Multiply Your Money: The Easy Guide to Savings and Investments by Nick Louth

Author:Nick Louth [Louth, Nick]
Language: eng
Format: epub
Publisher: Harriman House
Published: 2015-03-26T22:00:00+00:00

Big Firm

Small Firm

Combined

Net earnings

£1,000

£500

£1,500

Shares in issue

20,000

5,000

25,000

EPS

£0.05

£0.10

£0.06

Share price

£1

£1

£1

P/E

20

10

16.7

Market value

£20,000

£5,000

£25,000

In reality, matters are even worse. Takeovers are usually conducted at a premium to the target company’s share price, which will eat into the earnings enhancement, so it is beholden to the acquirer to estimate how much money they will save. This is often made to sound very precise, but I am convinced that some companies work out how big the savings need to be to justify the takeover, and only then work out what operations at the target company will be chopped or sold.

Buyouts

A buyout means a company returns to private ownership, and is either undertaken by a private equity company or by management. Private equity companies usually substitute debt for equity, and chop costs hard to get a quick return. Some have been pilloried for selling off valuable land and property, loading companies with debt, and paying themselves quick dividends. Most private equity companies try to get the firm sold back on the stock market within two to three years.

A management buyout is a very strong signal that management believes the market is undervaluing the company, or part of the company. The timing often means the terms offered to shareholders do not seem overgenerous.

Share buybacks

Companies can either repurchase shares in the market or, less commonly, make a public tender for a proportion of their own shareholders’ stock. Either way, it tends to boost the value of the remaining shares, first because earnings are now spread across fewer shares, and secondly because of the effect of a big extra buyer in the market. Companies sometimes buy back their shares to compensate for the dilutive effect of options granted to staff and management, or as a tax-efficient alternative to paying dividends. Occasionally shares that are bought back are not cancelled, but retained in the treasury department for use as an acquisition currency. A large share buyback is a strong signal of an undervalued stock price.

Bankruptcy

Bankruptcy, the winding up of an insolvent company, means that a court appoints a trustee (or receiver) to sell (liquidate) what is left of the assets for the benefit of creditors. While extremely common for small building firms or garages, it rarely occurs to large public companies. Size matters here. Remember the old adage:

“If you owe a bank £100 and you can’t pay, you’re in trouble. If you owe the bank £100 million and can’t pay, then the bank is in trouble.”

For the major-league indebted there are a hundred exits before the buffers, and most large failing firms succeed in taking one or another. One of the most common is administration, where an externally appointed specialist manager attempts to satisfy creditors while running the business as a going concern.

This can mean radical job cuts, dismemberment and sale of parts of the company, and the closing of unprofitable lines. It frequently means extra loans dished out by creditor banks in exchange for a larger stake in the company. The important thing to remember about bankruptcy is that an ordinary shareholder is right at the back of a very long queue for any proceeds.

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