CPA Magazine – Strategies for creating value in a low-growth environment
Date: October 29, 2014
Name: CPA Magazine – Strategies for creating value in a low-growth environment
Presenter: Howard Johnson
When economic growth remains at low growth, many executives are facing the challenge to increase shareholder values in their organization. Many organizations need to overcome this challenge in order to remain profitable in the economic environment. Howard Johnson, the Managing Director of Vercap M&A International Inc. and Campbell Valuation Partners Limited, works with many executives to maximize their shareholder value. His experience will help many business owners to improve their current strategies. CPA Magazine invites Johnson to share his insight. Moreover, this webinar will create positive impact for any business owner who is looking for guidance to assist their organization’s operations.
Based on the economic growth rate, Canada, US and Western Europe are remain low and expect to be low for many years. Johnson conducts the analysis of public information to see if there is any strategy to retain or create shareholder values, and the research discovers there is a pattern from many major corporations to pursue higher shareholder values.
Johnson indicates there are 4 strategies to create shareholder value. All strategies are not mutually exclusive. The first strategy is acquisition, which is to purchase or merge other corporation. The second strategy is capital discipline, which is to look at the financial position from the capital investment’s perspective. The third strategy is operational excellence, which is to improve the operation practice. The last strategy is innovation, which is to create niche value from existing core competency.
In the technical perspective, shareholders value is created when the return on capital is greater than the cost of capital. The research shows many organizations have challenge or ignore to measure the cost of capital. Therefore, Johnson believes it is important for all business owners to identify and measure the cost of capital as often as possible.
Johnson believes the framework of shareholder value creation comes from entrepreneurial environment. In order to execute all 4 strategies, Johnson identifies the 6 criteria that all companies should incorporate in their organization environment.
- Strong management team with open communication
- Culture of passionate employees
- Attentiveness to customer needs
- Progressive approach to risk management
- Moderate use of debt in their capital structure
- Long-term perspective to shareholder value creation
Clear communication is essential in all companies. The influence of positive culture is important because the biggest asset of any company is employees. It is important to initiate the response to customer in timing matter. Management needs procedure to assess risks. Companies should make use of debit financing and have future goals.
Strategy #1: Acquisition
Johnson looks at the company called “Constellation Software” and studies their successful acquisition strategy. He discovers the company performs internal rate of return (IRR) and mutually exclusive and collectively exhaustive (MCECE) on every acquisition. Constellation Software will target small companies that have customer diversification, customer attraction, strong leading market share, and potential growth through geographic or product expansion. Moreover, companies need to have the ability to add value to the existing practice.
Strategy #2: Capital Discipline
Johnson uses the example of a firm called “Birch Hill” that executes the capital investment strategy to acquire another company called “Softchoice”. Instead of looking at the bottom line from income statement, Birch Hill forces on the balance sheet. Softchoice has no debt or any significant cash reserves, and it signals Birch Hill to seek the opportunity to use debt financing to leverage equity return. The asset is less than depreciation and the working capital is less than 2% of revenue. Another main factor is that Softchoice has low accounts receivable because of upfront customer payments. Based on the analysis, it has high return on equity. Johnson suggests companies should not just look at the earnings before interest, taxes, depreciation, and amortization (EBITDA); instead, company should look at other financial factors.
Strategy #3: Operational Excellence
Johnson reviews the company called “Goodlife” and discovers Goodlife emphasizes on culture of excellence and employee engagement. Goodlife offers new products and promotions to retain members. Goodlife utilizes social media to identify possible opportunities and reduce risks. Goodlife creates attention that focus on customers’ needs and demands. Moreover, Goodlife demonstrates the values come from people, customer, and system. Johnson realizes the cultural fit and integration are important elements in operational excellence.
Strategy #4: Innovation
Johnson interviews a movie theatre company called “Cineplex” to identify their successful innovation strategy. Cineplex captures the home entertainment trend and finds way to leverage new capabilities. Cineplex offers new innovative products add value towards customers’ demand. Cineplex creates efficiency on customers’ experience and improves the infrastructure for the customer base. By focusing on customer loyalty, Cineplex has successfully incorporated culture of innovation in every theatre. Johnson believes innovation involves two way communication and front line engagement.
Johnson suggests all companies to conduct employee survey. The stats can potentially become the important factor in all acquisition. It is important to perform risk management procedure as regular exercise. Companies can implement balance scorecard to measure companies’ targets. Nevertheless, companies can identify the financial position through working capital ratio.