MSc ln SLraLeglc ManagemenL

llnanclal dlmenslon of sLraLeglc declslons

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012 342 562 722

lnflaLlon spolls sound flnanclal pollcy. ln parLlcular lL leads Lo:
o CverlnvesL: anLlclpaLlng lnvesLmenL makes lL cheaper
o keep hlgh level of lnvenLorles: manufacLurlng goods Loday and selllng Lhem
nexL year allows Lo make lnflaLlon proflLs"
o llnance Lhe company wlLh hlgh proporLlon of debL: lnflaLlon makes (generally)
debL cheap

A company does noL run lnLo flnanclal dlsLress because lL has Loo much debL buL
because lL ls noL proflLable enough
o uebL acceleraLes flnanclal dlsLress buL does noL cause lL
o A company Lhe reLurns of whlch are lower Lhan reLurns expecLed by funds
provlders (lnvesLors: shareholders and banks) wlll sooner or laLer run lnLo
flnanclal Lroubles
CperaLlng resLrucLurlng shall mlx
o CosL cuLLlng plan
o (Lemporary) reducLlon of capex
o 8educLlon of worklng caplLal
llnanclal resLrucLurlng very ofLen needs Lo be supporLed by operaLlng resLrucLurlng
(and vlce eL versa). 1hls lmplles sacrlflce from all sLakeholders
o ulluLlon and/or addlLlonal lnvesLmenL of shareholders
o arLlal abandon of debL and/or posLponemenL of maLurlLy of debL for lenders
o lncrease of producLlvlLy (employees)
o uelaylng paymenL of suppllers
o AcceleraLlng paymenL of cllenLs

A company LhaL generaLes hlgher reLurns Lhan average reLurns requlred from
lnvesLors wlll sooner or laLer face lncreaslng compeLlLlon (dependlng on barrlers Lo
enLry)
o ln pracLlce, lf 8CCL>WACC boLh should converge over Lhe long Lerm (cashflow
fade)
o ln such case Lhe company needs Lo change paradlgm (lnnovaLlon, merger, .)

L8C ls a powerful sLrucLure Lo enhance operaLlng performance
o ManagemenL ls puL under pressure by hlgh level of debL
o ManagemenL geLs also hlgh flnanclal lncenLlve
o Change ln governance ls Lhe key Lo L8Cs
o 1ax shleld helps buL ls noL absoluLely necessary

2

MSc ln SLraLeglc ManagemenL
llnanclal dlmenslon of sLraLeglc declslons


!"# %&'"&(&#) *+ ,&)" )%-./")


8499

AudlLors reporL shall noL be neglecLed
o Any speclflc elemenL makes flnanclals hlghly suspecL

CrowLh normally requlres sLrong lnvesLmenLs
o 1o flnance capex and lncreaslng worklng caplLal
negaLlve worklng caplLal can be a powerful Lool Lo develop a company
o ln very speclflc cases, cusLomers flnance growLh (cusLomer advances)

Are flrms allowed Lo spend cllenLs' money?
o Legally: someLlmes
o llnanclally: rlsky
o Morally.

8499 : #"&;) &+%";

Sound sLraLegy for a sLarL-up company requlres reduclng rlsks
o llnanclal rlsks: sLarL-ups are Lo be flnanced by equlLy (!" $%&& !' ()*"+ ',*' !'
!' +,*-- ".' /) 0!"*"1)2 /3 14+'.()5+ /4' /3 +,*5),.-2)5+)

ConsolldaLlon of a secLor may allow Lo resLore decenL reLurns for Lhe consolldaLlng
player

MarkeL evldence can dlffer from hlsLorlcal performance
o lf markeL seLs hlgh value Lo a poorly performlng flrm lL elLher mean LhaL lL ls
wrong (noL conslsLenL wlLh perfecL markeLs) or LhaL lL anLlclpaLes fuLure good
performance

noLe LhaL 1833 flled for bankrupLcy ln CcLober 2013

3

MSc ln SLraLeglc ManagemenL
llnanclal dlmenslon of sLraLeglc declslons


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nv ls Lhe besL crlLerla Lo assess lnvesLmenL opporLunlLles

ln Lhe case of complex lnvesLmenLs Lhe analysls may requlre Laklng a broader vlew
Lhan Lhe slmple asseL consldered. An assessmenL of marglnal lmpacL of Lhe
lnvesLmenL on Lhe whole group ls Lhen necessary

ln Lhe case of Saffroyce Lhls was lllusLraLed by Lhe negaLlve nv of Lhe workshop buL
Lhe hlgh lncrease of margln ln selllng subsldlarles (due Lo reducLlon ln producLlon
cosLs)

Analysls and quaLlflcaLlon of beneflLs need Lo Lake lnLo accounL Lhe lmpacL on markeL
dynamlcs of Lhe new lnvesLmenL.
o 1he enLry of a new player generally leads Lo hlgher compeLlLlon and reducLlon
ln prlces
o 1he reducLlon of cosLs may lead sooner or laLer Lo a clalm from cllenL for
reducLlon of prlces (dependlng on compeLlLlon)

SLraLeglc lnLeresL" should noL [usLlfy an lnvesLmenL lf beneflLs are noL quanLlflable

!v may be a smarL way Lo enLer a new geography

!v wlLh a cllenL lnduce sharlng cosLlng lnformaLlon wlLh hlm whlch may be an lssue


4


MSc ln SLraLeglc ManagemenL
llnanclal dlmenslon of sLraLeglc declslons


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negoLlaLlon LacLlcs depends on
o need for falrness and Lransparency of Lhe process
! a sLaLe-owned seller may need Lo prove LhaL a falr and large process
has been lmplemenLed
! 8ecenL lrench law on dlsposal of manufacLurlng slLe lllusLraLes also
needs for a broad process
! lf broad process and Lransparency ls requlred, an aucLlon should be
favoured
o unlverse of poLenLlal buyers
! lf Lhe unlverse of poLenLlal buyers ls narrow, prlvaLe negoLlaLlon may
be preferred
o CuallLy of Lhe asseL
! lf Lhe LargeL ls complex of ln bad flnanclal slLuaLlon, prlvaLe
negoLlaLlon should be preferred
o 1lmlng
! rlvaLe negoLlaLlon may Lake longer Lhan aucLlon where Llmlng ls
regulaLed by Lhe seller

SwlLchlng from one process Lo Lhe oLher ls always feaslble


5

MSc ln SLraLeglc ManagemenL
llnanclal dlmenslon of sLraLeglc declslons


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ulvldend pollcy should be dlcLaLed prlmarlly by Lhe lnvesLmenL opporLunlLles

8easons for holdlng cash lnclude
o 8uslness (e.g. cash ln shops)
o 8ecause lL ls resLrlcLed cash (down paymenL from cllenLs)
o 8eassure sLakeholders (cusLomers, employees, suppllers)
o 1o galn flnanclal flexlblllLy and be able Lo cease exLernal growLh opporLunlLles

A flrm holdlng a large amounL of cash wlll be sooner or laLer under pressure Lo glve lL
back Lo shareholders (or spenL)

Cash can be reverLed Lo shareholders ln Lhe form of
o Crdlnary dlvldend
o LxcepLlonal dlvldend
o Share buyback on Lhe markeL
o Share buyback by Lender offer

6

MSc ln SLraLeglc ManagemenL
llnanclal dlmenslon of sLraLeglc declslons


!"# %&'"&(&#) *+ ,&)" )%-./")


EA+*A/"

SLarL-ups should only be flnanced Lhrough equlLy

SLarL-ups are flnanced ln dlfferenL sLeps
o Lvery 12-18 monLhs
o Allows Lhe lnvesLors Lo monlLor Lhe ramp-up
o Allows Lhe founders Lo have lncreaslng valuaLlon as buslness model ls
demonsLraLed

1he lssue wlLh valulng goodwlll ls LhaL lnLeresL of lnvesLors and founders may dlverge
lf buslness plan ls noL dellvered
o ln LhaL case value may remaln above whaL founders have pald buL below
whaL lnvesLors have pald creaLlng confllcLs

7

MSc ln SLraLeglc ManagemenL
llnanclal dlmenslon of sLraLeglc declslons


!"# %&'"&(&#) *+ ,&)" )%-./")


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ln very speclflc cases hybrld flnanclng can be used by flrms

Such producLs Lake feaLures of debL and of equlLy
o ConverLlble bonds
o 8onds+warranLs
o Lxchangeable bonds (whlch are debL)
o MandaLory converLlbles
o ueeply subordlnaLed bonds

Accordlng Lo flnanclal Lheorles
o LfflclenL markeLs Lheory does noL [usLlfy Lhelr use
o Agency Lheory [usLlfles Lhe use of hybrld producLs (ln parLlcular converLlble
bonds) as lL closes Lhe gap beLween shareholders and lenders
o Slgnalllng Lheory lndlcaLes LhaL Lhe premlum of converLlble bonds relays a
poslLlve slgnal Lo lnvesLors

use of converLlble bonds ls [usLlfled by
o Lasy placemenL
o ulverslflcaLlon of sources of flnanclng
o Low cash requlremenLs ln Lhe shorL Lerm for growlng companles
o CeLLlng some equlLy conLenL (ln accounLs and for raLlng agencles) lf equlLy
cannoL be lssued (low prlce, conLrol lssues)

Cenerally speaklng such lnsLrumenLs are expenslve (llquldlLy dlscounL, hlgh fees from
banks)