Capital markets shareholder value

To understand this recent evolution and the perspectives for the chemical industry, it is essential to understand the capital market point of view, which drives the strategies of most global chemical players today. The importance of the shareholder value era for the chemical industry is discussed in the following two chapters. 

Capital Market Deviations as the Key Challenge for Shareholder Value Orientation... 

Thus, doubts as to whether capital markets reflect a reasonable representation of the fundamental value of a company, and the significance and persistence of potential deviations, pose a significant conceptual and practical challenge to shareholder value orientation. 

In light of the results above, the rationale for SHV seems as valid as ever. However, to address their skepticism and try to manage the risks from capital market deviations, many companies need to develop a more sophisticated understanding of the true meaning of SHV - an advanced shareholder value orientation. 

Finally, the company s own estimation of fundamental value will frequently be more or less in line with the capital market valuation. This would mean that if the corporate plans are realized in the succeeding years, a shareholder return can be expected of exactly the level of the cost of equity, i.e., roughly the industry average. Here, the valuation logic can be used to set more ambitious objectives in relation to capital market performance, and to translate these into operational targets for profit improvement. 

As a further consequence of an advanced shareholder value orientation, a more targeted approach can be taken to investor relations. We feel that investor relations in many chemical companies today is predominantly aimed at providing timely, accurate, and exhaustive information to capital markets. Again, the assumption is that capital markets are perfectly efficient and will always evaluate this information correctly again, this does not match up with the real world. Behind the capital markets are investors with a wide variety of expectations and important specific investment preferences and institutional restrictions. In addition, it can be demonstrated that only a small number of investors with significant trading volume mainly influence stock prices in the short and medium term (Coyne, K. P. and Witter, J. W.). 

These metrics were selected in order to capture different aspects of value creation TRS measures the realized value creation for shareholders. The market-to-book value is a proxy for the capital market s expectations on future value creation. And ROIC is, in an... 

Shareholder value In this most recent phase the main focus is on financial returns, that is on the value created for investors. M A activity in the industry is widespread but disaggregation is also a feature of the corporate landscape as more and more firms choose to focus on a smaller number of fields. The need for value creation imposed by capital markets is forcing Western chemical players to take action, which is sometimes quite painful. They have had to fundamentally rethink their strategies and ways of doing business. In particular, the process of building new businesses outside the traditional scope of activities has provided an opportunity to crack the growth challenge (see also Chapter 3). 

And, finally, companies can enjoy higher profits and shareholder value, resulting from lower operating and overhead costs, for example, administrative and sales, regulatory reporting, and cost of capital and greater access to new capital markets. 

Again motivated by their diverging interests, shareholders favor riskier investments. This includes for example debt financed acquisitions of other companies that squeeze up gearing. The increased risk is mirrored in higher financing costs of the issuer when capital markets are tapped again. Over the longer term shareholder value sinks, too. Acquisitions to keep the issuer competitive are equally of interest for bondholders. However, they should be cautiously financed. 

It will be apparent that it is possible for a company to generate a negative EVA. In other words, the cost of capital employed is greater than the profit after tax, The impact of a negative EVA, particularly if sustained over a period of time, is to erode shareholder value. Equally improvements in EVA will lead to an enhancement of shareholder value. If the net present value of expected future EVAs were to be calculated this would generate a measure of wealth known as market value added (MVA), which is a true measure of what the business is worth to its shareholders, A simple definition of MVA is ... 

When speaking of value, there is, basically, a financial and a non-financial interpretation of that term (Moller Tdrrdnen, 2003 323 Walter et aL, 2001 45). The financial meaning is closely linked to shareholder value, which characterizes a concept solely orienting a company s activities towards an enhancement of the value of its shareholders. As a result, the market value of the employed equity capital will be maximized (Buhner, 1992 418). The interests of other stakeholders are taken into account insofar as they are a means of achieving that objective. For the measurement of value enhancement, a set of diverse business metrics is developed, for example the economic value added (EVA), the discounted cash flow (DCF) or the cash flow return on investment (CFROI). However, the development of the shareholder value approach is not yet complete (Beck, 2003 3). Thus, many forms of application and transfer can be found, such as a combination of SCM and the shareholder value approach. Singhal Hendricks (2002, 2008) hint at the necessity of managing a supply chain in terms of the principles of shareholder value. The same thoughts can be found in the publications of Laupper (2004), Losbichler Rothbock (2006) and Neher (2003), who all deal with the transfer of the ideas of shareholder value into the context of supply chains. Due to the one-sided concentration on financial metrics and the value enhancement for the benefit of the company s shareholders, the stakeholder value approach is opposed to shareholder value (Achleitner, 1985 73 Bischoff 1994 ... 

We therefore chose to examine the performance of chemical companies in relation to some easily measurable dimensions of their corporate activity - such as product portfolio, scale, geography, market position, and product focus. By classifying companies this way, we were able to test a number of hypotheses about what drives the creation of value, measured by total return to shareholders (TRS), market-to-book value, and pre-tax return on invested capital (ROIC). Data from the last full commodity cycle (1992 to 2003) generated surprising insights.5 ... 

The results were revealing. We found that there is no statistically significant difference between the performance of more cycHcal and less cyclical companies either in terms of total returns to shareholders or ratio of market value to invested capital (Fig. 16.8). 

The above statements can be further substantiated by looking more closely at the various perspectives from which the Asset can be considered. In order to do this, we will follow the typical design process to realize a value opportunity. From outside in, it is important that the predicted revenue streams for the capital investment are realized as per shareholder promises. The capability to deliver on this could be qualified as Economic Integrity, although this term is not widely used. It will only happen if the underlying production performance is delivered as per expectation in all key performance areas. The market conditions further determine the revenue streams. 

When a company is set up, its memorandum of association (see below) states what the company s authorized share capital is to be and the number and nominal value of its shares it also states who the initial shareholders (the subscribers) are and how many shares each will owm The authorized share capital is the maximum amount up to which the compatty can issue shares. The company need not, and usually will not, issue all its shares. New companies are often started with an authorized share capital of 100 divided into 100 shares with a nominal value (or par) value of 1 eaeh. The nominal value is the value written on the share, which is normally the money paid to the company when the share is first purchased it bears no necessary relation to arty subsequent market value of the share. Companies may issue shares initially at a priee lower than the nominal value such shares are said to be partly paid and the owner of such a share must be prepared to pay the balance up to the nominal value to the eomparty when called upon to do so. A company may also issue shares at a premium, that is, at a price higher than the nominal value of the shares. 

Nevertheless, nowadays the maximization of the shareholder s value (SHV) seems to be the main priority of the firms and what really drives their decisions. The use of SHV as the objective to be maximized is mainly motivated by the fact that it reflects in a rather accurate way the capacity that the company has to create value. The SHV of the firm can bee indeed improved by maximizing its CV. According to Weissenrieder (1998), the market value of a company is a function of four factors (i) investment, (ii) cash flows, (iii) economic life, and (iv) capital cost. Specifically, this model applies the discounted-free-cash-flow method (DFCF) to compute the CV of a company. 

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