HK CORPORATE FINANCE
Value Destroyers
Ineffective Board and management
People create and destroy value. Capital and equipment are simply key inputs into the equation. In many private companies the owner-manager is usually its greatest strength and greatest weakness. For instance, a company with 250 employees was seriously under-performing and had 9 month's cash reserves being depleted at the alarming rate of $3 million a month.. The majority shareholder requested an independent survey of the issues. It came down the Chairman and the CEO, both minority shareholders, while brilliant innovators and developers were very poor operators of a more mature business. While these same people had created significant shareholder wealth in the start up phase they were destroying it rapidly in the operating phase. It was time for a change at the top.
Weak communication
Weak communication underpins weak teamwork. Teamwork is the dynamic that enables people to perform to their potential. To be a good manger you must be able to communicate effectively. Value tip: Did you know that most communication takes place non-verbally; only 7% is word; 38% voice, tone, inflection; 55% face and body.
In addition to the people issues, the following list of key value destroyers has been put together from years of experience working with businesses, large and small, public and private.
Under-performing industry
It is difficult to create value in a failing industry. The first questions to be asked should be: does this industry have a future in this country; what is the industry's growth potential; can sufficient gross margin be generated to provide an adequate return on investment?
Loss of market share
If you are not growing you are dying. Your competitors are taking market share.
Poor Planning
Poor planning or simply a lack of it is a reflection of the quality of management. Value Tip: Don't plan yourself into inaction. However, with a well planned strategy your chances of a successful implementation can only increase.
Unknown profitability
Many businesses simply do not know where they make the money. They cannot tell which divisions, which product lines or which customers are profitable. Therefore they cannot rationalise the operations and make meaningful change.
Weak asset management
Management of the working capital is often overlooked. Having thousands of dollars tied up in underperforming debtors and stock is money down the drain. When did you last check to see if you had SLOBS (slow moving and obsolete stock) in your inventory?
Data not Information
Good managers understand the key metrics that measure operational excellence. There needs to be no more than five in most businesses. By 8am the next day a good manager has yesterday's metrics and has the ability to extrapolate monthly profit within 5%, two weeks into the month. Value Tip: Concise, accurate and timely information is what is required, not volumes of data.
Poor acquisitions
Poorly planned and poorly executed acquisitions can really blow apart a good company. Bad acquisitions leave a lasting legacy. They destroy management teams and balance sheets. Significant shareholder value has been destroyed acquiring businesses outside of the base geography, in particular in cross border transactions. People fail to realise the significant differences in market and business cultures. Value Tip: You need to have the best local management talent involved in running these acquisitions.
Lack of Innovation
Innovation drives growth, productivity and a lower cost structure all of which are key components of the value equation. To innovate you need to be able to change.
Under-capitalised
This is the Achilles heel of many start-ups and growing companies. Under-capitalisation retards growth, creates a lot of management stress and it impacts on the ability to maintain a competitive advantage. Value Tip: You may be better off owning 40% of something that is disproportionately larger, than owning 100% of a smaller under-capitalised business.
