Problems

1
Problems

• Last lecture beta building
• This lecture
• uncertainty Courtney
• RiskPenman
• IPOsMcCarthy
• IBO Wright Robbie
• CKM ch.15 and 19
• Negotiation on saturday 09.00! In and around H211
• Exam !!! Only reports ?! Indicate personal
  contribution !

2
Strategy under Uncertainty

• 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

3
Uncertainty

• -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)

4
Uncertainty

• 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

5
Risk

• Fundamental /Equity risk consists of operating r.
  and financial r.
• Operating r. consists of operating r.1 and growth
  r., which splits the risk determinants into
  financial statement drivers (expressed as risk on
  commen equity growth risk)
• Growth in investments - heavily influenced by the
  double risk from sales. This double risk
  illustrates risk interaction, generating fat
  tailes/ extreme returns (/-)

6
Risk

• In the ROCE both the o.r. and f.r. can be
  leveraged
• distribution of value gives VaR-profiles
• further to fundamental irsk the investor bears
  price risk due to market inefficiency and
  liquitity risk
• foreward looking risk premium in US is app. 3,5

7
CKM ch 15 Dot.coms

• Characterized by high growth, -uncertainty and
  -losses
• investments are immaterial and hence running
  through the income statement
• estimate the possible/ probable future position
  and work backwards
• weight the scenarios with probabilities and test
  the sensitivities for these weights
• cash flow risk is hence taken care of and should
  NOT be added - use industry-average beta and
  general market risk premium
• the winner takes all/ best of breed

8
CKM ch 19 Emerging markets

• Extra risks
• macroeconomic uncertainty
• political risks
• illiquid capital markets
• capital restrictions
• 3 approaches (to supplement each other)
• probability weighted scenarios
• countryrisk premium in cost of capital
• local multiples
• local cost of capital when restrictions differs
• local risk free rate ?
• beware of the accounts with regard to
• local rules
• hyper inflation real/ nominal rates ?
• FX impact

9
IBO Investor led buy-outs

• 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

10
IPOs Initial public offering

• How much is left on the table - 20 ?
• Oversubscription 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 ?

11
Saturday 9.00 - 17.00 ?

• In
• Agenda
• 09.00-9.45 1st. Round. As -Bs are observers
• 9.45-10.30 1st. Round Bs -As are observers
• app. 10.30 - 12.00 guest speaker PWC
• 12.00-13.00 lunch (the bistro is open)
• 13.00-13.45 2nd. Round As -B observe
• 13.45-14.30 2nd. Round Bs -A observe
• 14.30-15.00 break
• 15.00- 17.00 short negotiation presentation from
  each TEAM
• As Inditex,LM,Harboe,Lundb.
• BsVestas,Martin,Virgin