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Value Creation

Value Creation. Tom Epley. A five-step recipe for true value-creation. 1. Acquire “reasonably” Buy chaos at a discount Avoid bidding contests 2. Structure (financially) appropriately Balance of financial instruments Don’t cash-starve the business

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Value Creation

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  1. Value Creation Tom Epley

  2. A five-step recipe for true value-creation 1. Acquire “reasonably” • Buy chaos at a discount • Avoid bidding contests 2. Structure (financially) appropriately • Balance of financial instruments • Don’t cash-starve the business (Note, failure usually occurs because one or more of these steps are shortchanged)

  3. A five-step recipe for true value-creation 3. Create a clear strategic direction • At least equal input from within organization • Communicate ad nauseum, same story to all constituencies 4. Execute with precision • First 100 days • Throughout, including occasional complete re-look

  4. A five-step recipe for true value-creation 5. Package the business crisply • Sell clarity at a premium

  5. A five-step recipe for true value-creation 1. Acquire 2. Structure 3. Strategize 4. Execute (note, this step is most often undervalued and overlooked) 5. Package

  6. Value Creation • Do (Note, first is obvious, will discuss the yellow items further) • Rely on in-depth cash flow analysis • Get outside the prospectus box • Recognize the difference between restoring and raising • Recognize the rising tide phenomenon • Search for hidden or soft assets and liabilities • Double your time horizon

  7. Value Creation • Don’t • Rely on the greater fool theory • E.g. high multiples keep multiplying • Be optimistic • Rely on reported earnings • Underestimate the value of a 98-percentile CEO, or acquiesce toa 75-percentile CEO, or worship a one-trick pony

  8. Get Outside the Prospectus Box • A prospectus document is a trap • Talk to customers • Talk to middle managers outside the meeting room • Visit company locations without entourage • Read speeches of presentation of CEO to alternate communities (Note, this approach set me apart from other big-school analysts with whom I was competing in my first post-MBA position)

  9. Restoring vs. Raising In general it is much easier to: Restore a previously performing company than to Raise a never-performing company (Note, Paradyne, Bekins, NOD, AMIS had hidden capabilities, my analysis of Africa proves the point – www.plagueofgoodintentions.com)

  10. Rising Tide A rising tide lifts all ships A lowering tide lowers all ships (Note; comparative performance for CEO’s and companies more relevant than absolute, timing of cycles critical, every 12-or-so hours the tide changes)

  11. Hidden Assets and Liabilities A Cultural Issue (Note: this is one reason why raising vs. restoring is valid, cheating cultures hide liabilities, performance cultures develop hidden assets.) (Examples of hidden assets; a customer base which had a previous good feeling for the company—although recently tarnished, lenders who have a good track record, employees who know how to do it) (Corner turned when the good news coming out of the woodwork exceeds the bad news.)

  12. Double Your Time Horizon Put yourself in the position of ______________________________ the next buyer (Note; it’s interesting that your products have a solid four year time horizon; but the value of the company is the four year horizon after that)

  13. Reported Earnings • OK as a starter but…. • Exxon, Satyam (India), March First examples • Use the general ledger • Weekly basis • Pre-adjustments (Note; normal reported earnings, even to the diligent, can be highly misleading for a long period; slight changes in reserve accruals, timing of cash events, non-recording of certain liabilities, all can cloud the issue. Cash accounting, in parallel, is a good practice.)

  14. CEO Performance • Excellent CEO’s with excellent boards create tons of value • And vice versa • Creation of a performance culture takes: • Visitation, communication, credibility, continuity, self-critique, attention to detail ___________________________________ It’s not what you plan to do, It’s not even what you do, It’s how you do it Note, see http://www.boldexec.com/boldexec/real_world_decision_making/ http://www.boldexec.com/boldexec/decisive_action_trumps_perfection/

  15. How you do it Force Reduction (Note, see http://www.boldexec.com/boldexec/2007/08/cut-and-fill.html

  16. Value Creation www.boldexec.com www.plagueofgoodintentions.com tomepley@runninghorse.com

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