10 ways to create shareholder value Essay

Submitted By janet0705
Words: 865
Pages: 4
Open Document
Ten Ways to Create Shareholder Value
The value delivered to shareholders because of management's ability to grow earnings, dividends and share price. In other words, shareholder value is the sum of all strategic decisions that affect the firm's ability to efficiently increase the amount of free cash flow over time. Some managers and investors obsessed with next quarter’s results, failure to invest in long-term growth. The author set out ten basic governance principles for value creation, which will help companies with a sound, well-executed business model to better realize its potential for creating shareholder value. Overall, Three main concepts have been discussed in this article.
Firstly, focus on long-term value creating instead of short-term earnings. Because shareholder value is driven by long-term free cash flows to equity holders and it can be created when long-term returns is higher than cost of capital. In other words, high earnings do not always create shareholder’s value. For example, A company invest at rates below the cost of capital or forgo investment in value-creating opportunities in an attempt to boost short-term earrings cannot meet investor expectations. Lower expectations will decrease stock price and shareholder’s value at the same time. Secondly, reduce the capital they employ and increase value by focusing on high value-added activities and by out-sourcing low value-added activities. For example, Ford Company designs their cars in American but manufacture in China. And then there’s Amway’s well-chronicled direct-to-customer business model, which minimizes the capital the company needs to invest in a sales force and distribution, as well as the need to carry inventories. The last concept is providing investors with value-relevant information. Better disclosure of finical report not only offers an antidote to short-term earnings obsession but also serves to lessen investor uncertainty and so potentially reduce the cost of capital and increase the share price.
What I am surprise in this article is that acquisition can create value faster than any other corporate activity. Although M&A is one of the quickest paths to growth, it’s not the surest and shareholders do not get the enterprise value promised from the deal. Deals are inherently complex and laden with risk, whether they occur domestically or in a foreign market. Valuations are complicated by clarity of cash flows, complex accounting rules and tax legislation. And integrations are difficult to execute. Moreover, EPS, as the index that companies and investment banks most considered, will pose an additional problem on top of the normal short-comings of earnings when it comes to exchange-of-shares mergers. However, as mentioned in article, M&A deals are based on their prospects for creating value, not on their immediate EPS impact, as long as management can identify clearly where, when and how it can accomplish real performance gains by estimating the present value of the resulting incremental cash flows, they can make acquisitions maximize expected value, even at the expense of lowering near-term earnings.
In the article, the author mentions that earnings have no connection with shareholder value or change in value. I don’t agree with this idea. Earning shows performance of company in current year. It’s one of the main reasons for people who don’t have too much financial knowledge decided whether buy or sell their stocks. The value of company is depends on the expectation. If the earnings of a company
Show More

Related Documents: 10 ways to create shareholder value Essay

Acfa - Question2 (I) Signalling Essay

prospects of the company, dividend payout policies may create positive or negative signals to the markets. Based on dividend signalling hypothesis, a change in dividend reflects the manager’s views on the firm’s future earning prospects (Berk, DeMarzo 2011). For example, during 1967-1993, companies that increased dividend at least 10% saw a 1.34% increase in stock prices after dividend announcement while the companies that reduced their dividend at least 10% saw a decrease in stock prices by 3.71% (Grullon…

Words 843 - Pages 4

Essay about Corporate Assignment Abdisamad

N ONE 1.1 Introduction 3 1.2 Value maximization and other goals 3 1.3 Customer and employee safety 4 1.4 General goodness of society 4 1.5 Conclusion 5 2.0 QUESTION TWO 2.1 Introduction 6 2.2 Corporate ownership 6 2.3 Agency problem 8 2.4 Conclusion 8 3.0 QUESTION THREE 3.1 Introduction 9 3.2 The…

Words 3633 - Pages 15

Stock Market and Genentech Essay

synergies. The pharmaceutical companies have been unable to introduce new products lately, and their only way to remain profitable is by mergers and acquisitions. Roche also used this method. Acquisition will help the firm compete in the market and thus will help it grow. Advantages of owning 100% of Genentech’s shares: The merger will lead to formation of the world’s largest biotechnology company. Value of total benefit from synergies will be $5billion. This will be a result of M&D, manufacturing, development…

Words 1683 - Pages 7

Business Finance Essay

Course Instructors FINS1613 – Business Finance      Introduction to FINS1613, Business Finance FINS1613_S2_2010_L1   Ms. Xiangping You Room: ASB 365 E-mail: x.you@unsw.edu.au Direct telephone: 9385 5865 Lecturer Week 1-9 Lecturer Week 10-12 is Dr. Zhian Chen(Lecturerin-charge) For contact details see Course Outline or Blackboard 1 FINS1613_S2_2010_L1 2 Learning Objectives for FINS1613 This subject introduces the theoretical basis and analytical framework for corporate financial decision…

Words 2409 - Pages 10

Essay on Dividend Payout policy

policy, growth and the valuation of shares” suggests that under certain assumptions (namely perfect capital markets, rational behaviour from investors and set investment plans for companies) payout policy selected by managers will have no bearing on shareholder wealth and is therefore irrelevant. The “irrelevance” comes as a result of there being a trade-off between the issuing of dividends and the repurchasing of shares depending on whether the company is raising or lowering payout. Due to one of the…

Words 1360 - Pages 6

Essay on Northampton Group Inc. – Case Study Analyses: How to Increase Shareholder Value

Case Study Analyses: How to increase shareholder value Nicole Arends, Jenny Feng, Laura Tromp & Zilha Wever FHTMS University of Aruba Mr. Don Taylor Corporate Finance FTS 2415 March 26, 2013 Introduction This Corporate Finance paper focuses on analyzing the challenges that Northampton Group Inc. (NGI) is facing as it tries to increase shareholder value. In the case study it is stated by the firm’s major shareholders, that they believe NGI is currently undervalued…

Words 5328 - Pages 22

General Mills’ Acquisition of Pillsbury from Diageo Plc Essay

the present value of the expected cost savings (synergies). In the spring of 1998 General Mills began studying areas where they could add to the company and advanced a strategy of acquisition-driven growth. General Mills has several motives for pursuing a deal to acquire Pillsbury. Pillsbury was identified as an ideal target due to its ability to complement General Mills’ other existing businesses and Diageo’s readiness to sell. The potential acquisition of Pillsbury would create value for shareholders…

Words 1928 - Pages 8

Case Study Of A Look At A Global Transformation

communications sector, they have managed to remain competitive by anticipating in the environmental changes and trends and by trying to transform every threat to an opportunity, nevertheless their mission is to remain “a world leader in sustainable value creation though imaginative ideas and connections.” Drastic changes in technology and economy happened the last decade, forced them to restructure their business model. The primary goal was to upgrade their digital skills to provide integrated services…

Words 3724 - Pages 15

Stock Market and Company Essay

and hence getting listed on the stock market. It is definitely a risky affair these days as it does have an association with the dividend given by a company. The paper shows that in spite of noble thoughts of the company, there are times when the shareholders perceive it as the beginning of the company to get delisted from the stock exchange. Also, nowadays, buy back is generally preferred when there is surplus earning in the company. Over the last decade a lot of foreign involvement has come up with…

Words 6367 - Pages 26

Business: Franchising and Financial Performance Essay examples

DOES FRANCHISING CREATE VALUE? AN ANALYSIS OF THE FINANCIAL PERFORMANCE OF US PUBLIC RESTAURANT FIRMS* E. Hachemi Aliouche, Ph.D. Assistant Professor, School of Business Southern New Hampshire University Senior Research Fellow, The William Rosenberg International Center of Franchising, University of New Hampshire Udo Schlentrich, Ph.D. Associate Professor, Whittemore School of Business and Economics University of New Hampshire Director, The William Rosenberg International Center of Franchising…

Words 5408 - Pages 22