Management & Capital Allocation
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One of the critical concerns for VC funds is the issue of self-dealing. An index describes how this problem is addressed legally across different countries. Self-dealing, Tunneling, and Investor Expropriation Self-dealing occurs when the management or majority shareholders of an organization direct resources towards themselves in a manner that does not fairly compensate minority shareholders.…
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When evaluating an organization, one of the important decisions concerns the target leverage, which affects the WACC (Weighted Average Cost of Capital) and consequently the valuation outcome (naturally, the rating also influences the cost of debt). There are typically two main assumptions in this regard: first, that debt increases proportionally with the growth of the…
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The optimal level of financial leverage is determined, on the one hand, by the amount of tax savings an organization receives by deducting interest expenses, and on the other hand, by the magnitude of the probabilistic costs of bankruptcy arising from increased risks. However, one component that I haven’t encountered in academic literature but have…
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Financial theory tells us that there is an optimal capital structure derived from tax savings and the risks of financial leverage, but it says little about how to achieve the optimal structure for a specific organization. The diagram below shows the hierarchy of value creation using cash, which represents the foundation for properly forming a…
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Managers often justify mergers and acquisitions by claiming that the operation is accretive, meaning that EPS (earnings per share) increases, and therefore shareholders should be satisfied. However, the market focuses not on transactional accounting but on whether value is actually being created. The table below discusses a hypothetical example that shows the deterioration of an…
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According to McKinsey’s research (1999-2013, 1770 transactions), the combined value of the acquiring and acquired organizations increased by an average of 5.8% as a result of acquisitions. In 95% of acquisitions, the value of the acquired organizations represents less than 5% of the acquirer’s capitalization. Generally, synergy achieved through mergers and acquisitions is difficult to…
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Understanding what creates value and how it is created is critically important. A good format to grasp this is through a value creation tree diagram: First, let’s start with the idea that the opportunities for value growth are greater at the lower levels of the organization. Therefore, the lower the level we observe on the…