 30 months: Roll-out of new
industrial accounting management
system
▪ T + 30 months: 1st major G&A cost
savings program implemented
▪ T + 30 months: Closed down branch
in developed country
▪ T + 30 months: Sales force
effectiveness project implemented
▪ T + 36 months: Opened new
Emerging Markets subsidiary
▪ T + 36 months: New web site Roll-
out
▪ T + 36 months : SAP go live!
▪ T + 15 months : Supply chain
revision process project (assisted
by external consultants)
▪ T + 20 months : CSO hired
▪ T + 22 months: International sales
force enhancement, with the
entrance of export manager, area
managers, and country mangers for
key geographies
▪ T + 20 months : Completed revision
of Receivables cycle / Back Office
project (credit committee, payable
management, payment solicitation)
▪ T + 22 months: First time adoption
of IAS audited year-ending financial
accounts
▪ T + 25 months: Supply chain
revision project implementation
initiated
MEDIUM TERM
▪ T + 1 month: Establishment of
working capital improvement
program
▪ T + 3 months : CFO hired
▪ T + 6 months : Implementation of
new MBO plan
▪ T + 6 months : Fully audited
year-ending financial accounts,
first time in history
▪ T + 9 months : Receivables cycle
/ Back Office process project
(assisted by external
consultants)
▪ T + 12 months : International
Accounting Principles (IAS)
project (assisted by external
consultants)