Corporate Venture Capital Trends

With the rapid rise of corporate venture capital and increasing pressure to jump on board with startups, it seems that many companies across the industry spectrum are making venture investments.

GM Trades at 5.6x Earnings for a Reason; Subprime Lenders Can Too

David Einhorn of Greenlight Capital Inc. is no stranger to controversy. His current project is General Motors Corp. He put a flashlight on its common shares on March 28 arguing that they are unreasonably cheap. Immediately before the proposal was made GM’s shares were trading just below $35 per share, which equates to 5.8x 2016 earnings of $6.00 per share and 5.6x the midpoint of management’s 2017 guidance ($6.25 per share). The dividend yield is high at 4.4%, more than double the yield of the S&P 500. As Einhorn points out, the yield is not high because the payout ratio is high; the $1.52 per share dividend equates to just one quarter of (current) earnings.

Revenue Recognition: What’s an Analyst to Do?

The new revenue recognition standard has been called “historic in its breadth and impact across industries.” The standard itself was introduced back in 2014 with the FASB’s issuance of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). Since that time, accountants and preparers have grappled with preparing for the new guidance. The focus of this post is not to comprehensively explain the new rules. Instead, we examine one public company’s experience with the transition (Workday) and then highlight a few areas that may be of interest to analysts, finance managers, and interested onlookers – from a valuation perspective.

Reading the Tea Leaves at Ruth’s Chris Steak House in Lafayette

l was struck by how the Ruth’s Chris Steak House in Lafayette, La. was packed on a mid-March Tuesday night. When I ate there a year ago, I was one of a half-dozen people in the restaurant. Perhaps it is just a coincidence, but the price of oil nearly doubled over that period. The regional economy may not be that responsive to moves in the price of crude, but people’s reaction of being tight-fisted vs. loosening-up can change quickly based upon perceptions.

Is Cash Always King?

When it comes to money, “enough” is the hardest word to define. The challenge of defining “enough” extends to corporate managers deciding what cash balance is appropriate. Cash balances can provide a cushion against unanticipated adverse events in the business. When companies need cash is usually the worst time to try to raise capital. Having sufficient cash on hand to weather an unexpected downturn in the business can help shareholders avoid dilutive capital raises at inopportune times. On the other hand, cash is a very low-yielding asset.

Charles Ellis on Indexing

A few months ago Amazon put Charles Ellis’ new book, Index Revolution, on my recommended list. I probably would not have bought it had I not heard Ellis give an extended interview on Bloomberg Radio one morning while walking the dogs. He is quite persuasive about the rationale for index funds. Although I own index funds, it is not a subject I had given much thought.

Cashing In by Checking Out

The motivation behind incentive pay at the startup level is that in order for the employees to strike it rich, the company must succeed by hitting certain milestones. This aligns employees’ personal goals with the company’s overall success. The slight misalignment of this structure, however, can lead to employee turnover at companies.

A Market Participant Perspective on the Size Premium

The traditional method for measuring return premiums is backward-looking. Analysts typically compare realized returns for various asset classes over long historical periods, inferring the premiums from the differences in the return series. With regard to the size premium in particular, this approach has a number of shortcomings.

Blowback from Going Nuclear: Massive Goodwill Impairment Looms at Toshiba

On December 27, 2016 Toshiba Corporation, the Japanese electronics conglomerate, announced the possibility of a goodwill impairment charge related to its U.S. nuclear power plant construction business, specifically, CB&I Stone & Webster Inc. (“Stone & Webster”), which was acquired for $229 million in late 2015 by Toshiba’s Westinghouse Electric Company subsidiary. Both the buyer and target have been plagued by financial difficulties (and goodwill impairment charges) since that time.

Capital Structure in 30 Minutes

Capital structure decisions have long-term consequences for shareholders. The purpose of this whitepaper is to equip directors and shareholders to contribute to capital structure decisions that promote the financial health and sustainability of the company.

Crafting a Deal in Order to Stay Afloat

Sears is in trouble. Or rather, it’s been in trouble for some time. Same-store sales fell 13% in November and December 2016 and Sears has booked losses of over $9 billion during the past eight years. The company has had to resort to shedding assets – tangible and intangible – in a bid to right-size operations and manage liquidity. In the past, Sears financed some of these losses through the sale of real estate.

Gravity Matters, Especially for Financial Investors

Gravity is supposed to matter for private equity or financial buyers. Strategic buyers can pay up for an acquisition with publicly traded shares that may trade at lofty valuations. Plus, share exchanges are about relative valuations, and strategic buyers usually expect to achieve some amount of cost savings. Not so for private equity buyers, who acquire for cash with their capital and borrowed money and often cannot extract expense savings unless the acquisition is a bolt-on to an existing platform company.

Guest Post: Solving the Conundrum Presented by Non-GAAP Financial Measures

Vincent Papa, PhD, CPA, CFA is Interim Head, Financial Reporting Policy at CFA Institute. He recently co-authored a two-part report on a comprehensive CFA Institute-member survey on non-GAAP financial measures. The views and opinions expressed in this post are those of the author and do not necessarily represent the views of Mercer Capital.

Capital Budgeting in 30 Minutes

The purpose of Travis W. Harms’ newest whitepaper, Capital Budgeting in 30 Minutes, is to assist directors and shareholders in evaluating proposed capital projects and contributing to capital budgeting decisions that enhance value.

Market Participant Perspectives

We have published a collection of these posts in a book entitled “Market Participant Perspectives: Selections from Mercer Capital’s Financial Reporting Blog.” For our existing clients and blog subscribers, we hope that the book uncovers a post or two of interest that you might have missed the first time around. For clients that we haven’t met yet, there’s probably no better introduction to our team than the collection of posts in this book.

Non-Traditional Venture Investors are Changing The Rules Of The Game

The source of new capital has changed in the venture capital industry, as there has been an increase in nontraditional investors – including pension plans, hedge funds and mutual funds. From growing regulation and transparency to growing capital and propped-up valuations, this rise of the nontraditional investor has had a profound effect on VC. It’s an odd situation, where new players are welcomed and then threaten to change the rules of the game.

Ultimate Earnings Adjustments

Earnings adjustments are an important part of a valuation professional’s bag of tricks, but they are susceptible to misuse. The purpose of earnings adjustments is to convert the income statement from one that is backward-looking to one that is forward-looking. In this post, we review some characteristics of legitimate (and questionable) earnings adjustments.

Twilio and the Rise Of Debt Financing

Twilio, a cloud communications platform designed to help developers add messaging, voice, and video to web and mobile applications, went public on June 23. Priced at $15 per share, Twilio’s share price closed at $28.79, the largest single-day increase of an IPO in over two years, which increased the company’s market cap by 95% to nearly $2.4 billion.

Corporate Finance in 30 Minutes

Corporate finance does not need to be a mystery. In this whitepaper, we have distilled the fundamental principles of corporate finance into an accessible and non-technical primer. Structured around the three key decisions of capital structure, capital budgeting, and dividend policy, the guide is designed to assist directors and shareholders without a finance background to make relevant and meaningful contributions to the most consequential financial decisions all companies must make.

Fairness Considerations for Mergers of Equals

When asked about his view of a tie years before the NCAA instituted the playoff format in the 1990s, Coach Bear Bryant famously described the outcome as “kissing your sister.” If he were a portfolio manager holding a position in a company that entered into a merger of equals (MOE), his response might be the same.

Market Value of Total Capital and Enterprise Value: Cash Creates Potential Differences in Total Capital Multiples

What is the difference between a company’s total capital value and enterprise value? The difference between these two concepts is the treatment of cash. In the current market environment, many public companies have accumulated significant, even massive, amounts of cash. The treatment of cash, then, will impact multiples. In the following post, we examine the effect of cash on the relative valuation multiples of Apple, Microsoft, and IBM.

Income Post-Mortem and Coupon Clipping

“So why be constructive on private credit when one of the tenets of the central banks’ zero and negative interest rate policies is to push investors to take more risk? Maybe it is misplaced, but I think there is more value (all else equal) in high current income than waiting on a terminal value when asset values are inflated.”

2016 Mid-Year Market Review of Public and Private Equity

The first six months of 2016 were eventful for U.S. markets. Worldwide, markets dealt with the continued blight within the oil industry and the shockwave of United Kingdom’s decision to leave the European Union. In the U.S., investors worried over potential Fed interest rate hikes and the inflated unicorn valuations.