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”)


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


IMPROVING OPERATING CASH FLOW AND CAPITAL EFFICIENCY


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


Key Financials


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


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)



— 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



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


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


CREATING VALUE THROUGH CORPORATE GOVERNANCE & MANAGEMENT CHANGES


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)


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


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”)


CREATING VALUE BY DELEVERAGING


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)



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)



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


IN REAL LIFE….


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)

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