Corporate Valuation Institut for Regnskab, IC Pontoppidan Problems Last lecture: beta building This lecture –uncertainty: Courtney –Risk:Penman –IPO’s:McCarthy –IBO: Wright & Robbie –CKM ch.15 and 19 Negotiation on saturday 09.00! In and around H211 Exam !!! Only reports ?! Indicate personal contribution !

Corporate Valuation Institut for Regnskab, IC Pontoppidan Strategy under Uncertainty Framework for uncertainty and its implication for strategy 4 levels of uncertainty 3 generic strategies (Postures) 3 types of action (Moves) The tradition has been to find the most likely outcome and create a strategy based on this, where the uncertainty got buried in the cash flow forecast. But this creates an either-or attitude to uncertainty. Instead the “residual” (after trends and analysis) uncertainty is characterized in 4 levels

Corporate Valuation Institut for Regnskab, IC Pontoppidan Uncertainty -each with its own strategic “logic” clear-enough (value chain, Porters 5, DCF) alternate futures (options, game theory) range of futures (no expected value, robustness) true ambiguity (indicators of drivers + analogies) The 3 generic strategies (postures) are shaping adapting reserving the right to play (special form of adapting on level 2-4)

Corporate Valuation Institut for Regnskab, IC Pontoppidan Uncertainty The 3 types of action (moves) are big bets options no-regret moves (always positive) e.g. L1 adapters: where and how to compete L2 shapers: try to increase the probability that a favored industry scenario will occur L3 shapers and adapters: reserving via organizational capabilities L4 shapers: provides vision that coordinates

Corporate Valuation Institut for Regnskab, IC Pontoppidan Risk Fundamental /Equity risk consists of operating r. and financial r. Operating r. consists of operating r.1 and growth r., which splits the risk determinants into financial statement drivers (expressed as risk on commen equity + growth risk) Growth in investments - heavily influenced by the double risk from sales. This double risk illustrates risk interaction, generating “fat tailes”/ extreme returns (+/-)

Corporate Valuation Institut for Regnskab, IC Pontoppidan Risk In the ROCE both the o.r. and f.r. can be leveraged distribution of value gives VaR-profiles further to fundamental irsk the investor bears price risk due to market inefficiency and liquitity risk foreward looking risk premium in US is app. 3,5%

Corporate Valuation Institut for Regnskab, IC Pontoppidan CKM ch 15 Dot.coms Characterized by high growth, -uncertainty and -losses “investments” are immaterial and hence running through the income statement estimate the possible/ probable future position and work backwards weight the scenarios with probabilities and test the sensitivities for these weights cash flow risk is hence taken care of and should NOT be added - use industry- average beta and general market risk premium the winner takes all/ best of breed

Corporate Valuation Institut for Regnskab, IC Pontoppidan CKM ch 19 Emerging markets Extra risks –macroeconomic uncertainty –political risks –illiquid capital markets –capital restrictions 3 approaches (to supplement each other) –probability weighted scenarios –countryrisk premium in cost of capital –local multiples local cost of capital when restrictions differs local risk free rate ? beware of the accounts with regard to –local rules –hyper inflation: real/ nominal rates ? –FX impact

Corporate Valuation Institut for Regnskab, IC Pontoppidan IBO: Investor led buy-out’s 3 basic categories of investors –industry / “trade” –institutional investors (IBO) –management (old or new) MBO/ MBI industry knowledge and synergy means lower uncertainty and higher gains for industry investors i.e. highest buyer value today the investor categories do mutate –venture funds –institutional investors + management (BIMBO) buying whole companies or parts –carve out, spinn off, split, breaking due diligence often VERY important and diffenent for the differet categories

Corporate Valuation Institut for Regnskab, IC Pontoppidan IPO’s: Initial public offering How much is “left on the table” - 20% ? Oversubscription = sold out first day ! –Add extra selling ? –Price too low ? Banks earn fee with no risk ? Is it sellers against share buyers or together with ? Impossible to forecast the “temperature” in the market ? –100 % increase the first day ?????????? –Other valuation models ?

Corporate Valuation Institut for Regnskab, IC Pontoppidan Saturday ? In Agenda st. Round. A’s -B’s are observers st. Round B’s -A’s are observers app guest speaker PWC lunch (the bistro is open) nd. Round A’s -B observe nd. Round B’s -A observe break short negotiation presentation from each TEAM A’s: Inditex,LM,Harboe,Lundb. B’s:Vestas,Martin,Virgin