Agenda of today

1. Agenda of today • Workshop • Dialogue and coaching • Exercise 15.2 • Lectures • The Negotiation day (16 November) • Problems & challenges (chap 15, 19 & 4 articles): • Uncertainty: Courtney • Risk:Penman • IPO’s:McCarthy • IBO: Wright & Robbie • CKM ch.15 and 19

2. Important dates • Draft report & price • Wednesday, Nov 13, evening • Send email to Tom • Negotiation on Saturday Nov 16th • Final report • Monday, Nov 25, 12.00

3. Negotiation day - time schedule • In and around room M209 • 09.00-9.45 1st. round A’s (B’s observing) • 9.45-10.30 1st. round B’s (A’s observing) • app. 10.30 - 12.00 guest speaker PWC • 12.00-13.00 lunch & calculation (bistro open) • 13.00-13.45 2nd. round A’s (-B observe) • 13.45-14.30 2nd. round B’s (-A observe) • 14.30-15.00 break and presentation prep. • 15.00- 17.00 short negotiation presentation from each TEAM • A’s: Coloplast 1, B&O 1, Vestas • B’s: Coloplast 2, B&O 2, Wal-Mart, Micon

4. Final report • inclusive of “negotiation process and outcome description” + “learning reflections” • describe in the introduction of your report, who has written the different sections of the report. • 3 copies of the final report (enclose your valuation model on electronic media (floppy disk or CD) to each copy) • Deadline: Monday, Nov 25, at 12.00, hand in toCharlotte Løchte, c102

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

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

7. Strategy under Uncertainty (Courtney) • The 3 types of action (moves) are • big bets • options • no-regret moves (always positive) • e.g. • L1 adapters: where and how to compete • L2 shapers: try to increase the probability that a favored industry scenario will occur • L3 shapers and adapters: reserving via organizational capabilities • L4 shapers: provides vision that coordinates

8. Risk (Penman) Value of company = NOPLAT1 * (1 - g/ROIC) WACC - g • Equity risk consists of operating risk and financial risk • Operating risk consist of ROIC / NOPLAT-risk and growth risk. • Financial risk consist of Debt-risk and borrowing rate-risk in the WACC. • ROIC/NOPLAT-risk (ROIC-tree, exhibit 9.8): • EBITA/Revenues-risk (margin risk) • Revenues/invested capital-risk (capital turnover risk) • Tax-rate (Tax-risk) • Operating liability risk - MV(Debt)

9. Risk (Penman) • Growth-risk: uncertainty about a company’s investment opportunities (and hence the revenues growth) adds to risk. • Financial risk: consists of risks concerning net borrowing costs (interest rate) times debt (financial leverage). If companies have fixed-interest-rate also risk regarding MV(debt) exist. • Note that the different risks often interact. • Further to equity risk the investor bears price risk due to market inefficiency and liquidity risk.

10. CKM ch 15 Dot.coms • Characterized by high growth, -uncertainty and -losses • “Investments” in acquiring customers are expensed and hence running through the income statement creating high net income losses. • Make optimistic and pessimistic scenarios of the position of the company in 10, 12 or 15 years. For each scenario, evaluate: • What will the market share of the company be in it’s product markets? and what will revenues of the company be? • What operating margins will the company have in the different product markets? • What will capital turnover be? • Given the above, within each scenario: • Work backwards to present, estimating revenues, margins and capital turnover for each year. • Work further into the future (from scenario position) making explicit forecast and continuing value.

11. CKM ch 15 Dot.coms • WACC: use industry-average beta and general market risk premium in each scenario to calculate each scenario value • Weight the values of the scenarios with probabilities and test the company value sensitivity against these weights • It is more or less the probabilities that determines the value of the company. • Cash flow risk is taken care of by using scenarios -that is why we should use industry-average beta and general market risk premium in the WACC

12. CKM ch 19 Emerging markets • Extra risks • macroeconomic uncertainty • political risks • illiquid capital markets • capital restrictions • 3 approaches (to supplement each other) • DCF by discounting expected cash flow by using cost of capital inclusive of country risk • Local multiples • Probability weighted scenarios (modeling risk explicitly) • Beware of the accounts with regard to • local accounting rules • hyper inflation: real/ nominal rates ?

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

14. IPO’s: Initial public offering (McCarthy) • How much is “left on the table” - 20% ? • Over subscription = sold out first day ! • Add extra selling ? • Price too low ? • Banks earn fee with no risk ? • Is it sellers against share buyers or together with ? • Impossible to forecast the “temperature” in the market ? • 100 % increase the first day ?????????? • Other valuation models ?