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NIBC Contenu Accretion dilution concepts.....................................1 Industry-specific valuation metrics.............................5 Sum of the parts valuation......................................9 What are Non-Operating Assets? How do they Affect Value?.......19 Impact of stock versus cash deals..............................19 Operational efficiencies.......................................24 Media Industry.................................................25 Advertising ..................................................32 Print Media ..................................................32 Television ...................................................33 Filmed Entertainment .........................................34 Video Games ..................................................34 Radio ........................................................35 Internet based Media .........................................35 Media Technology Manufacturers ...............................36 Accretion dilution concepts Basically, accretion / dilution analysis answers the question: " Does the proposed deal increase or decrease the post-transaction earnings per share (EPS)?" This determines the justification for the deal in the first place. Accretion/dilution analysis is a type of M&A financial modelling performed in the pre-deal phase to evaluate the effect of the transaction on shareholder value and to check
myriamelandryblog.files.wordpress.com · Web view2015. 1. 30. · cash is used to make the purchase, and additional considerations on post-transaction intangible asset amortizations
NIBC
Contenu Accretion dilution concepts 1 Industry-specific valuation
metrics 5 Sum of the parts valuation 9 What are Non-Operating
Assets? How do they Affect Value? 19 Impact of stock versus
cash deals 19 Operational efficiencies 24 Media Industry 25
Advertising 32 Print Media 32 Television 33 Filmed Entertainment 34
Video Games 34 Radio 35 Internet based Media 35 Media Technology
Manufacturers 36
Accretion dilution concepts
Basically, accretion / dilution analysis answers the question:
"Does the proposed deal increase or decrease the post-transaction
earnings per share (EPS)?" This determines the justification
for the deal in the first place.
Accretion/dilution analysis is a type of M&A
financial modelling performed in the pre-deal phase to
evaluate the effect of the transaction on shareholder value
and to check whether EPS for buying shareholders
will increase or decrease post-deal.
Generally, shareholders do not prefer dilutive transactions;
however, if the deal may generate enough value to become accretive
in a reasonable time, a proposed combination is justified.
Accretion / dilution analysis is often seen as a proxy for whether
or not a contemplated deal creates or destroys shareholder value.
But how can you assess whether or not two entities should merge, if
you are only analyzing a two-year horizon? For instance, if the
combined entity has better manufacturing capabilities and more
diverse offerings, it may take more than a couple of years to fully
integrate both operations to leverage and realize efficiencies and
for marketing to convey the message. This type of analysis is not a
composite of the complete picture, nor does it contemplate on how a
newly-combined entity operates, adjusts or takes advantage of
opportunities years down the road.
Is the pro forma EPS higher than the original EPS? An increase to
EPS is regarded as accretion, while a decrease is regarded as
dilution. Many on Wall Street typically frown at dilutive
transactions. If a deal has a reasonable likelihood of turning
accretive from year two and onwards, a proposed business
combination may be more palatable.
Accretion/dilution is relevant to a strategic buyer as it can be
regarded as a proxy for whether the acquisition creates
or destroys value for shareholders. EPS serves as an
indicator of a company’s profitability. If a transaction is
going to decrease the company’s profitability (i.e. it is
dilutive), the value of the buyer
should theoretically decrease following the
transaction.
However, there are significant limitations to this analysis. First,
accretion/dilution is looking at the transaction over a fixed
period of time. Strategic buyers generally intend to own an
acquired business indefinitely. Additionally, EPS is impacted by
numerous accounting decisions (which can be manipulated)
and does not necessarily reflect the
economic reality or the combined company’s ability to generate
cash flow.
Steps Involved in Accretion / Dilution Analysis
1) Estimate a pro forma net income for the combined entities.
Include conservative estimates of net income, taking into account
prospective operational and financial synergies that are likely to
result after the deal is finished. Some groups incorporate the last
12 months (LTM) as well as one- or two-year projections. Others
include projected net income only. Regarding prospective synergies,
the new company may anticipate higher revenues, due to
cross-selling of a wider array of product and service offerings, as
well as lower costs, due to the elimination of redundant functions
and manufacturing facilities. (If you're unfamiliar with pro forma
net income, refer to Understanding Pro-Forma Earnings.)
Aside from variables that affect the pro-forma net income due to
anticipated synergies, the analyst should also account for
transaction-related adjustments that may occur, such as higher
interest expense, if this is a leveraged buyout and debt is used to
fund the deal, lower interest income, if cash is used to make the
purchase, and additional considerations on post-transaction
intangible asset amortizations.
2) Calculate the combined company's new share count.
Tabulate the prospective acquirer's share count. Factor new shares
that would be issued to make the purchase – if it's a stock
deal.
3) Check the accuracy of your numbers.
Lest you risk looking dumb in front of the deal team, check your
numbers before presenting them. Are you incorporating some
professional skepticism on prospective synergies, or is the entire
garden laden with beautiful roses?
4) Divide pro forma net income by pro forma shares to arrive at a
pro forma EPS.
Is the pro forma EPS higher than the original EPS? An increase to
EPS is regarded as accretion, while a decrease is regarded as
dilution. Many on Wall Street typically frown at dilutive
transactions. If a deal has a reasonable likelihood of turning
accretive from year two and onwards, a proposed business
combination may be more palatable.
Example
Pre-deal situation[edit]
BuyCo plans to acquire 100% shares of SellCo in a stock-for-stock
transaction.[2]
BuyCo has a net income of $300,000 and 100,000 shares
outstanding
Market shareprice of BuyCo is $50.0
Pre-deal EPS = $3.0
Pre-deal P/E = 16.7
SellCo has a net income of $100,000 and 50,000 shares
outstanding
Market shareprice of SellCo is $60.0
Pre-deal EPS = $2.0
Pre-deal P/E = 30.0x
BuyCo agrees to pay a premium for control of 30%, so the offer
price for one SellCo share is 1.3*$60.0 = $78.0
Stock-for-stock exchange ratio is $78/$50 = 1.56 of BuyCo shares
for one SellCo share
BuyCo issues 1.56*50,000 = 78,000 new shares to exchange them for
all the SellCo shares outstanding
Total shares of NewCo = 100,000 (pre-deal shares of BuyCo) + 78,000
(new shares) = 178,000 shares
NewCo expected EPS = Total net income/Total shares outstanding =
($300,000+$100,000)/178,000 = $2.25
NewCo expected shareprice = (P/E of BuyCo)*(expected EPS) =
16.7x*$2.25 = $37.45
Post-deal situation[edit]
EPS of NewCo fall from $3.0 to $2.25, so the deal is 25% dilutive
for BuyCo shareholders
BuyCo shareholders own 100,000/178,000 = 56.18% of NewCo
SellCo shareholders own 78,000/178,000 = 43.82% of NewCo
We are now ready to complete the pro forma income statement for the
combined business. Our goal here is to show whether or not the
transaction is accretive or dilutive to the acquirer in the years
subsequent to the transaction.
In calculating accretion/dilution, we must include all transaction
adjustments. The equations used to calculate the "Interest (Income)
/ Expense" line item for 2009 and beyond might be intimidating, but
can be broken down into four components: 1) the sum of the
standalone companies' interest (income)/expenses, 2) incremental
interest expense on acquisition debt, if any, used to finance the
transaction, 3) any interest income lost due to the use of the
companies' cash balances to fund the acquisition, and 4) a
reduction in interest expense due to conversion, if any, of
TargetCo's convertible securities (TargetCo's convertible debt pays
2.5% interest if not converted, but pays no interest if
converted to equity). We could also make adjustments here for
TargetCo's standalone contribution to the combined company's
interest expense based on whether previously outstanding debt was
retired or assumed by BuyerCo. For example, if BuyerCo retires
TargetCo's $230 million convertible debt issue, there would be no
post-transaction interest expense associated with the convertible
debt regardless of whether or not the convert is
"in-the-money"
In calculating the pro forma interest (income)/expense, we combine
several steps that we perform separately in the "After-Tax
Acquisition Adjustments" section of a subsequent topic on
accretion/dilution . Therefore, it may facilitate your
understanding of how to compute pro forma interest (income)/expense
by studying this topic first and returning to the pro forma income
statement afterwards to complete the accretion/dilution.
Other adjustments are made in the "Other Transaction Adjustments"
line item, including any write-down of deferred revenue and any
deferred stock-based compensation expense previously
calculated.
Note that we only computed accretion/dilution for cash, rather
than GAAP, accounting results. You could take the pro forma P&L
a step further by additionally computing GAAP accretion/dilution in
a manner similar to that used to arrive at GAAP EPS on TargetCo's
and BuyerCo's income statements.
Industry-specific valuation metrics
The EV/EBITDA ratio is a relevant ratio for market
valuation.
Excellent customer experiences are a vital aspect for the success
and growth of any business. The customer experience is powerful and
differentiating factors that can help businesses consolidate their
customer base through strong customer loyalty to assist in
increasing revenue. Companies that focus on providing
holistic customer experiences can ensure they will build a strong
customer base and individualize themselves from their competitors.
Top-notch customer experiences can help develop an emotional bond
that drives them to buy a company’s product or service on multiple
occasions. To get the best ‘value for their money’, customers turn
to various mobile apps, social media, online comparison shopping,
and customer reviews before making a purchase. Companies must
ensure that customers get the same level of customer experience
across all touch-points. There is only one boss—the customer.
And he can fire everybody in the company from the chairman on down,
simply by spending his money somewhere else.
- Sam Walton, Founder Walmart
Customer experience metrics help to quantify the overall experience
in which customers have across all touch-points. It is the key
indicator of a company’s success and relationship with their
customers. Some of the metrics businesses should track to ensure
supreme customer experiences include: Average Revenue Per User
(ARPU) Average Revenue Per User (ARPU) is a widely used metric
across various industries and is derived by dividing the total
revenue generated by total number of subscribers. It calculates the
amount companies bring in from customers or how much each
subscriber buys from the company within a specific time frame. A
company can increase the customer experience and ARPU by focusing
on up-selling and cross-selling methods, offering bundled packages,
and using scalable pricing. ARPU can reveal which layer of customer
acquisition you need to improve upon and what methods are needed to
improve customer experience. Customer Lifetime Value (CLV) Customer
Lifetime Value (CLV) can be defined as the expected value of profit
generated by a business due to the relationship with a customer
over time. Customer experience is very much closely related to CLV
and is a critical driver because the quality of customer
experiences can greatly impact CLV. Every customer interaction
during marketing communication, sales contacts, service/product
delivery, and customer service can improve the customer
experience and then positively impact future buying
behaviors. Customer Loyalty Customer Experience metrics
include: Customer Satisfaction, Recommendation, and Customer
Loyalty. These can measure the response or behaviors of customers
and the result of their experiences after their interaction with an
agent or representative. Businesses must provide a positive
customer experience to reap the benefits of increased customer
loyalty. In hindsight to this, quality customer experiences will
ensure that businesses receive a greater profit, and the likelihood
of their customers to recommend product and services to others.
According to the Temkin Group Report published in March 2012 (1),
there is a high degree of correlation between customers’
experiences and their likelihood to recommend a company and to
consider purchasing more products and services from that company in
the future. Share of Wallet The Share of Wallet metric can be
defined as the share of dollars that customers are spending on a
particular brand. Share of Wallet can be used by companies to
identify which customers prove to be most loyal. This metric can
also be used to increase repurchase options and assist companies in
knowing about competitors. A higher share of the wallet metric
shows that companies are providing higher customer experiences and
are enjoying a greater customer loyalty.
Over the years, valuation experts have distinguished patterns in
the selling price of businesses and financial ration of relevant
groups. These patterns, industry specific multiples, determine the
current value of a company. Industry specific multiples are the
techniques that demonstrate what business is worth. To evaluate the
estimate of the value of the business one can use financial ratios
such as:
· Enterprise value (EV) to gross revenues or net sales
· EV to net income
· EV to EBIT and EBITDA (earnings before interest, taxes,
depreciation, and amortization)
· EV to seller’s discretionary cash flow
· EV to total business assets
· EV to owners’ equity.
One can use different combinations of these financial performances
to calculate the estimate of the firms’ value for different
industries. (See Table 1) For instance, EV/revenue multiple is used
to evaluate value of various new industries. While EV/EBITDAR
multiple is used when there are significant rental and lease
expenses incurred by business operations.
Market Capitalization
Market capitalization is the value of a publicly traded company
based on current market prices. It is calculated by multiplying all
outstanding shares by the share price. For example, you start up a
company called XYZ, and you divide your company into 100 publicly
traded shares. One share of XYZ costs $5 per share. Therefore, your
market capitalization would be $500.
There are four categories for market capitalization:
· Large Cap companies have a market cap of over $10 billion.
· Mid Cap companies have one between $2 to $10 billion.
· Small Cap companies have one between $300 million to $2
billion.
· Micro Cap companies have one under $300 million.
Market capitalization can be deceiving and must be measured in
correlation to other important business metrics. Just because a
company’s market cap is soaring doesn’t necessarily mean that it is
justified – it just means that the stock price is increasing at a
rapid pace, thus increasing the company’s weight.
Price-to-Book Ratio
Let’s say your company, XYZ, has $500 in available cash. Remember
that you issued 100 shares at $5 each. In this situation, the
price-to-book ratio is now 1. That means that for each outstanding
share, there is $5 in cash to back it up. It is calculated by
dividing the share price by the cash (book) value per share. Let’s
say your company’s shares increase in value to $10, but you still
only have $500 in cash. Dividing $10 by $5 would now give the
company a price-to-book ratio of 2.
Legendary investors such as Benjamin Graham and Warren Buffett have
been followers of the book value principle. Graham famously taught
that if a company is fundamentally sound and its price-to-book
ratio falls below 1.0, then it is a good value investment, since
logically, barring other capital losses, a company’s stock price
should be worth at least its book value, if not higher.
Price-to-Earnings Ratio
Price-to-Earnings, or P/E ratio, is the most frequently used
valuation technique for businesses. It is calculated by dividing
the share price by its annual earnings (profit) per share. Let’s
pretend your XYZ company, which now trades at $10, survived for a
year, and at the end of the year you earned profits (revenue –
expenses) of $50. Remember that you still have 100 total
outstanding shares, currently worth $10 each.
Divide $50 by 100 and you have an EPS (earnings per share) of
$0.50. Now let’s divide the share price of $10 by $0.50 = 20. 20 is
now your current P/E ratio, which from now on will be referred to
as a trailing P/E ratio.
Now your company will provide the public with a forecast, or
guidance, of what your next 12 months are going to look like. You
declare with certainty that your company will earn $100 next year
and double your profits from this year. Divide that $100 by 100 and
now you have an estimated EPS of $1. Dividing the share price of
$10 by $1 now gives you a new P/E ratio – 10. This is now regarded
as your forward P/E, or a forecast of how your stock will perform,
based on your current promises.
Now, investors get really excited about the prospects of your
business, so they bid your shares up to $20 per share. Your
trailing P/E has now increased to 40, while your forward P/E has
now risen to 20 – a fairly top-heavy situation. This is the reason
stock prices increase and are ultimately throttled by P/E
multiples.
Value investors will seek out stocks with low P/Es – usually under
20, but it can be higher in a high-growth industry such as tech –
and declare that they are “cheap”. These stocks will tend to move
slowly or not at all, but with limited downside risk.
Meanwhile, growth investors will search for stocks with high P/Es –
some higher than 50, depending on the sector – in an effort to find
stocks with the most momentum and driven by the most hype. These
stocks can move very fast – see any Chinese Internet stock – but
can also crash the fastest, due to the lack of fundamental
scaffolding.
Other Valuation Metrics
These three are but the tip of a very big iceberg, but
understanding these three valuation metrics will make it far easier
to understand other important metrics, such as P/S (price-to-sales)
and ROE (return-on-equity), and make it far easier to gauge the
value and profitability of a business.
Sum of the parts valuation
10.4.3 Diversification Discount
Note that both the information- and the governance-related
motivations for corporate
break-ups are based, at least to some extent, on reducing
diversification.
Reduced diversification enhances the quality and quantity of
analyst following
and boosts corporate performance by means of managerial incentives
and specialization.
Theoretically diversification can produce some benefits (e.g.,
internal capital
markets, reduced cash flow variability, and hence lower cost of
capital, etc.).
Nonetheless, it is well known that some conglomerates trade at
discount to their fair
value: it is the “diversification discount” (i.e., the difference
between actual market
value of the firm and the “sum of the parts” value) which justified
many hostile
takeovers followed by split up strategies. Recently some studies
have challenged
the size and even the existence of the diversification discount
(Villalonga 2004).
Nonetheless, investment bankers often use the “diversification
discount” motivation
to convince firms to undertake a break-up. Consider the following
example:
assume Pharma (health-care industry) is a fully owned subsidiary of
Giant Group
(food & beverage industry). Giant is publicly listed. Table
10.10 reports the last
available data about the two companies:
Also assume that the average EV/EBITDA multiple in the food &
beverage
industry is 10x, while the average EV/EBITDA multiple in the
health-care industry
is 20x.
Investment bankers normally use a “bottom-up” approach: in other
terms they
estimate the value of the conglomerate as sum of parts, trying to
prove that this
value is higher than market value. Since Pharma has an EBITDA equal
to _100, its
estimated EV is _2,000 (or 20 times _100). The EBITDA of Giant
excluding
Pharma (i.e., the pure “food & beverage” EBITDA) is equal to
_900 (or _1,000
less _100), resulting in an estimated EV of Giant, excluding
Pharma, equal to
_9,000. The sum of parts is therefore _11,000 (or _9,000 plus
_2,000): it seems
therefore reasonable to unlock the hidden value (_1,000) by means
of a break up.
While this approach is widely used by investment bankers in their
pitches, it is
worth underlying that it is based on the crucial assumption that
there actually is an
hidden value (i.e., not reflected into the stock prices) to be
unlocked. What if the
market perfectly reflects the value of Giant and Pharma and there
is no hidden value
Table 10.10 Carving out
*From consolidated financial statements
to unlock? Consider a “top-down” approach: by subtracting the
estimated Pharma
EV (2,000) from the conglomerate market EV (10,000), we get the
implicit
market EV of the pure “food & beverage” activity of Giant:
8,000. Since the pure
“food & beverage” EBITDA is equal to 900, the implicit market
multiple is 8.89x,
well below the industry average, which is 10x. However, the
lower-than-average
multiple of the Giant’s “food & beverage” activity might simply
be justified by a
lower prospective growth or some other sort of competitive
dis-advantage, that has
nothing to do with the hypothetical hidden value. In this case,
separating Pharma
from Giant would not generate any incremental value:
post-restructuring Giant stock
price would simply reflect an EV/EBITDA multiple lower than
pre-restructuring.
The main point here is not to argue than one approach is better
than the other
(bottom-up versus top-down) but simply to pinpoint that whatever
estimate is
conducted pre-restructuring, the actual outcome of the
restructuring can be assessed
only post-restructuring.
Valuing a company by determining what its divisions would be worth
if it was broken up and spun off or acquired by another company.
For example, you might hear that a young technology company is
"worth more than the sum of its parts." This means that the value
of the tech company's divisions could be worth more if they were
sold to other companies. In most cases, larger companies have the
ability to take advantage of synergies and economies of scale that
are unavailable to smaller companies, enabling them to maximize a
division's profitability and unlock unrealized value.
We then use either DCF or price multiples to come up with
value of each business and thus come up with the EV and
subsequently value of equity of the firm.
The SOPT allows for
1) Computing the fair value of a company that is trading at a
discount to the sum of its parts.
2) Restructuring a company’s value through a spin-off, or
3) Reorganization to unlock the value of business segments to their
potential.
Diversification discount arises from sum of part valuation, due to
Multiple Businesses, non clarity of business specifics and lack of
management focus, market tends to give discount to the SOTP. This
is known as Diversification discount or portfolio discount. Global
Studies over the years on Diversified companies has shown that
these companies trade at a discount in the range of 10% to
30%
It is also observed that very big companies attract more Discounts
as there is difficult to reorganize them due to Mega Complex
structures. However mid level companies can reduce this discount
significantly through Management action and reorganization.
Sum-of-the-parts ("SOTP") or "break-up" analysis provides a range
of values for a company's equity by summing the value of its
individual business segments to arrive at the total enterprise
value (EV). Equity value is then calculated by deducting net debt
and other non-operating adjustments.
For a company with different business segments, each segment is
valued using ranges of trading and transaction multiples
appropriate for that particular segment. Relevant multiples used
for valuation, depending on the individual segment's growth and
profitability, may include revenue, EBITDA, EBIT, and net income. A
DCF analysis for certain segments may also be a useful tool when
forecasted segment results are available or estimable.
Applications
SOTP analysis is used to value a company with business segments in
different industries that have different valuation characteristics.
Below are two situations in which a SOTP analysis would be
useful:
· Defending a company that is trading at a discount to the sum of
its parts from a hostile takeover
· Restructuring a company to unlock the value of a business segment
that is not getting credit for its value through a spin-off,
split-off, tracking stock, or equity (IPO) carve-out
This analysis is a useful methodology to gain a quick overview of a
company by providing a detailed breakdown of each business
segment's contribution to earnings, cash flow, and value. many
companies can be viewed as a candidate for break-up valuation. The
table below provides a number of examples:
Company
Disney
United Technologies
Fortune Brands
Tyco
Sara Lee
Theme parks:
Broadcast network:
Film Studio:
Distribution channels
Television:
Traditional Channels: Film content moves through a variety of
channels with staggered release windows, conventionally beginning
with theaters and ending with television.
New Channels: Industry is undergoing significant changes including
digital release which comes earlier in a film’s lifecycle
Digital growth: $5.2bn of digital revenues in 2012, up 50% from
2011. Emergence of digital distribution platforms is increasing
overall demand for content but also threatening networks and cable
and satellite operators due to potential for substitution
Reason for using this method
A sum of parts valuation may be used to adjust a valuation method
to suit different parts of a business. For example,
1) a company may have a growth business that deserves a high
PE and a mature business that deserves a low PE.
2) A cyclical business may require a higher discount rate when
doing a DCF.
How to calculate
Value the separately listed subsidiary using the market value of
its shares, possibly with a premium for the fact that it is a
controlling interest.
Use a DCF for the new start-up.
Use an EV/EBITDA for the stable business
How do you do the analysis?
1) Determine the value of each business units, using a combination
of Discounted cashflow, multiple and asset-based valuation
2) Deduct the value of the corporate centre
3) Add non-operating assets (e.g. cash, marketable
securities)
4) Deduct non-operating liabilities (e.g. debt, pension)
5) This gives you the implied market capitalisation
6) Compare to current market cap to determine conglomerate
discount
Methodology
(1) Gather segment-level data from any of the following
sources:
· Investor presentations
· Latest annual report, 10-K, or 10-Q
· Moody's company profiles, S&P tearsheets
(2) Spread LTM and, to the extent possible, projected financial
data for each business segment
· Typical financial metrics used include EBITDA, EBIT, and net
income
· The SOTP financial information should equal the consolidated
financial information for the entire company
· As necessary, an "other" category may be used, but care should be
taken to determine the nature of this category in order to assess
multiples, value, etc.
· Allocate corporate overhead to divisions based on percent of
revenues, EBIT, or industry norms for each segment. It is also
acceptable to value overhead as a standalone item
· If depreciation and amortization are not provided by segment,
allocate to divisions using methodologies that may include percent
of assets, revenues, EBIT, or industry norms for each segment
· Use your judgment to the extent necessary
(3) Determine an appropriate range of multiples for each business
segment by applying metrics and multiples which are most relevant
for each business segment
· Use either trading or transaction comps, as appropriate, for each
industry to determine the appropriate range
· Use a range of multiples, not point estimates
· To the extent overhead was not allocated, apply blended multiples
to determine the "negative value" of overhead. Since this may
create misleading values for the individual segments, allocating
overhead is preferable, assuming there is sufficient data
· DCF valuations may be useful for certain business segments
(4) Sum the values of each business segment, offset by corporate
overhead, if appropriate. The result is an aggregate EV range for
the consolidated company.
(5) Deduct net debt and add/subtract other non-operating/financial
items from the EV range to determine a range of equity
values.
(6) Divide by the sum of diluted shares outstanding to arrive at a
range of equity values per diluted share. Be sure to include any
in-the-money options and convertible securities.
(7) Other considerations:
· Minority interest could be attributable to a single segment or
may have components from all segments. If attributable to a single
segment, be sure to make note of it in the valuation analysis
· Similarly, certain liabilities may be attributable to one or more
segments, or may be entirely separate
Interpreting the Analysis
Compare the range of results to current trading levels and ask: "At
the current share price, is the company being undervalued or
overvalued compared to the SOTP equity value per share?" Also,
compare results to any of the following metrics and look for
consistency with the calculated range:
· 52-week high and low
Theme parks, broadcast network, film studio, retail stores,
theaters,
What are Non-Operating Assets? How do they Affect Value?
From a business valuation perspective, non-operating assets (often
referred to as “redundant” assets) are assets owned by a company,
but not used in the day-to-day operations of the business. Common
redundant assets include cash, marketable securities, loans
receivable, unutilized equipment and vacant land. The
identification of non-operating assets is an important step in the
valuation process as these are often overlooked when the business
is being valued based upon its earnings potential. The
capitalization of earnings/cash flow approach does not capture the
value of redundant assets. These assets must be valued separately
and added to the value of the business otherwise determined.
Consider, for example, a company which owns a parcel of land (with
an assumed value of $500,000) that is being held for future
development or expansion. At the valuation date the land is not
being used in the business. Using an earnings-based approach the
company was valued at $2,000,000. However, because the land is not
contributing to the company’s earnings, its value is not captured
in the earnings based valuation approach. In fact, the vacant land
likely is reducing the company’s earnings due to the property taxes
that are being paid on the land therefore reducing the value of the
company otherwise determined. These property taxes should be added
back in determining maintainable earnings and the $500,000 value of
the land (net of applicable taxes and disposal costs) should be
added to the earnings value of the business. This same analysis
also applies to cash, marketable securities or loans
receivable.
Impact of stock versus cash deals
The market often reacts more favorably to a cash deal than a stock
exchange. It is important to keep in mind that the market will
react more positively to signals of confidence from the acquiring
company = cash deal or fixed value in stock exchange. Sellers can
often achieve a higher price for their companies by accepting stock
deals
Stock Deal:
In a stock deal, the risk that the synergies do not materialise is
share between the acquirer shareholders and the target shareholders
(in cash deal the acquirer shareholders bear all the risk). There
will also be a dilution of control for the shareholders.
It also offer the target favorable tax treatment as they will
decide when they’ll sell their share and they’ll have to pay the
taxes (in cash deal they have to pay the taxes on capital gain-
however pension funds do not pay taxes)
a) Fixed Share
The number of shares are fixed both the value of these may
fluctuate.
However the price of the shares of the acquirer may differ between
the time of the announcement and the time of the trade (However the
dilution of share should not change)- the target shareholders bear
the risk that the shares of the acquirer decrease).
In long-term both shareholders parties support the risk that the
premium paid was greater than the synergies. As such, they also
share the increase in the stock value.
b) Fixed Value
The acquirer will issue a fixe value of share, in this method, the
number of share may differ but the value of the exchange should
not.
In this method, the proportion of dilution is not certain until the
closing date of the deal. At that point, it is the acquirer’s
shareholders who bear the risk of the decrease in price between the
announcement and the deal dates. The price might decrease at an
equal value of the premium paid.
Also the target’s shareholder do not bear the risk that the
synergies does not materialise as the price of the acquirer’s
company should had decrease by the amount of the synergies at the
time of the deal.
Options for Reducing the Uncertainty of Stock Deals*
1. “Floor-and-ceiling” on the offer price: setting a minimum and
maximum value that the seller will receive regardless of the
acquiring company’s stock price (e.g. minimum 85% and maximum 115%
of stock price at closing)
2. “Fixed dollar value of stock”: locking in the stock price at a
fixed price
3. “Receiving a portion in cash”
4. “Hedging after the sale”/ “Establishing a Collar”: a collar
means that the seller of a company simultaneously sells a call
(seller of a call is obliged to sell a commodity at an agreed upon
date for an agreed upon price) and buys a put (a put allows the
buyer the right but not the obligation to sell a
commodity or financial instrument (the underlying instrument) at a
certain time for a certain price)
5. Softening the lockup provisions/no lockup
Cash deal:
A cash deal signal that the company is certain to materialize the
synergies and that its stock is not over evaluated
In a cash deal, the company first has to pay a premium to the
targets shareholders so that they’ll accept the deal. The remaining
premium of synergies or the losses) will be shared only with their
shareholders.
The only problem with cash deal is that often the company does not
have sufficient liquidity to finance the deal. As such they will
make a deal with both cash and stock.
How a company should make the decision to offer cash or stock
exchange:
1) Are the share under, fairly or over evaluated?
If the acquirer believes his shares are currently under evaluated,
it should not issue share for the deal (it will pay a higher price
than it should). As such, if the company decides to finance the
acquisition by issuing new shares the market will believe the
shares are over evaluated which should decrease the price of the
stock.
2) What are the risks that the synergies paid in the premium do not
materialize.
If the management believes that the synergies will materialize the
will offer a cash deal so that their shareholders are they only one
to benefit from the synergies.
3) What are the risks that the value of the shares of the acquiring
company drops between the announcement and the deal? (This question
helps differ between fixed value and fixed shares in stock
exchange)
A seller should consider the following aspects when weighing a
stock deal versus a cash deal:
· tax implications
Stock deals enjoy a distinct financial advantage over cash deals
due to U.S. tax policy (stock for stock deals are not considered
taxable events)
· strength/potential of acquiring company
· seller’s risk comfort level
Extra
Mergers usually occur between companies of equal size that
believe that a newly-formed company will compete better than the
separate companies can on their own. Mergers usually occur on an
all-stock basis. This means that the shareholders of
both merging companies are given the same value of shares in the
new company that they previously owned. Therefore, if a shareholder
owns $10,000 worth of shares before the merger, he or she will own
$10,000 in shares after the merger. The number of shares owned will
change following the merger, but the value of those shares remains
the same.
However, mergers are rarely a true "merger of equals". More often,
one company indirectly purchases another company and allows the
target company to call it a merger in order to maintain its
reputation. When an acquisition occurs in this way, the
purchasing company can acquire the target company by either using
all-stock, all-cash, or a combination of both. When a larger
company purchases a smaller company with all cash, there is no
change to the equity portion of the parent company's balance
sheet . The parent company has simply purchased a majority of the
common shares outstanding. When the majority stake is less than
100%, the minority interest is identified in the
liabilities section of the parent company's balance sheet. On
the other hand, when a company acquires another company in an
all-stock deal, equity is affected. When this occurs, the parent
company agrees to provide the shareholders of the target company a
certain number of shares in the parent company for every share
owned in the target company. In other words, if you owned 1,000
shares in the target company and the terms were for a 1:1 all-stock
deal, you would receive 1,000 shares in the parent company. The
equity of the parent company would change by the value of the
shares provided to the shareholders of the target company
the form of payment might be decisive for the seller. With pure
cash deals, there is no doubt on the real value of the bid (without
considering an eventual earnout). The contingency of the share
payment is indeed removed. Thus, a cash offer preempts competitors
better than securities.Taxes are a second element to consider
and should be evaluated with the counsel of competent tax and
accounting advisers. Third, with a share deal the buyer’s capital
structure might be affected and the control of the Newco
modified. If the issuance of shares is necessary, shareholders of
the acquiring company might prevent such capital increase at the
general meeting of shareholders. The risk is removed with a
cash transaction. Then, the balance sheet of the buyer will be
modified and the decision maker should take into account the
effects on the reported financial results. For example, in a
pure cash deal (financed from the company’s current account),
liquidity ratios might decrease. On the other hand, in a pure stock
for stock transaction (financed from the issuance of new shares),
the company might show lower profitability ratios (e.g. ROA).
However, economic dilution must prevail towards accounting dilution
when making the choice. The form of payment
and financing options are tightly linked (a more detailed
overview on financing options will be posted at a later stage). If
the buyer pays cash, there are three main financing options:
· Cash on hand: it consumes financial slack (excess cash or unused
debt capacity) and may decrease debt rating. There are no major
transaction costs.
· Issue of debt: it consumes financial slack, may decrease debt
rating and increase cost of debt. Transaction costs include
underwriting or closing costs of 1% to 3% of the face value.
· Issue of stock: it increases financial slack, may improve debt
rating and reduce cost of debt. Transaction costs include fees for
preparation of a proxy statement, an extraordinary shareholder
meeting and registration.
If the buyer pays with stock, the financing possibilities
are:
· Issue of stock (same effects and transaction costs as
described above).
· Shares in treasury: it increases financial slack (if they don’t
have to be repurchased on the market), may improve debt rating and
reduce cost of debt. Transaction costs include brokerage fees if
shares are repurchased in the market otherwise there are no major
costs.
In general, stock will create financial
flexibility. Transaction costs must also be considered
but tend to have a greater impact on the payment decision for
larger transactions. Finally, paying cash or with shares is a
way to signal value to the other party, e.g.: buyers
tend to offer stock when they believe their shares are overvalued
and cash when undervalued.
In conclusion, for the seller cash is often king, except if he
believes in potential synergies and future higher value of the
Newco. On the buyer’s side the mix between price, form of payment
and financing must be carefully analyzed before submitting a deal
structure to the target, in order to optimize the investment.
Operational efficiencies
Digital technology cuts both ways.
On the one hand, digital distribution is the great enabler, linking
you to potentially unlimited consumer households and devices. On
the other hand, it’s the great equalizer—linking your competitors
to those very same people and screens.
The truth is, for traditional entertainment and media platforms,
digital content and platforms are eroding advertising revenue,
average revenue per user (ARPU), and profit margins—this while the
industry is still in recovery mode from several years of downturn
and low growth in certain territories.
What’s more, with the plethora of digital marketing alternatives
and the rapidly developing behaviour of digital consumers, the
media buying process has become vastly more comple
In a business context, operational efficiency can be
defined as the ratio between the input to run a business operation
and the output gained from the business. When improving operational
efficiency, the output to input ratio improves.
Inputs would typically be money (cost), people (headcount) or
time/effort. Outputs would typically be money (revenue,
margin, cash), new customers, customer loyalty , market
differentiation, headcount productivity, innovation, quality, speed
& agility, complexity or opportunities.
The terms "operational efficiency", " efficiency " and "
productivity " are often used interchangeably. An explanation to
the difference between efficiency and (total factor) productivity
is found in "An Introduction to Efficiency and Productivity
Analysis". [1]
In order to improve operational efficiency, one has to start by
measuring it. Since operational efficiency is about the output to
input ratio, it should be measured both on the input and the output
side. Quite often, company management is measuring primarily on the
input side, e.g. the unit production cost or the man hours required
to produce one unit. Even though important, input indicators like
the unit production cost should not be seen as sole indicators of
operational efficiency. When measuring operational efficiency, a
company should define, measure and track a number of
performance indicators on both the input and output side. The
exact definition of these performance indicators will vary from
industry to industry, but typically these categories are
covered:
· Input: Operational expenditure ( OPEX ), capital
expenditure (CAPEX), headcount (including headcount of
partners)
· Output: Revenue, customer numbers/distribution between segments,
quality, growth, customer satisfaction
Definition of 'Operational Efficiency'
A market condition that exists when participants can execute
transactions and receive services at a price that equates fairly to
the actual costs required to provide them. An
operationally-efficient market allows investors to make
transactions that move the market further toward the overall goal
of prudent capital allocation, without being chiseled down by
excessive frictional costs, which would reduce the risk/reward
profile of the transaction.
Also known as an "internally efficient market".
Investopedia Says
Investopedia explains 'Operational Efficiency'
Consider the hypothetical example where all brokers charged a
minimum commission of $100 per trade. If you were a huge mutual
fund trading 20,000 share blocks at a time, this fee may not limit
your ability to be operationally efficient in your trading. But if
you were a small investor looking to trade 10 or 20 shares, this
fee would keep you from trading almost entirely, making the market
(as you saw it) extremely inefficient.
In the case of trading costs, the advent of electronic trade and
increased competition have pushed fees low enough to be fair to
investors while still allowing brokers to earn a profit.
In other areas of the market, certain structural or regulatory
changes can serve to make participation more operationally
efficient. In 2000, the Commodity Futures Trading Commission (CFTC)
passed a resolution allowing money market funds to be considered
eligible margin requirements, where before only cash was eligible.
This minor change reduced unnecessary costs of trading in and out
of money market funds, making the futures markets much more
operationally efficient.
10 Tips for Increasing Operational Efficiency
To remain competitive, businesses must boost operational efficiency
wherever possible. It's particularly important for SMBs to operate
efficiently, because they often have more limited resources than
larger enterprises.
To remain competitive in an increasingly competitive world,
businesses must boost operational efficiency wherever possible.
"Sooner or later, any company not operating efficiently will be out
of business," says Laurie McCabe, vice president of small and
medium-sized business (SMB) insights and solutions for research
firm AMI-Partners. It's particularly important for SMBs to operate
efficiently, McCabe adds, because they often have more limited
resources than larger enterprises.
The following are 10 tips for using network technology to help your
business increase operational efficiency, reduce costs, improve
customer satisfaction, and stay ahead of the competition.
1. Provide employees with secure, consistent access to
information. One advantage of being an SMB is the ability to
react more quickly than larger competitors. But if your company
network is frequently down, sluggish, or unsecured, that
competitive advantage is eroded. A secure, reliable, self-defending
network based on intelligent routers and switches provides your
business with maximum agility by providing reliable, secure access
to business intelligence. What's more, a secure, reliable network
infrastructure provides the necessary foundation for a number of
efficiency-enhancing technologies and solutions, such as IP
communications.
2. Deliver anytime, anywhere access to mobile employees. SMB
employees are typically more mobile than those in larger
enterprises, says Jan Dawson, research director of Ovum Research.
"Ubiquitous access to people and information is particularly
important for SMBs," in order to be productive while on the go, he
adds. Technologies enabling ubiquitous access include virtual
private networks (VPNs), which securely connect remote workers to
the company network, and pervasive wireless networks, which enable
workers to stay connected to the network while roaming about an
office building or campus.
3. Create effective business processes with partners. Some
large enterprises make efficient, secure business processes a
prerequisite for doing business with them. To develop efficient
business processes that meet the requirements of your partners,
your business needs a secure, reliable network
infrastructure.
4. Make it easy to collaborate. Effective, interactive
collaboration between employees, partners, suppliers, and customers
is a sure-fire way to boost efficiency while also reducing costs.
Integrated voice, video, and data and wireless provides the kind of
interactive calendaring, videoconferencing, IP communications, and
other technologies your business needs to foster seamless, easy
collaboration.
5. Enable employees to take their phone systems wherever they
go. Missed calls create any number of business challenges,
including operational inefficiencies (from trying to reach absent
colleagues), project delays, missed opportunities and lost
revenues. An IP communications solution enables your workforce to
have one phone number that simultaneously rings on multiple
devices, greatly increasing the chances of being reached on the
first try. Workers can access their entire communications system
wherever they go and can check e-mail, voice mail, fax and pages
all in one inbox, among other benefits.
6. Streamline communications with customers. Interacting with
customers efficiently and knowledgeably helps keep them
satisfied—and few things are as important to your bottom line as
satisfied customers. Linking an IP communications system to a
customer relationship management (CRM) solution is one way to
enhance customer communications. When a customer calls, a pop-up
window of the customer contact record appears on an employee's IP
phone screen, computer screen, or both. Before the second ring, the
employee answering the call has access to information about the
customer calling, such as orders pending and recent returns.
7. Reduce unproductive travel time. Any time spent traveling,
particularly by airplane, can dramatically reduce operational
efficiency. An IP communications solution that offers rich-media
conferencing, such as videoconferencing, helps reduce the need to
travel to offsite meetings and training sessions. The time saved
from traveling can be better spent on more productive pursuits.
Also, reducing travel saves money.
8. Outsource IT tasks. Is it the best use of an employee's
time to manage your network security or IP communications system?
Often, a more efficient option is to outsource such tasks to a
managed service provider. A service provider has the expertise that
your business needs but may lack, without the need to spend time or
money developing that expertise in house. Also, outsourcing enables
your employees to stay focused on productive activities related to
your business's core competencies. And that helps keep your
business competitive. Outsourcing tasks can help improve customer
satisfaction and your competitiveness. "A lot of small businesses
think it's cheaper to do everything themselves," says AMI-Partner's
McCabe. "But employees can get overloaded, and they may not be in a
good mood when interacting with your customers." McCabe adds that
SMBs often don't do as good a job at an IT task, such as IP
communications, as a managed service provider would do for them.
"And if you're not doing a good job at something, your competition
probably is," she adds.
9. Improve employee retention and satisfaction. When your
business has inefficient processes, such as antiquated phone
systems or a sluggish network, employees can get frustrated,
because they can't get their jobs done with the tools provided.
Customers may perceive that frustration and lose confidence in your
business. Even worse, valued employees can become burned out and
decide to move on. Not only have you lost a productive worker, you
must spend time and money hiring a replacement. To help ensure
employees are productive and satisfied, your business needs, at a
minimum, a secure, reliable, always-available network.
10. Develop a long-term technology plan. Whenever you replace
hardware that has become obsolete or ineffective, it's disruptive
to workers—and that results in low productivity. You can minimize
or eliminate such disruptions by carefully determining short- and
long-term business objectives and the carefully mapping technology
solutions to those objectives.
Media Industry
M&E’s decline in financial performance appears to be primarily
the result of intensified competition, as with nearly all the
industries discussed in this report. Competitive Intensity in the
industry more than doubled in the 43-year time period we studied,
as firms struggled to come to terms with new entrants, newly
powerful consumers, and a wide range of online substitutes for
traditional media and entertainment products. Customers benefited
enormously from growing options at lower prices. Talented workers
also made gains relative to firms.
Underlying these factors is the inexorable pace of technological
change. Most recently, the rise of the Internet has posed a
particularly tricky set of challenges for M&E companies. While
the Internet at first seemed to provide an enticingly economical
way of reaching consumers and marketing one’s wares, the Web soon
evolved into a threatening means of exchanging pirated 28
goods, a free distribution channel over which M&E companies had
no control, and a driver (or at least an enabler) of new consumer
preferences (like downloaded individual songs, video on computers
instead of TVs, and books read on screens as opposed to
paper).
More recently, the Internet has evolved into a means for consumers
to circumvent the broadcast networks and cable companies to quench
their seemingly limitless thirst for video entertainment, and as a
place where former consumers are now making and sharing their own
entertainment. Customers now spend unprecedented amounts of time
enjoying content that has been created by amateurs; perhaps just as
important, they also spend large amounts of their time creating
content of their own, in the form of videos, online reviews, blog
entries or Facebook updates.
The pain is not limited to more mature sub-sectors like
Publications & Print, Cable & Broadcasting, or Advertising.
Even new forms such as interactive gaming are challenged by the
Internet. The emergence of browser-based and cell phone-based
gaming, for instance, threaten to make the expensive, fiercely
fought battles over gaming console market share moot.
M&E companies face several major challenges going forward:
dealing with a depressed global economy, managing business
volatility, navigating new regulatory landscapes, meeting new
consumer demands, accessing and developing talent, and effectively
expanding their companies as global competition becomes more
intense. We believe that there is a disproportionate focus on the
cyclical challenge, and a lack of appreciation of the other more
pervasive shifts. When the economic cycle improves, and consumers
spend more freely and advertising revenues improve, the significant
issues of managing volatility, navigating new regulatory systems
and new consumer behaviors, developing talent and competing
globally will emerge as the thorny issues demanding immediate
attention. These issues are deep-rooted, fundamental forces that
show no signs of abating. How M&E companies attack those
remaining challenges will be what sets apart the winners from the
rest.
“The divergence today between low-growth, low-multiple businesses
and higher-growth businesses in media has never been
greater,”
When the market crashed in 2008, media companies were hit
particularly hard and needed more disciplined leadership
In many cases, what the slimmed-down media conglomerates are
hanging on to is their cable-TV networks. After Time Warner spins
out Time Inc, 80% of its operating profits will come from its
networks (which include HBO), up from 32% in 2008. More than 90% of
Viacom’s operating profits came from its networks in 2012.
Discovery Communications, one of the best-performing media stocks
over the past few years, specialises in building and expanding
television networks, such as the Discovery Channel and Animal
Planet.
For now investors like having exposure to this cash-rich, growing
industry. The rise of Netflix, Hulu and other online-streaming
services has so far caused little disruption to the pay-TV business
model. But should this change, these firms’ lack of diversification
could become a liability.
A few media firms are still bucking the trend and adding a bit of
sprawl. In 2011 Comcast, an American cable operator, bought
NBCUniversal, a film-and-TV content company with a broadcast arm,
making it the largest media group in the world after Disney: its
market capitalisation is now over $100 billion. As for Disney
itself, besides buying Lucasfilm, the production company behind
“Star Wars”, last year, it also bought control of UTV, a
Bollywood-to-computer-games business in Mumbai.
In businesses that benefit from scale, such as cable and
newspapers, there will be more consolidation. Time Warner Cable and
Charter Communications, two American cable operators, are rumoured
to be discussing a merger. Having recently bought Virgin Media, a
British cable firm, Liberty Global of America—which already owns
Germany’s second-largest cable operator—is now competing with
Vodafone to buy Kabel Deutschland, Germany’s largest. On June 13th
Gannett, a big American newspaper and local-TV chain, said it would
merge with Belo, a smaller counterpart, to expand its market share
in both businesses (while also, overall, making it less reliant on
newspapers).
The media giants’ soaring share prices will make it easy for them
to swallow smaller firms. “I think things are going to tend much
more toward scale,” says James Murdoch, one of Rupert Murdoch’s
sons. “Content groups are going to get much larger.” As long as
they get bigger at what they do best, shareholders will be
happy.
Entertainment and media businesses raise their game in agility and
customer insight-as constant digital innovation becomes the new
licence to operate
Entertainment and media (E&M) businesses are continuing to
raise their game in operational agility and customer insight, as
constant digital innovation becomes the industry’s new licence to
operate. Across the world, consumers’ access to E&M content and
experiences is being democratised globally by expanding access to
the Internet and explosive growth in smart devices. And while
traditional, non-digital media will continue to dominate overall
E&M spending globally throughout the coming five years, the
growth will be in digital.
To harness this growth and turn it into rising digital revenues,
E&M companies of all types are evaluating their competitive
advantages and seizing their positions in the evolving
ecosystem—with the connected consumer at its core. To achieve this
successfully, every industry participant will need to invest in
constant innovation that encompasses its products and services, its
operating and business models and—most importantly—its customer
experience, understanding and engagement.
Connected consumers are driving companies to apply innovation and
agility...
Connected consumers are driving companies to apply innovation and
agility in order to understand and meet their needs
Consumers, who are increasingly connected and calling the shots but
also increasingly confused by the blizzard of content offerings and
models available to them both legally and sometimes illegally, are
driving companies to apply accelerated innovation and agility to
understand and meet their needs. Led by the burgeoning middle
classes in emerging markets, consumers worldwide will continue to
increase their spending on E&M as they migrate towards digital
and, increasingly, mobile consumption across an expanding array of
devices. The underlying journey is from ‘mass media’ to ‘my media,’
and the E&M companies that successfully accompany consumers
along the way will be those that have the speed, flexibility and
insight to engage and monetise an ever-more-diverse consumer base
by delivering personalised, relevant and, ultimately, indispensable
content experiences
Multi-platform analytics drive advertiser insights...
Multi-platform analytics drive advertiser insights into the
connected consumer’s behaviour, expectations and buying
intentions
Advertisers, which absolutely must keep pace with the irresistible
consumer shift towards ‘my media’ and digital consumption
behaviours, will increasingly harness big data to understand,
target and engage consumers at an ever-more-personal level. This
will require that they generate and apply multi-platform
analytics-driven insights into connected consumers’ behaviour,
expectations and buying intentions while they use new measurement
techniques to ensure relevance and demonstrate returns on ad spend.
Rather than enough big data, the biggest challenges will lie in
collecting and extracting the small data—the kind that leads to
true understanding of consumers’ future behaviour—and striking the
right balance between consumers’ desire for relevance and their
emotional and regulatory right to personal-data privacy.
To stay relevant, content creators will have to innovate...
To stay relevant, content creators will have to innovate both in
their products and the ways they deliver them
Content creators, which are facing the same imperative as
advertisers—by having to engage and stay relevant to connected
consumers—will adapt to consumers’ changing needs by experimenting
and then applying ongoing innovation to content itself and the ways
it’s delivered. To understand what content people will pay for and
how they want to consume it, content creators will get closer to
consumers than ever before, including harnessing social media via
the second screen and embracing new business models,
windowing/bundling approaches and collaborative partnerships. With
compelling content together with the user experience set to remain
the key differentiator with consumers and with over-the-top (OTT)
technology and telecom entrants racing to acquire the content they
need to drive revenues, content companies that combine the right
consumer insights, business models and partnerships will be
well-placed in the new ecosystem.
Digital distributors need to deliver the right content...
Digital distributors need to deliver the right content at the right
time, on the right platform, at the right price
Digital distributors, which must meet consumers’ demand for content
across multiple devices—whenever and wherever those consumers
choose—need the insight and the agility to deliver the right
content at the right time, on the right platform and at the right
price. Those that get the blend right will be able to resist the
pressure towards being a dumb pipe while successfully both
accelerating growth in digital revenues and deterring piracy. Of
all of the participants in the ecosystem, it is arguably the
distributors that face the most daunting array of challenges, such
as a blurring of the traditional divide with technology companies,
escalating OTT competition, the threat of cord cutting by
consumers, intensifying and fragmented regulation, and pressure to
invest in bandwidth without the certainty of returns. Again, the
winners will be those that innovate and collaborate to deliver the
consistent and compelling content experiences demanded by the
connected consumer.
North Africa.
88% of E&M CEOs are making changes to their customer growth,
retention or loyalty strategies in response to shifting consumer
spending and behaviours.
E&M CEOs remain confident about revenue growth over the next
three years and continue to focus on the consumer, recognising the
need to meet their rapidly evolving demands. What else did they
tell us?
Continuing focus on shifting consumer spending and behaviours
The impact of shifting consumer spending and behaviours on growth
continues to be a key concern for E&M CEOs, with 75% concerned
or extremely concerned, in line with last year’s survey – and
higher than almost any other industry. And 88% anticipate changes
to their customer growth, retention or loyalty strategies, in
response to this.
Investments in technology and speed of technological change
continues
73% of E&M CEOs expect to increase their investments in
technology over the coming year, while 61% are concerned about the
speed of technological change, 19% above the global cross-industry
total – showing that technology remains a key enabler for E&M
companies to keep apace with consumers’ rapidly evolving
demands.
The power of customers, clients and social media users
Customers, clients and social media users are influencing business
strategy and E&M CEOs are responding by strengthening their
engagement programmes with these groups. 100% of E&M CEOs say
customers and clients somewhat or significantly influence their
business strategy, with 93% strengthening their engagement
programmes with these two stakeholder groups. 70% report users of
social media as being somewhat or significantly influential, with
95% of these CEOs strengthening their engagement programmes to this
stakeholder group – 17% above the global cross-industry
total.
Concerns over intellectual property and customer data remain
55% of E&M CEOs are concerned about a lack of trust in their
industry, against a global cross-industry total of 37%, with 59%
concerned about their inability to protect intellectual property
and customer data, 25% above the global cross-industry total,
reflecting continued concerns around piracy for the industry.
Talent management strategies likely to change
88% expect changes to their talent management strategies over the
coming year, highlighting the continued focus on finding and
retaining key talent – which remains a concern for 57% of E&M
CEOs, against 65% last year and this year’s global cross-industry
total of 58%.
Overall confidence in E&M revenue growth
E&M CEOs’ overall confidence in revenue growth over the next
three years remains resilient with 80% feeling very or somewhat
confident, with a year-on-year dip in confidence over the coming
year, from 84% to 70% – reflecting a slight recalibration of
expectations of the time that a return of investment will
take.
The media and entertainment industry captures a wide variety of
companies that serve to provide products and services that keep the
everyday consumer engaged. There are a number of segments within
the industry, each of which provides a different form of
entertainment to consumers around the world. These segments include
traditional print media, television, radio broadcasting, film
entertainment, video games, advertising and perhaps most
importantly, the manufacturers of the technology that the above
segments rely on. The significance of these manufacturers cannot be
overlooked when considering the industry as a whole; after all none
of these segments has been around longer than the technology used
for its distribution. Due to its dependancy on technological
developments new segments of the media and entertainment industry
are constantly up and coming. To that end, the most significant
technological development (in recent years, at least) for the
evolution of the media industry has been the rise of the internet.
This technology alone has changed how media is consumed and
furthermore has created entirely new sectors and platforms for
mainstream entertainment that are still in the early stages of
their development.
In 2007 the U.S. spent roughly $930 billion on the media industry
as a whole, with advertising spending accounting for over $284
billion. [1]
Advertising
In 2007 U.S. advertising spending was about $284 billion, nearly
31% of total spending on the entire media industry. Advertising has
long been the major revenue generator for media companies. [1]
The advertising industry utilizes nearly every communication
channel available to make their clients' products and services
known. Major mediums for advertising include television ,
radio, print media, and to an increasingly large degree, the
internet . Other platforms for advertising include public
advertisements like billboards (both traditional and digital
) and city busses.
The development of internet advertising has had a very
significant impact on the advertising industry and has created some
trouble for many media companies that rely on traditional
advertising platforms. With over 80 million broadband internet
connections in the U.S. during 2007, advertising companies have
found a new and very significant audience Major companies in the
advertising industry include
You probably wont get any of this cause you dumb
Print Media
Companies that produce and distribute newspapers, magazines, and
books are considered to be in the print media segment. Many of
these companies use the subscription revenue model, which is very
attractive as customers pay for product before receiving it,
allowing the firm to invest the proceeds, earning a return even
before delivering the product. Also, the cost structure of the
publishing business is mostly fixed. The printing machinery and
distribution network of a typical publisher can deliver 750,000
copies for only slightly more than the cost of delivering 500,000
copies, meaning higher volume falls directly to profits (also known
as leveraging costs). This allows excellent return on capital for
the larger publishers. Lastly, these firms have valuable intangible
assets in the form of brands that protect their products from
competition. Value Line, despite a complete lack of product
innovation and no embrace of the internet, can still afford to
charge a premium for their product because of it's long standing
reputation with investors.
However, beware the internet. More than any other business sector,
the internet has affected the business model of media companies
drastically. Once upon a time, newspapers were an outstanding
business. Many had a monopoly within their city, as few cities were
large enough to support more than one. However, the internet allows
anyone to read news from around the world, advertising has moved
online (leading to falling print ad rates), and classified ads took
a hit from eBay (EBAY) and Craigslist. Keep in mind how
the internet can hurt (or help) your publisher of choice.
Since the rise of the internet , print media companies have
had a difficult time keeping up with the pace of the industry.
Internet advertising has seen strong fast paced growth in recent
years and as a result newspapers and magazines have had trouble
attracting ad revenues. In 2006 there were 2,344 total daily and
Sunday newspapers distributed throughout the U.S. and newspaper
companies earned $49.3 in advertising revenue. U.S. Magazine
advertising revenues for 2006 were $24.0 billion. [2]
Evidence of the print media industry's struggle against
internet advertising can be seen in decreasing ad revenue
figures. The Newspaper Association of America reported that 2007
newspaper ad revenues were down 9.4% to $42 billion, the most
significant percentage loss in the 50 years that the NAA has been
reporting these figures. [3] Companies that produce and
distribute print media such as newspapers, magazines and books
include
The television segment of the media and entertainment industry
includes a large number of companies that compete directly and
indirectly by offering various services to consumers. It has long
been a traditional entertainment segment and has evolved in many
directions since its beginning. Today there are various offerings
for television users including network television channels, cable
networks and satellite television services. The latter two options
are generally subscription based services which offer programming
not available to non-subscribers. In 2007 there were roughly 112
million U.S. households with televisions, or about one third of the
entire population. [2]
As the technology supporting the media and entertainment industry
evolves, television service providers are required to evolve their
services in order to keep up. Television providers have had some
success in keeping up with the fast paced and fiercely competitive
industry though. Since the TiVo hit shelves in 1997 service
providers like Comcast and DirecTV have produced
similar hardware and services for their subscribers. The popularity
of the internet however, has not been such a quick fix for
companies in this segment. As with print publishing, television
broadcasting companies are now competing with the enormous
advertising platform that is the internet. Furthermore, programming
that was once exclusively available through television service
subscriptions can be found (both legally and illegally) with the
click of a mouse. Companies involved in television broadcasting
include
Filmed Entertainment
1.45 billion movie tickets were sold in 2007 making filmed
entertainment a $10.2 billion dollar segment of the industry.
[2] Companies whose operations include the production or
distribution of filmed entertainment include
Video Games
In 2007 the video game industry brought in $7.4 billion in U.S.
revenues. [2] Companies that produce and distribute video
games, consoles and technologies include
Radio
9,163 stations [1] . The Radio is generally called the granddaddy
of all broadcast media. It's also a business model that has taken
serious hits over the past ten years, as satellite radio, digital
music, and recorded audio programs ("podcasts") have increasingly
become the preferred forms of audio entertainment. For
example, Westwood One (WON) , which has a stock price of
$1.71 as of this writing. Compare this to a price near $40 in late
2003 and it's clear this is not an industry we want to be investing
in. Companies that operate radio stations and services
include
Internet based Media
Internet based media has seen significant growth in recent years.
There were 80 million broadband internet connections in the U.S.
during 2007 [2] up from roughly 58 million in 2006. [4]
Broadband internet growth around the world can be seen in the
chart below. This growth is allowing media and entertainment
companies to market their content to a much larger group of
consumers each year.
· 14. Cross-Industry Perspectives The forces of the Big Shift are
affecting U.S. industries at to come, call into question the very
rationale for today’s varying rates of speed. One set of industries
has already companies. Do they exist simply to achieve ever-lower
been severely disrupted, and is suffering the consequences: costs
by getting bigger and bigger—“scalable efficiency”? declining
return on assets (ROA) and increased Or can they turn the forces of
the Big Shift to their Competitive Intensity. A second set, which
includes the advantage by focusing instead on “scalable
learning”—the bulk of U.S. industries, is currently midstream: some
are ability to improve performance more rapidly and learn seeing
declining ROA, and others are facing increases in faster by
effectively integrating more and more participants Competitive
Intensity, but none have yet encountered distributed across
traditional institutional boundaries? both. A third, smaller set of
as-yet-unaffected industries shows little change in performance.
U.S. firms can learn two key lessons from the industries
experiencing early disruption. First, the assumption that These
findings—a follow-up to the macro-level study productivity
improvement leads to higher returns is flawed: released in June
20092—reflect a U.S. corporate sector industries with higher
productivity gains do not necessarily on a troubling trajectory.
The difficulties are more visible experience improvement in ROA.
This is the performance in some industries, but all industries
will, to some degree, paradox mentioned earlier. Second, customers
and eventually be subject to the forces of the Big Shift, which
talented employees appear to be the primary beneficiaries represent
a fundamental reordering of the economy driven of the value created
by productivity improvements. Access by a new digital
infrastructure3 and public policy changes. to information and a
greater availability of alternatives have put customers squarely in
the driver’s seat. Similarly, The industry-level findings are cause
for some alarm. U.S. as talent becomes more central to strategic
advantage and industries are currently more productive than ever,
as as labor markets become more transparent, creative talent
measured by improvements to Labor Productivity. Yet those has
increased its bargaining position. improvements have not translated
into financial returns. Underlying this performance paradox is the
growing How, then, can firms also benefit from the Big Shift? The
Competitive Intensity in most industries. Consolidation key is to
not only create value but to capture the value has helped offset
these effects in some cases, but it is a created. To do so, firms
must learn how to participate in short-term solution. Likewise,
firms in most industries are and harness knowledge flows and how to
tap into the investing heavily in technology, but the benefits are
short- passion of workers who will be a significant source of value
lived as competing firms do the same. creation as companies shift
away from accumulating and exploiting stocks of knowledge. This
move from scalable The breadth and magnitude of disruption to U.S.
efficiency to scalable learning will be a key to surviving, and
industries, and a trajectory that suggests more disruption
thriving, in the world of the Big Shift. 2 See John Hagel III, John
Seely Brown, and Lang Davison, The 2009 Shift Index: Measuring the
Forces of Long-Term Change (San Jose: Deloitte Development, June,
2009). 3 More than just bits and bytes, this digital infrastructure
consists of the institutions, practices, and protocols that
together organize and deliver the increasing power of digital
technology to business and society. 2009 Shift Index—Industry
Metrics and Perspectives 13
· 15. Cross-Industry Perspectives Most Industries are Feeling the
Effects of tries have experienced declining ROA, but only four have
the Big Shift also endured a significant increase in Competitive
Intensity (see Exhibit 3). These industries include Technology,
Media, The 2009 Shift Index highlighted trends at the economy-
Telecommunications, and Automotive. They embody the wide level in
the U.S.: declining ROA, increasing Competi- long term forces that
are re-shaping the business environ- tive Intensity, increasing
Labor Productivity. The industry- ment, and are thus harbingers of
changes to come in other level findings are similar. With few
exceptions, all U.S. industries. industries are being affected by
the foundational forces of the Big Shift. In Technology, customers
have gained power as open architectures and commoditization of
components have One set of industries—most notably Technology,
Media, intensified competitive pressure. As a result, the Technol-
Telecommunications, and Automotive—is already being ogy industry
has experienced a significant deterioration in affected by the Big
Shift. These industries have experi- return on assets. enced
significant increases in Competitive Intensity and corresponding
declines in profitability. A middle tier of The Media industry has
become more fragmented as forms industries, representing the
majority of industries evaluated of content proliferate and the
long tail becomes ever richer in this report, appears to be
experiencing the initial effects with options. In a very real
sense, customers—supported of the Big Shift. A third tier consists
of two industries that by digital infrastructures that enable
convenient, low-cost have, so far, been insulated from the forces
of the Big Shift. production and distribution—are emerging as key
competi- tors for traditional media companies, generating their own
In the Middle of the Storm content and sharing it with friends and
broader audiences. Industries that have experienced both increases
in Com- petitive Intensity and declines in Asset Profitability are
the The Telecommunications industry has experienced dramatic early
entrants into the Big Shift. Ten of the fourteen indus- changes
over the past two decades. Wireline service, the Exhibit 3: Changes
in Competitive Intensity and ROA (1965-2008) 4 Competitive
Intensity Decrease Static Increase Aerospace & Health Care
Defense Increase 5 Consumer Static ROA Financial Services Products
Aviation Energy Decrease Insurance Automotive Life Sciences Media 4
Static Competitive Intensity is Process & Industrial Technology
defined as a change of less than Retail Prod. Telecom. .01(+/-) in
the HHI. 5 Static ROA is defined as a change of less than 5 percent
(+/-). Source: Compustat, Deloitte Analysis 14
· 16. Cross-Industry Perspectives former mainstay of the industry,
is being supplanted by ing. As we will discuss, the metric for
Competitive Intensity wireless and VOIP. A combination of
regulatory changes does not capture competition from other parts of
the value and increased Competitive Intensity has driven firms to
im- chain. One of the pervasive themes of the Big Shift is the
prove Labor Productivity, but has not resulted in improved growing
power of customers and creative talent and the financial returns.
pincer effect on firms’ profitability as these two constituen- cies
capture more of the value being created. Many of the In the
Automotive industry, Competitive Intensity has been firms in this
tier are subject to greater competition from driven by greater
global competition, supported both by these two groups. trade
liberalization and more robust digital infrastructures that
facilitate global production networks. This has resulted The
Consumer Products and Retail industries both expe- in lower Asset
Profitability as domestic firms have been rienced decreasing
Competitive Intensity as measured by unable to quickly adjust their
operations to meet chang- industry concentration, although Retail
also experienced ing market demand and more aggressive
international a decline in ROA.6 Both of these industries were
highly competitors. competitive, historically, and both have
experienced sig- nificant consolidation among large firms to combat
margin Entering the Storm pressures driven in part by the growing
power of custom- The industries in this tier have not yet felt the
dual impact ers. The consolidation of these two industries is
related. As of the Big Shift—intensifying competition and declin-
retailers became more concentrated, consumer products ing ROA—but
are likely to soon. These industries already companies began to
consolidate as a defensive measure to exhibited a high level of
Competitive Intensity in 1965 as preserve bargaining power with the
retailers. Conversely, measured by industry concentration (see
Exhibit 4), and it is as consumer products companies consolidated,
retailers likely, therefore, that the initial fragmenting impact of
the felt additional pressure to consolidate in order to preserve
Big Shift may have been muted. On the other hand, many bargaining
power relative to larger consumer products of these industries did
experience erosion in ROA, suggest- companies. ing that other forms
of Competitive Intensity were increas- Exhibit 4: Competitive
Intensity as measured by HHI for All Industries, 1965, 20087
Industry 1965 Actual 2008 Actual Absolute change Process &
Industrial Products 0.01 0.01 0 Industries that began Consumer
Products 0.01 0.02 0.01 at higher levels of Competitive Intensity
Financial Services 0.02 0.03 0.01 Aviation & Transport Services
0.03 0.03 0 Energy 0.03 0.03 0 Retail 0.03 0.06 0.02 Life Sciences
0.04 0.03 -0.01 Insurance 0.04 0.05 0.01 Aerospace & Defense
0.04 0.10 0.06 Media & Entertainment 0.07 0.03 -0.04 Technology
0.15 0.03 -0.12 6 Retail ROA data display some cycli- Automotive
0.17 0.08 -0.09 Industries that began cality. The decline discussed
here is derived from a line fit. Health Care Services 0.32 0.08
-0.24 at lower levels of 7 Insurance and Health Care data is from
1972–2008. Data from Telecommunications 0.37 0.03 -0.34 Competitive
Intensity 1965–1972 was from a very small number of companies for
these industries and therefore not truly Source: Compustat,
Deloitte analysis indicative of market dynamics. 2009 Shift
Index—Industry Metrics and Perspectives 15
· 17. Cross-Industry Perspectives Financial Services experienced
static ROA performance and The ability of companies in this
industry to retain the sav- static Competitive Intensity. Financial
Services is comprised ings from these initiatives and improve ROA
has been sup- of two primary sub-sectors—Banking and Securities.
ROA ported by the industry consolidation (leading to a decline
increased marginally for Banking while it declined signifi- in one
key measure of competitive intensity), reinforced cantly for
Securities in the face of growing competition. by high barriers to
entry, including investment in technol- As described in the
Financial Services report, Banking has ogy and capital
requirements. Subsidies to incumbents act benefited from public
policy that has regulated prices for as a further barrier to entry,
as do burdensome qualifying banks over time. Nonetheless, recent
trends in Financial requirements for bidding on government
contracts, which Services suggest that there has been further
erosion of the require significant upfront investment by new
players. Col- industry’s ROA in the past couple of years as a
result of less lectively, these factors limit the effects on this
industry of protection from public policy. We anticipate further
disrup- broader public policy trends towards economic liberaliza-
tion going forward.8 tion and enable the relatively small number of
industry participants to achieve higher asset profitability. The
Calm Before the Storm This last group is comprised of just two
industries that The future is uncertain for these two industries.
Of the have bucked the overall trend in ROA erosion, enjoying in-
two, Health Care is perhaps more exposed to changes creased Asset
Profitability.9 The Aerospace and Defense and that could
dramatically reshape the industry: impending Health Care industries
actually improved their ROA to 6.7 legislation, medical tourism,
new provider delivery options percent and 3.6 percent respectively.
As we will discuss, and alternative Health Care options are just a
few looming regulation and public policy have played a significant
role changes. In an intriguing parallel, the movement towards in
shielding these two industries from the effects of the Big greater
emphasis on prevention in both of these industries Shift. may
represent a major catalyst for accelerated change. In the Aerospace
and Defense industry, the rise of asymmetric For Health Care ROA
increased while Competitive Intensity warfare driven by a new
generation of “competitors” may was also increasing. As described
in the Health Care in- also catalyze interesting i